The advertising industry may see a hole in its pocket as the service tax anti-evasion wing mounts a country-wide operation to book offenders.
This can have a major impact on major media agencies and wipe out the annual profits of smaller players.
Officials told Business Standard that advertising and media buying agencies were guilty of not including the bulk discounts received from print media companies while declaring their agency commission revenues.
They claimed that the agencies could be nailed on the basis of a 1999 circular, which stated that while the amount paid to print media was exempt from service tax, the commission received was taxable.
"The value component not paid to print media companies is taxable," said a senior official.
"The department is in the process of contacting ad agencies and clients to unearth the exact nature of the transactions," said another official. He added that the department was co-ordinating with service tax wings all over the country to unearth the scale of the evasion.
What opened a can of worms was the nailing of an agency in Mumbai, from which close to Rs 1 crore (Rs 10 million) was recovered. The department has already issued a notice to another large agency and is probing the functioning of several others. Their names were withheld as investigations were in progress.
For the high-profile but low-margin advertising business, the operation can seriously dent bottomlines, as tax claims can be backdated five years.
According to advertising executives, by a conservative estimate, bulk discounts amount to five per cent of total ad spends. So, if a large media buying agency has billings of Rs 500 crore (Rs 5 billion), it would have to pay service tax of Rs 3.06 crore (Rs 30.6 million) on bulk discount earnings of Rs 25 crore (Rs 250 million) at current service tax rates.
If the ad agency makes a net profit of 10 per cent, its revenue for the current year would be Rs 50 crore (Rs 500 million). However, if tax officials slap a five-year tax claim, the agency would have to cough up Rs 10 crore (Rs 100 million) as additional service tax (average of eight per cent over five years) - a 20 per cent hit on the year's bottomline.
On top of that would be the interest component, an average of 17.5 per cent over the last five years.
The total print media spends in 2005 amounted to Rs 6,336 crore {(Rs 63.36 billion) Source: Adex, a division of TAM media}. The taxable income for the industry through bulk discounts alone would be approximately Rs 317 crore (Rs 3.17 billion) for 2005.
On a service tax slab of 10.2 per cent up to April 2006, the ad industry would have to shell out an additional service tax of Rs 31.05 crore (Rs 310.5 million) for 2005, apart from the interest.