Service tax on online advertisement

The budget presented by the finance minister of India for 2014-2015 financial year has got some news for the bloggers. Online advertising has been removed from the negative list for service tax exemptions. This means, Indian bloggers and online publishers will have to collect service tax from their clients and pay to the Government on behalf of the clients. However, AdSense publishers are not directly affected by this for the reasons covered at the end of this article.

History of service tax for online advertising
In 2012, the UPA government had changed the service tax policy and switched to the negative list based system. Online advertising was in the negative list, which allowed the bloggers to enjoy the service tax exemption for their online advertising revenue including the AdSense revenue. However, the NDA government has removed online advertising from the negative list, as per the new budget proposal and introduced service tax for the online advertising business.
(Even though only advertising revenue was excluded from service taxes earlier, some bloggers and publishers were reporting their other online income under online advertising revenue to avoid service tax. The online revenue is sort of a gray area and it is hard to distinguish between advertising revenue and other types of online revenue. So, many publishers have been interpreting the definition of service tax for online advertising in their favor in the past.)
How will the new service tax rules affect AdSense publishers and bloggers
As per the new budget, online advertising is no longer in the negative list for exemption of service tax. This means, all online publishers will have to collect service tax for their online advertising services from their advertising clients, effective 2014-2015 financial year.
Let us see how this will affect bloggers and online publishers:
There are few scenarios:
Scenario 1: publishers receiving advertising fees directly from advertisers
In this case, publishers will be dealing directly with advertisers. When an invoice is sent to the advertiser for online advertising, a service tax for 12.36% on the fees needs to be added to the bill. The recipient of the service (advertiser) is supposed to pay the service tax in addition to the normal advertising cost and the blogger/publisher just acts as an agent to collect the tax from the advertiser and pay to the government.
For example, consider you are selling advertising banners on your blog for Rs 10,000 per month. With the new rule, you will have to add 12.36% service tax to the advertising fees, which will make it Rs 11,236 cost for the advertiser. The additional Rs 1,236 you collect will need to be paid by you to the government on behalf of the advertiser. Please note that his is completely different from any income tax you have to pay from your revenue of Rs 10,000.
Service tax is not applicable in case you are providing services to a foreign client, subject to many conditions. You may want to consult a chartered account to check if service tax is applicable in your case. Also, service tax is not applicable if your annual turnover is less than 1,00,000/-.
In theory, there is no additional tax burden on the publishers and bloggers in this case. However, in most cases, you will be selling your ad space for a gross amount and your advertisers may refuse to accept the extra cost for service tax. In that case, you may be forced to include service tax in your total bill. So, you may be forced to reduce your advertising rates to accommodate the extra cost for the service tax. This will indirectly affect your income.
Scenario 2: You are using an ad network like Google AdSense
If you are not dealing with the advertisers directly but using an ad network, then you are not responsible to collect the service from the customers. The ad networks, like Google AdSense, TribalFusion, Amazon affiliate program etc, are responsible to collect the service tax from the advertisers and pay to the government. The bloggers and publishers are not responsible to collect or pay service tax.
Even in the second scenario, the service taxes will not directly affect the AdSense publishers and bloggers. However, due to the additional tax burden for the advertisers, it may affect their overall advertising budget and that will ultimately affect the income of publishers.
Here is the official statement from the finance budget:
To broaden the tax base in Service Tax, it is necessary to prune the negative list and exemptions to the extent possible. Accordingly, the negative list has been reviewed and service tax leviable currently, on sale of space or time for advertisements in broadcast media, is being extended to cover such sales on other segments like online and mobile advertising. Sale of space for advertisements in print media however would remain excluded from service tax. Similarly, tax is being proposed on the service provided by radio-taxis to place them on par with rent-a-cab service. These new levies will come into effect from a date to be notified after the passing of the Finance Bill
Small Scale Exemption
If your total income from advertising is below 10 lakhs during the financial year, you can optionally claim service tax exemption. However, if you have charged service tax to your clients, you are expected to pay that to the government.
How to collect service tax for advertising income
Most of the Indian AdSense publishers use Google AdSense or similar ad networks for providing advertising services. When AdWords publishers pay to Google, those payments include service tax as well. The service tax is collected by ad networks like Google AdWords.
Even though the new service tax rules will not directly affect the tax liability on the bloggers, it could indirectly affect the publishers since this will have a major impact on the advertising budget of advertisers due to their additional tax burden.
Service tax updates – December 2015
As of November 15, 2015, advertisers are liable to pay 14% service tax on their total advertising bill. The original service tax as per the budget proposal was 12.36, which was increased to 14% effective June 1, 2015. This was further increased to 14.5% from Novermber 15, 2015. When a bill is generated for the AdWords customers, 14.5% service tax will be added on top of the advertising cost.