The Hindu Business Line : Taxing message

BOTH ON SUBSTANTIVE and procedural aspects, the draft circular modifying the method of computing the service tax by an advertising agency is flawed and must be withdrawn. It is bad on a substantive question of law inasmuch as it goes beyond the accepted principles of what has been held to be an advertising service and the constitutional implications of stretching it so. It suffers from the procedural infirmity as it seeks to give the operative clause imposing a tax a radically wider scope to the one in vogue without explaining what aspect of the advertising industry's operations has changed as to render irrelevant the earlier notion of this service.

It is true that an advertising agency obtains space or time (depending on the media) and is an essential input to whatever the advertisement message is. Equally valid are the other parameters referred to by the circular — that there is no contractual relationship between the media entity carrying the message and the advertiser, or that the advertising agency does not receive from the client the exact amount paid by the agency to the media. The agency, too, does not perform the role of an agent, either of the media vis-à-vis the advertiser or vice versa. Yet, none of these aspects has changed since the time the tax was proposed on advertising services. Even the phrase ` any service' — in the context of what an advertising agency provides a client — employed in the charging section, and the one on which the latest circular places so much emphasis has remained on the statute books exactly as originally enacted. Nor is there anything in the circular on why the Government wants to change the basis of computation. It is also silent about the tax treatment where the agency indicates separately the amount paid to the media and the fee for its own services and, thus, setting itself up as an intermediary in substance if not in form. Answers to these questions would, if nothing else, have demonstrated that the Government has applied its mind on the question before coming up with the proposal.

The proposal, as it is worded, is clearly a tax on the advertising space at least insofar as that portion of the money collected by an agency from its client and given to the media that carries the message. In fact, given the preponderance of such a charge in the total contractual payment made by a client, the levy is, in essence, a tax on the advertising revenue of a media player. It cannot be denied that such imposts that make it more expensive for advertisers to display their message could either dissuade them from doing so or at least scale down their commitment. This has the potential to affect varyingly the commercial viability of all players in the media industry. The Supreme Court has consistently taken the view that in view of the special interest that society has in freedom of speech and expression, the Government should be more cautious while levying taxes on matters concerning the newspaper industry — an observation that could be expanded to cover media in general. That being so, a proposal with such far-reaching revenue implications deserves far greater consideration than the almost casual manner in which the administrative arm of the Government has treated it.

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