On a hot, creative pursuit

Ad industry’s budget formula: Less taxes + more adspends = more consumption

It’s not surprising that India,  hailed as one of the most exciting consumer markets in the world, is witnessing a 20% annual growth in the advertising sector. The idea is to capture eyeballs, wallets and loyalty points before anybody else does. Keeping this in mind, the Centre’s role in the Budget should be to keep the momentum going, to take India to the next level of economic growth. The advertising and media fraternity is hoping to be a catalyst in this process and therefore expects a budget which simply pushes consumption through the roof.

Push consumption
The ad industry’s stance is a slight shift from the usual hankering over reducing service tax, fringe benefit tax, et al. Of course, less taxation is welcome. But from the macro view, the industry is hoping that the Budget should do
to consumption what a fresh supply of coal does to a steam engine in motion.

The insight is this: less taxation will improve bottomlines, making advertisers spend more on advertising. This will encourage more consumption, benefiting everybody in the process.

Industry experts say it’s not surprising that costs (real estate, research, infrastructure and people) have gone up and therefore taxation is inevitable.

Ravi Kiran, CEO, Starcom MediaVest Group, Southeast Asia, says, “As a media agency, I don’t think the government has a solution to all my problems. The purpose of lower taxation over a long-term is to boost consumption and I hope this budget does that.”

Ambi MG Parameswaran, executive director and CEO, Draftfcb+Ulka, says that adspends are directly related to the growth of markets.

He says: “Over the past

10 years, we noticed that when economic growth crossed 7%, it drew adspends to cross 10% levels. The recent stock market crash, or correction, has led to some dampening of sentiment. We have noticed that the stock market often drives the ‘mood’ of consuming classes. They feel ‘rich’ when the market is up and ‘poor’ when the market is down. Obviously a ‘rich’ consumer tends to spend more, though his bank balance is the same. A positive budget with some sops can help elevate the mood once again.”

Sam Balsara, chairman and MD, Madison Communications, says consumption can be increased when brands are built. “Indian entrepreneurs have been late in appreciating the power of advertising to build brands. Had the Tatas, Birlas, Godrejs understood this, our growth rates in the ’60s, ’70s and ’80s would not have been as poor as they have been,” he says.

Less taxes on TV sets, cable, DTH
To encourage consumption, a step in the right direction would be reducing duties and taxes on colour TVs and making cable and DTH (direct-to-home) services cheaper. Balsara explains: “The arrival of TV in a home, especially with a C&S connection changes the outlook of the family, makes it more ambitious, leads children to pursue better education, better lifestyle and afford the advertised products. It promotes consumerism, and that, we have finally understood, is not a bad thing.”

From a macro-view, although several categories have seen increase in advertising budgets by 20-25% to back aggressive growth plans, the margins for agencies have become thinner.

Reason being that the fallout of the media boom has been fragmentation of viewership, which has made media plans more complex and reduced the return of investment (ROI) of advertising. Secondly, it’s a well-acknowledged fact that Indian ad rates are one of the most lowest in the world. And thirdly, bottomlines for agencies have shrunk because of existing tax structures.

Unfriendly fringes
Fringe benefit tax (FBT), for example, impacts media and ad agencies in a big way because both sectors involve a lot of travel, food and entertainment-related costs.

Also, when agencies buy new equipment or software, they have to pay value added tax (VAT) — something which cannot be offset to the client by hiking charges and passing it on to them. This ultimately increases the cost of operations for the agency.

Also, analysts point out that more services related to the media industry have been brought under the service tax net like development and supply of content for use in ad agency services and sale of space in business directories, yellow pages and catalogues.

Meenakshi Madhvani, CEO, Spatial Access Solutions, a media audit firm, says exi isting service tax rates are “very high” (up from 10.2% to 12.36% in two years, an increase of 21%).

More pitches, more a/c shifts
“Advertisers are ensuring that their total expenditure includes service tax. Therefore the amount that goes to the media is actually going at a lower rate. This brings to light the most unfortunate fallout - quicker and more account movements,” she says.

The reason, she adds, is that advertisers are trying to milk the system to the greatest extent possible which leads them to become “saving seekers”.

“Agencies use this weakness and offer their services at lower rates to get business from competitors. This attitude on part of both the agency and the client, is leading to quicker account shifts,” says Madhvani.

As a remedial measure and in order to break clutter and fragmentation, adspends on below-the-line activities and non-traditional media is likely to be upped in the coming days.