Taxation for the Digital Realm

September 12, 2017


The Digital Marketing sphere is expanding rapidly every day in intricate and innovative ways. With the advent of the start-up age, the combination of fresh minds and an endless online platform has resulted in some truly ingenious businesses. In this era of constant online presence, digital advertising and social media marketing has become an imperative part of both veterans and newcomers in any industry.


However, many organisations overlook the need to incorporate the tax burden in their cost and pricing strategies. There exists a lack of awareness regarding the ways that the GST can benefit many agencies in this field. Both the providers and customers of these services have much to gain from the policies under the reformed taxation rules. A thorough understanding of these will only serve to increase the scope and progress of the field.


Taxation while Paying Agency Fees


The primary function of the Good and Services Tax Law is to be a comprehensive taxation system that unifies markets across India, promotes easy compliance, and removes hidden costs. Before the introduction of GST, the advertisement and digital marketing industry had to pay a service tax of 15%. Under GST, the total tax burden will be 18%.


Let us suppose an agency has rendered services to another company for a total fee of ₹10,000. Depending on the location of the two companies in India, GST will be charged in the following manner:


Agencies providing services to a company registered in the same state:

Agencies providing services to a company registered in a different state:


On the surface, it appears that companies will be paying 3% more taxes now than before. However, eligibility for input tax credit systems actually reduces the actual amount that has to be paid by any company which was previously under the VAT regime. Under this scheme, the tax that has been paid to acquire an input can be deducted from the tax paid on the sale of product.


For example, imagine a company that manufactures t-shirts and charges VAT on sales before GST was implemented. This company would collect VAT, but pay service tax to its agency and to the ad platform and therefore did not get input credit of the 15% service tax. Now, even though the tax rate has gone up to 18%, the entire amount is eligible for input credit under the GST regime, effectively bringing down the tax rate from 15% to 0%.


Taxation while paying Ad Spends


Integration of GST with policies of existing advertisement platforms also requires a thorough understanding. Google Adwords is one of the most widely used mediums of advertising. When making payments to Google, a company is unable to deduct 2% as TDS (Tax Deducted at Source) since payment is made through a credit/debit card. Google has a special provision to address this, which many companies may not be taking advantage of. The customer must first pay the TDS charge on top of the amount instead of deducting it. Then they can claim the amount by submitting the TDS certificates to Google. The amount will be credited to the Adwords account.


However, this stipulation by Google now affects the total GST amount paid on an advertisement. Let us suppose an individual spends ₹100 on the platform.



Hence, even though Google refunds the 2% TDS that is paid, the extra 0.36% of tax is still incurred by the customer.


GST is only applicable to companies registered in India. Companies with no establishment in India, such as Facebook, Twitter, and LinkedIn have much to gain from this as they do not pay any taxes. It is also not possible to deduct TDS since these platform directly charge the customer’s credit card. To earn revenue from this huge stream of online advertising, the government has introduced a tax of 6% called the Equalisation Levy, which is sort of a replacement for TDS in this transaction. This further increases the amount of GST to be paid.


On an expenditure of ₹100 on an international advertisement platform,


Is online advertising better off under GST?


How will these new rules fare for players in different industries who engage in advertising? Eligibility for full input tax credit allows companies to claim the entire amount of tax they spend on advertising. The integration of various indirect taxes under GST has removed many irregularities of the system and made it easier to claim the tax credit.


Let us suppose that a company, which was previously under the VAT regime, spends ₹100 on Facebook through an agency.



Therefore, according to their input tax credit eligibility, companies will be able to reduce their tax on advertising drastically. The smooth flow of tax credit makes the service cheaper. GST has introduced flexibility into the industry and gives companies a sufficient margin to spend more on advertising.


The digital sphere is expected to grow and evolve further, so we can safely say that these rules are only going to get more complex. Keeping up with constantly changing facets of the industry is the mark of a methodical and well-run firm. It is imperative that every organisation keep itself updated on all applicable tax laws and provisions to avoid legal repercussions later.



The above article has been provided for informational purposes only. We do not claim to be experts on the topic. Please consult your chartered accountant before making cost and pricing decisions for your company.





















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