The Government's move to force newspapers to levy tax deducted at source (TDS) on payments made by them to advertising agencies amounts to double taxation and is based on a lack of understanding of the relationship between newspapers, ad agencies, and advertisers in todays world of disintermediation, feel tax experts, advertisers, media buyers and media analysts.

According to tax experts, advertisers already deduct 1% of the total amount paid by them to ad agencies for advertising in newspapers. The recent circular of the Central Board of Direct Taxes (CBDT) that directs newspapers to levy TDS on payments to ad agencies for the same advertisements therefore amounts to double taxation of the same income, they say.

Take the case of an FMCG company which spends Rs 1 crore on advertising in a newspaper through an ad agency. The advertiser already pays Rs 1 lakh as TDS to the government and pays the remaining Rs 99 lakh to the agency. Of this, the newspaper nets Rs 85 lakh and the agency gets Rs 14 lakh. The government has therefore already received Rs 1 lakh, which amounts to around 7% of the Rs 14 lakh earned by the agency. If, as the government has now directed, the newspapers levy a 5% TDS on the Rs 15 lakh (on which Rs 1 lakh has already been paid as TDS), it would amount to double taxation.

Says Dabur India group director P D Narang: Prima facie, there appears to be a case of double taxation. The relation between publications and ad agency is not that of a principal and agent. The government should review its decision. Adds Mukesh Butani, partner of CA firm, BMR & Associates: Withholding tax at two different stages is not fair.

Sam Balsara, CMD, Madison Communications, says the governments circular is totally wrong in its approach. TDS is deducted by those who make payments. In this case, advertisers pay the money, cut TDS, gives the balance to the ad agency, and issues a TDS certificate to the agency. Publications do not pay agencies. Agencies do bulk buying from them. Publications only give a value discount and value discounts cannot be construed as payments, he said

Mr Balsara added that several years ago, a similar case had happened in the case of Doordarshan but subsequently the appellate authority had resolved the issue.

According to Ravi Kiran, CEO, Starcom MediaVest, South Asia, there appeared to be a lack of understanding of the dynamics of the industry. Media analysts feel that by extending the scope of section 194 H of the Income-Tax Act to payments made by newspapers to ad agencies and treating such payments as commission, the government is not properly interpreting the relation between them. They point out that the CBDT circular is perhaps based on an unfounded assumption that ad agencies act as agents or brokers of newspapers.

The relationship between newspaper and ad agency is not that of an agent and a principal. Both the newspaper and agency are principals. The agency does not render any service to the newspaper. The newspaper does not hire the agency as its agent or broker. Instead, the agency renders services to the advertisers in terms of designing its creative communication strategy and effective media planning, says an analyst.

Unlike in the case of mutual funds, insurance products, and equity markets, where sale and purchase have to happen through a broker, there is no legal requirement for a newspaper and advertiser to have an ad agency between them. Direct trading of securities on the NSE or BSE is not tenable. The buyer and seller have to engage either an online or an offline trader. However, in the newspaper business, the buyer (advertiser) and seller (newspaper) can directly transact. Newspapers do not make it compulsory for an advertiser to engage an agency or broker to engage in business with them. Advertisers are free to buy space directly from newspapers for tariffs that are mutually agreed upon or on applicable tariffs. After the advent of the internet, clients can deal directly with newspapers to buy space just as a client can buy air tickets directly without a travel agent on the net, says a media expert.