The Digital Marketing sphere is expanding in intricate and innovative ways. In this era of constant online presence, digital advertising and social media marketing have become an imperative tool in every person’s arsenal. A recent survey estimated that the Digital advertising spends in India were to reach Rs. 9,700 crore by end of 2017. With brands spending heavily on ads, it is important to understand GST on Online Ads – i.e. the tax being charged by Facebook and Google for running ads online.
GST on Online Ads and Agency fees
Many organisations overlook the need to incorporate the tax incidence in their cost and pricing strategies. In an earlier article, we talked about how brands can register for GST and the effect of GST on businesses and Freelancers. In the current article, we will be talking about taxation in digital spends. There exists a lack of awareness regarding the ways that the GST can benefit brands running ads online. 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.
GST while Paying Agency Fees
The primary function of the Good and Services Tax (GST) 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 incidence 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:
1. Agencies providing services to a company registered in the same state
|9% of 10,000||₹900|
|SGST||9% of 10,000|
|Total||18% of 10,000|
2. Agencies providing services to a company registered in a different state:
|18% of 10,000||₹1,800|
|Total||18% of 10,000|
But wait, there is more…
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 a company pays to acquire an input can be deducted from the tax paid on the sale of output.
For example, imagine a company that manufactures t-shirts. In the pre-GST era, it charges VAT on sales and also pays VAT to the government on all the output sold. But it also pays tax on inputs it uses such as if it hires a marketing agency, it pays service tax to them; if the agency it hires uses an ad platform, the company pays a service tax on that too. Therefore, the company ends up paying tax on all the inputs it uses and all the output it sells. Which is just outrageous, right?
This has changed under the input tax credit system with GST. Even though the tax rate has gone up to 18%, the entire 18% of tax amount is eligible for input credit under the GST regime; effectively bringing down the tax rate from 15% to 0%. The t-shirt company can now show that they paid X amount in tax for the agency’s fees and Y amount on the ad platform. And the tax to be paid to the government will be reduced by X+Y (as it is already paid).
GST on Online Ads: Facebook Ads and Google Ads
Integration of GST with policies of existing advertisement platforms also requires a thorough understanding.
1. GST on Google Ads
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. But that does not make it even mind you! This stipulation by Google now affects the total GST amount paid on an advertisement. Let’s see how this works.
Let us suppose an individual spends ₹100 on the platform.
|02% of 100||₹2|
|IGST(or CGST+SGST)||18% of 102|
|Total||20.36% of 100|
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.
2. GST on Facebook Ads
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 platforms 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. Let’s see how this works.
On an expenditure of ₹100 on an international advertisement platform,
|06% of 100||₹6|
|IGST||18% of 106|
|25.08% of 100|
Wait, this feels like you are paying more under GST, right? Let’s understand this better with the help of tax credit.
Is online advertising better off under GST?
The integration of various indirect taxes under GST has removed many irregularities of the system and made it easier to claim the tax credit.
The eligibility for full input tax credit allows companies to claim the entire amount of tax they spend on advertising.
Let us suppose that a company, which was previously under the VAT regime, spends ₹100 on Facebook through an agency:
|06% of 100|
|15% of 106||₹15.9|
|Amount paid in total|
|21.9% of 100|
Remember, this entire amount is payable as the previous tax system did not have an input tax credit scheme. Now, let us suppose that a company, which is now under GST, spends ₹100 on Facebook through an agency:
|6% of 100||₹6|
|18% of 100|
[After availing input tax credit]
|6% of 100|
Pre-GST, the company had to pay ₹21.9. Under the GST regime, with input tax credit scheme (which will allow the company to claim the entire ₹19.08), it has to pay only ₹6.
According to their input tax credit eligibility, companies will be able to reduce their tax on advertising drastically.
GST has introduced flexibility into the industry and gives companies a sufficient margin to spend more on advertising. The smooth flow of tax credit makes the service cheaper under GST. This is all you need to understand about GST on online ads and agency fees.
The digital sphere is expected to grow and evolve further with latest trends, 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.
This is a guest post authored by Aditya Mehta. Aditya has completed his MBA from London Business School and is a seasoned marketer. He is running a digital marketing solutions company that has served over 90 clients ranging from startups to multinationals in 8 countries. We, at InstaTaskers, are immensely grateful to him for sharing his thoughts and expertise with our readers.
The above article had been provided for informational purposes only. I do not claim to be an expert on the topic. Please consult your chartered accountant before making cost and pricing decisions for your company.