Ad spend of companies may go up after GST: Kotak Mutual Fund
BCCL
Synopsis
Companies will gain from the lower ad cost under GST and will likely plough back it in advertising, increasing their ad spending by about 10%, or more than Rs 5,000 crore.
By ET Bureau
MUMBAI: Goods and services tax (GST) could reduce the cost of advertisement and lead to an increase in spending by companies to promote their products and services, Kotak Mutual Fund said.
The report takes in to account major changes due to GST, the new indirect tax system that is set to be rolled out this July. The profit margin of many companies will increase as a result of the way advertising is taxed under GST. But, due to the anti-profiteering clause under GST, they will have to pass on any higher profits from the implementation of the new tax system to customers, or increase spending.
The major gain is expected to be from input credit of tax paid on advertisements.
“Under the current taxation laws, input credit on sales tax and VAT is not available as it's not considered as manufacturing expense. Under GST, however, input credit of 18% would be available even on tax paid on the advertising expense, this would mean companies would have larger advertising budgets,” said Sachin Menon, national head, indirect tax, KPMG India.
So, if the advertising budget of a company is Rs 100 crore, then sales tax and VAT paid under the current regime is an expense.
On the same amount, however, the GST paid could be categorised as manufacturing expense and hence the company can claim a tax credit on this expense, thereby increasing the profit. “In order to keep margins constant (to comply with the anti-profiteering clause), we expect incremental spending by industry in advertising to boost volumes.
Even if 33% of the potential saving from lower taxes is redeployed … we could see 10% growth in advertising, i.e. more than Rs 5,000 crore of incremental spending coming through on a total advertising base of Rs 52,500 crore (CY16),” the report said.
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Companies that gain from the lower cost will likely plough back it in advertising, increasing their ad spending by about 10%, or more than Rs 5,000 crore, over the previously projected 10-12% growth for this fiscal year, it said in a research report.The report takes in to account major changes due to GST, the new indirect tax system that is set to be rolled out this July. The profit margin of many companies will increase as a result of the way advertising is taxed under GST. But, due to the anti-profiteering clause under GST, they will have to pass on any higher profits from the implementation of the new tax system to customers, or increase spending.
The major gain is expected to be from input credit of tax paid on advertisements.
“Under the current taxation laws, input credit on sales tax and VAT is not available as it's not considered as manufacturing expense. Under GST, however, input credit of 18% would be available even on tax paid on the advertising expense, this would mean companies would have larger advertising budgets,” said Sachin Menon, national head, indirect tax, KPMG India.
So, if the advertising budget of a company is Rs 100 crore, then sales tax and VAT paid under the current regime is an expense.
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On the same amount, however, the GST paid could be categorised as manufacturing expense and hence the company can claim a tax credit on this expense, thereby increasing the profit. “In order to keep margins constant (to comply with the anti-profiteering clause), we expect incremental spending by industry in advertising to boost volumes.
Even if 33% of the potential saving from lower taxes is redeployed … we could see 10% growth in advertising, i.e. more than Rs 5,000 crore of incremental spending coming through on a total advertising base of Rs 52,500 crore (CY16),” the report said.
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