Digital advertising is the fastest growing advertising medium in history. The Internet was primarily created as a military and educational device, and was never intended for what it is now — a huge medium for corporates to reach their prospects. Life without digital advertising is unimaginable today, as it has achieved manifold successes since its inception. Full of colour, it helps spread the word on services and products rapidly and effectively.

The digital advertising industry has been a major taxpayer. It paid a considerable amount of service tax under the erstwhile Service Tax regime. Advertising agencies as well as intermediaries (that is, companies engaged in buying and selling internet space/ timeslots for advertisements) were paying service tax on sale of Internet ad space/ timeslots. However, from July 1, 2012, the sale of space or timeslots for advertisement over Internet is not liable to service tax as it comes under the negative list of services.

The intermediary buys Internet ad space or timeslots from publishers and sells them to advertising agencies/ advertisers. The advertising agency, on the other hand, buys Internet space or timeslots for advertisement from the publishers/ intermediary and sells to advertisers. The consideration received by the advertising agency and intermediary for sale of Internet ad space/ timeslots may be fixed or calculated on the basis of specific parameters linked to performance/ outcome. It may or may not include commission.

The negative list does not specify who should be the service provider while selling Internet ad space/ timeslots and who the service recipient should be. The intention is not to tax the activity of selling space or timeslots on the Internet for advertisement per se . Thus, the sale of Internet ad space/ timeslots by advertising agencies/ intermediaries should not be subject to service tax irrespective of the form and mode of consideration, and who the service provider/ recipient is.

However, the clarification issued by the Tax Research Unit of the Central Board of Excise and Customs that ‘merely canvassing advertisement for publishing on a commission basis by agencies is taxable’ is being misinterpreted. Field officers and some players in the industry are treating the sale of Internet ad space or timeslots to advertisers by advertising agencies and to advertising agencies/ advertisers by intermediaries as canvassing of advertisements, as invoices separately disclose the margin on sale as commission. Accordingly, some companies are discharging service tax on it.

The clarification does not discuss the taxability of sale of Internet ad space/ timeslots and only highlights the fact that the activity of publicising advertisements on a commission is taxable. However, many players still treat this transaction as sale of Internet ad space/ timeslots and are not paying service tax.

Field officers have started issuing letters and visiting advertising agencies/ intermediaries seeking clarification on why service tax payments have dipped substantially since July 1. It is obvious that service tax outflow would reduce as the sale of Internet ad space has been included in the negative list of services.

As the field officers as well as some in the industry are unsure about the non-applicability of service tax for sale of Internet ad space/ timeslots, CBEC should issue clear instructions to help avert unwarranted litigation.

Sachin Menon is Partner and Head of Indirect Tax, KPMG in India

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