14/09/2017 Ad Agencies In The GST Regime On July 2, 2017 the Indian Govt. created history by declaring the GST Regime. The big agency networks, advised by the big consultants decided to bifurcate Media Charges & Agency Commission and apply 2 HSN codes in agency’s Tax Invoice: 1. Media Charges (HSN #1) GST Rate 5% 2. Agency Commission (HSN #2) GST Rate 18% With different GST Rates as & where applicable. Meanwhile, small & medium agencies across the country did not accept this format. They debated, discussed and finally adopted the simpler format of composite supply - where associated services could be billed together under a single HSN Code with a single GST Rate. (With no need for bifurcation, which would lead to additional reporting.) This simpler format of Ad Agency GST Tax Invoice was ratified by the GST Council on August 23. Clarification By GST Council / Finance Ministry (August 23, 2017) On Applicability of Goods & Services Tax on selling of media & in particular print media. Summary Query has been raised regarding GST applicable on selling of space for advertisement in print media. Selling of space for advertisement in print media is leviable to GST @ 5%.If the advertisement agency works on principal to principal basis, that is, buys space from the newspaper and sells such space for advertisement to clients on its own account, that is, as a principal, it would be liable to pay GST @5% on the full amount charged by advertisement agency from the client. On the other hand, if the advertisement agency sells space for advertisement as an agent of the newspaper on commission basis, it would be liable to pay GST@ 18% on the sale commission it receives from the Newspaper. ITC of GST paid on such sale commission would be available to Newspaper. However, if the advertisement agency supplies any service other than selling of space for advertisement, such as designing or drafting the advertisement, and such supply is not a part of any composite supply, the same would be liable to tax @18%. If such supplies are part of any composite supply, the rate applicable for the principal supply shall apply. Therefore, everything depends on the terms of the contract between the newspaper, advertisement agency and client. Retro Design In the Service Tax regime, the top advertising & media agencies were advised to bifurcate media charges & agency commission were deliberately bifurcated to account for 2 factors: (Both factors are not applicable in the GST regime): 1. Service Tax was not applicable for Print but applicable for Agency Commission. In the GST regime, tax is applicable for Print medium, albeit at a lower rate. 2. Most media agencies were not in a position to take the liability of Service Tax for Television Media as the tax liability would far exceed their fees. Yet, the releases had to be routed through the agencies. To circumvent this issue, TV Channels agreed to invoice the Client directly but collect payment from their agency. (Since the TV Channel invoices were addressed to Clients, they could directly avail of input tax credits.) Agencies would bill the Service Tax levied by TV Channels as reimbursement. Since the other component (Agency Commission) was subject to Service Tax, it was mandatory to bifurcate the 2 components. In the GST regime, ad agencies must apply GST on the total bill amount including Television charges. Here’s how Service Tax Invoice format (Print Medium) differed between small & large agencies: Small Agency Service Tax Invoice format: Gross Print Medium Cost Discount 12 % Billable Cost ST @ 2.25%of Gross Grand Total 1,000.00 120.00 880.00 22.50 902.50 * assuming Agency Commission of Rs 150.00 Large Agency Service Tax Invoice format: Gross Print Medium Cost Less Std. Agency Comm Net Media Cost Add Actual Agency Comm ST 15% on AAC Grand Total 1,000.00 150.00 850.00 30.00 4.50 884.50 * AAC: Actual Agency Commission In retrospect, their advice of bifurcating Media Charges & Agency Commission using 2 HSN codes seems to be an extension of the existing logic/method used in the Service Tax regime. The GST RegimeIn the GST regime, the rules applicable for Input Credits are independent of Sales. But the top advertising & media agencies were advised (in continuation of existing practice?) to adopt the process of applying 2 HSN codes in their Tax Invoices: 1. Media Charges (HSN #1) 2. Agency Commission (HSN #2) Majority of small & medium agencies never followed the above practice in the Service Tax regime. Naturally, they did not agree to go with this practice. Since they did not have the privilege of advice from a big consultant, they started studying the GST laws and asked their C.A.s & local experts for advice. Soon they zoomed in on the relevant GST clause which was applicable for composite services. So if an ad agency worked on principal-to-principal (P2P) basis (buying from media owner & selling to clients independently), they could include any associated service, such as designing the ad or making media plans as a part of a composite supply. In such cases, the GST rate applicable for the principal supply (media in this case) would apply for the whole. Thus, there was no need from to bifurcate media charges from agency commission for GST compliance. Composite GST Invoice format adopted by small agencies Print Medium Charges Trade Discount 12 % Billable Cost GST 5% Grand Total 1,000.00 120.00 880.00 44.00 924.00 Optional BreakupMedia Cost: Rs 850.00 Agency Fee: Rs 30.00 Media details attached Standard Media GST Invoice format Print Medium Charges (Net) Agency Commission 3% (Gross) Billable Cost GST 5% on Print Medium GST 18% on Ag Commission Grand Total 850.00 30.00 880.00 42.50 5.40 927.90 The simpler Composite GST Invoice format is an option available to ad agencies, with an optional footnote to explain the breakup where required: Breakup: Print Media Cost: Rs 850.00 Agency Fee: Rs 30.00 Composite Cost: Rs 880.00 With the media details could be attached as supporting documents. Note: In case of media exemption (foreign clients), billing could be split into 2 Tax Invoices. This would inter alia, reduce the complexity of applying 2 HSN numbers & 2 GST rates. And reduce data uploads on GST Server by 50% ! Conclusion Small & medium agencies - who did not have access to big consultants’ advice - started reading the GST Rules. They discussed with each other, asked their local experts including C.A.s and adopted the composite GST simple format: for the following reasons: 1. It follows the GST guidelines for composite billing under a single GST rate. 2. It does not force the agency to disclose its buying rate. (With the option of adding a footnote to disclose the breakup.) 3. It does not need multiple HSN Codes & GST Rates. 4. It’s simpler. As it is, there is very little logic on Govt. asking business users to bifurcate & report GST between State & Centre – a task which could clearly have been accomplished faster using software on the GST Servers. (Note: For Inter-State transactions, this is exactly how Govt. will bifurcate GST between State & Centre.) Finally, a small reminder: • All advice must be seriously vetted by the advisee - especially the underlying assumptions. • The best advice may come from unexpected quarters. • Persistence pays. By persisting vigorously, small & medium agencies got ratification from the GST Council for the simpler, composite-tax format.