The Hindu Business Line : An open letter to the FM

Let me begin by stating that I have been your unabashed fan for many years. I have stood and applauded as you presented your dream budget. I have silently thanked my stars when you took guard for your second innings. Now, I am writing to you not as an official representative of the advertising industry, but in my personal capacity as a simple advertising practitioner who has run an advertising agency for 22 years, and is now being called upon by your department to explain some points which I thought were not just rudimentary, but fundamental to my business.

What is an advertising agency? What services does it provide? To whom are these services provided? Who benefits from advertising? These are the questions I feel I need to clarify rather desperately. Desperate might be a rather extreme word, but we seem to be living in extreme times if we are called upon to explain the answers to the questions posed above. And the explanations we need to provide are not to a bunch of high school kids who might logically demand such explanations but to the Finance Ministry of the Government of India.

Sir, I am not a legal luminary. Nor a tax expert. I am just a professional. This is, therefore, a set of thoughts that comes straight from the heart.

Firstly, I am told there are about 750 advertising agencies accredited to the Indian Newspapers Society (INS). I know the INS has a stringent set of rules to comply with before accrediting an advertising agency. Yet we go through with this process because this entitles us to a trade discount of 15 per cent on the advertising we place in the print media.

To a simple person like me, this constitutes the revenue my agency earns. It logically translates into the income I derive by providing a service to the print media. Some years ago, this service and the income derived from it was subject to a service tax of 10 per cent. Legal experts took up cudgels against this, but nothing came of their efforts and I stoically paid 10 per cent of the 15 per cent my agency earned to the Excise Department.

I was advised by the experts to include this in my bill to my clients and most advertisers paid this amount. So in effect I became your tax collector.

This was a new calling, and as is the case in most new vocations, there were lessons to be learned every day. For example, some public sector units, (owned by your government, I am told), State Government undertakings and the like, disdainfully refused to pay this service tax.

The lesson was not that the Government need not pay taxes to the Government. It was that irrespective of what the Government paid or not, the tax collector would be bullied into paying it. So my little agency ended up paying the service tax that huge Government clients cocked a snook at. Of course, no one in your Ministry applied themselves on how to educate the Government undertakings. It was easier wielding a big stick on a small agency.

All this is in the past. Today I am told by the elders in the advertising industry that your Revenue Department has issued some circular that in effect (I really don't understand the legalese used in it) proposes a service tax of 10 per cent on the total value of the advertising placed by an advertising agency in the print media.

Sir, I will emphasise that I am not adept at the subtle nuances of drafting law, nor for that matter interpreting it. I leave that to people wiser than me.

However, I believe I am not bereft of common sense. Therefore I am very confused.

To me, space in the media is a commodity. I am not a trader in any commodity. I am a professional who adds value to communication. I bill the client for those services and am taxed accordingly. I place the advertiser's advertising in the media and since I get a trade discount from the media which constitutes my income, I am taxed on that too. I might not want to agree with the propriety of that tax, but I can understand it. And I abide by the law and pay it.

However, I cannot understand how the value of advertising space (which I called a commodity) that the advertiser pays the media for, albeit routed through the agency, can be termed as a part of a `service' I provide.

In my limited knowledge, the value of an airline ticket is not the cost of the service a travel agency provides. The commission a travel agency earns is the cost of the service it provides. For that matter, the value of real estate is not the cost of the service a real estate agent provides. The brokerage is the cost of the service provided.

Why then is the value of media space being lumped as the cost of the service my agency provides? I thought it is fairly obvious that the cost of service, could at best be the trade discount, or the revenue my agency earns.

What your department is saying is that I could be liable to pay 68 per cent of the revenue I earn, as service tax, for what is not a service. And then your Government undertakings can merrily refuse to pay this 68 per cent, as they refuse to pay the 1.5 per cent now. And since the government seems to be more adept at framing laws than following them, and in any case no one bothers to enforce the law in their case, my agency will end up liable to pay this entire amount to your excise department. And that will no doubt be ruthlessly enforced by your ExciseDepartment.

Sir, I will not go into the fact that if this circular becomes law it would cripple advertising, a critical engine of growth, because then I will have to talk about the inflexible budgets private companies have to operate within. Now, to professional government servants (unlike you) this would be gibberish because they seem to have totally elastic budgets that no one bothers limiting. And if the budget allocation has not been made, they simply do not pay the service provider, who by then has already paid the service tax on an income he might never realise. This is a familiar occurrence for advertising agencies handling State Government advertising.

I will not ponder whether this circular could contravene the provisions Article 19 (1) (a) of the Constitution of India that guarantees freedom of speech and expression (I am told this tax could be an indirect tax on newspapers and therefore on our fundamental right to expression). I will not even ponder whether it violates the Article which has been extended to include commercial expression which is what advertising is all about.

I will not debate whether this could be a tax on knowledge itself.I will certainly not go on about the benefits that responsible advertising provides to the economy (which you are so keen to spur on to greater growth), the advertiser who needs the creativity that advertising agencies provide and to the consumer who has the fundamental right to make an informed choice.

Sir, I will simply state that more that 50 small advertising agencies have closed down due to a combination of adverse market conditions and retrograde taxes.

I will also state that with the present revenues we earn, we barely make both ends meet.

If we are called upon to pay this unconscionable tax of 68 per cent of our revenues, it would ring the death knell of advertising agencies as we know them. And consequently of the approximately one lakh Indians who are directly and indirectly employed by the business.

I, for one, would have to immediately close shop.

I therefore appeal to you to kindly ensure this tax does not see the light of day. And in case you are wondering why I kept saying that I would not go into the many seemingly valid and weighty points I briefly mentioned, it is because if this tax became a reality, I would have all the time in the world to litigate on all those very valid points. After all, I wouldn't have much else to do anyway.

Thank you,

Ramesh Narayan

(The writer heads Canco Advertising.)

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