Except for death and taxes nothing is certain. We all have heard it several times isn’t it? When we look at the current changes in Point of Taxation (POT) rules with respect to SERVICE TAX, we realise that though the taxes (we are talking about service tax in particular) certain the incidence of tax and its administration could keep changing time and again. When it happens we keep complaining, shouting, protesting and so on. And later on we realise that the best thing would be to adapt and start following it. I am sure something similar would happen in case of leapfrog changes in POT that would come in effect from 1st July 2011.
Without getting technical aspects of those changes let us understand what has changed specifically for media and advertising companies.
1) Till 30th June 2011 whatever invoice service provider raises, she has to pay service tax thereon only once that amount is being collected from the customer. From 1st July the tax has to be charged while raising the invoice as usual and it has to be deposited to the treasury on or before 5th of the subsequent month, irrespective of the collection, In case, you operate in monopoly market and are privileged to be able to collect the same in advance or in less than 30 days, you need to pay tax element on or before 5th of the subsequent month.
2) The immediate reaction of many people has been, “oh in that case i would raise my invoice only just before the collection and manage my cash-flow.” People in finance ministry are very smart enough to take care of the situation. The rules say that the invoice has to be raised by service provider within 14 days from the “completion of the service”.
3) “The completion of service” has to be a part of written contract and cannot be left to the imagination of the service tax auditors. There task is not to “imagine” anything but to increase revenue for the department.
4) What if any service provider fails to collect? In other words after the payment of service tax on the invoice if the same turns bad, then there no recourse for the same. The service tax paid on subsequent bad debts is a cost any service provider has to bare.
What are the implications for outdoor advertising agencies in particular?
1) Average collection period for any outdoor advertising agency is in the range of 70 to 170 days. On a monthly billing you need to pay the service tax within 5 days from the end of the month. For every agency managing this cash-flow would be a nightmare. Some of us will have to borrow only to pay the tax, which means there cost implications as well by way of cost of funds.
2) The documentation with respect to the contractual obligations ahs to be water tight to the extent possible and there should be as less grey area as possible, to be left for the interpretation of the service tax auditors. “Completion of the service” would give rise to all kinds of disputes and litigations with the department.
The above measures are within the purview of the agencies and they would be internal controls. The following should be done by forming industry association:
1) Media owners have become aggressive and they have already decided what they want and what they would do for the same. Agencies’ association has to deal with it work towards preserving their own interests.
2) While competing within they need to define basic hygiene factors and stick to them. For example
3) Today there are agencies that go out and get the business at ZERO agency commission and on top of it they offer certain percentage of saving in media buying to that customer (sic!).
4) Some agencies while pitching for business offer crazy collection terms to the clients.
If such practices continue unabated they would turn out to be destructive for the entire business as a whole.
1) Agencies association needs to create a mechanism to define aspects as to what constitutes the “service” and what would amount to the “completion of the service” to avoid the potential are of litigation. Even after doing that when dispute arises with the department it should be represented and dealt with at the association level.
2) While an individual agency will have no bargaining power with the department. Senior officers in the department are instructed to lend an ear to trade associations and forward their grievances to the CBEC and finance ministry for resolution.
The moment the new Service Tax rules were brought in, the first two steps OAP took was first to write to the industry body to come together to understand the implications. The second step was to immediately realign and partly redesign our internal systems and processes to narrow gaps on billing, documentation and collection. Our ISO QMS was already in place. We are extending this QMS system with new provisions that would facilitate speed. We have taken this unfortunate ordeal as an excuse and also an opportunity towards meeting OTP (On Time Performance) and top quality QMS.
“We would love to see our competitors as well adopting to this system since it would help the entire industry to stay afloat, survive the onslaught and thrive in times to come.”
Courtesy: http://www.audiencematters.com
