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SP news blog - Star India Pvt Ltd. in war with Ad agencies.

Post by slmu on 2013-05-02, 12:45

EXCLUSIVE: Star India Pvt. Ltd In War With Ads Agencies.

Source: Press Release.


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A spat between television channels and advertising agencies over billing practices appears to be on the verge of reaching flash point with the broadcasters threatening to pull the plug and take commercials off the air over the issue.
“We will not run any commercials today because the advertising agencies are not agreeing to the net billing system,” Uday Shankar, chief executive officer, Star India Pvt. Ltd, said .
“We have been negotiating with the agencies for nearly two months now. But it is a standoff now.”
For more than a month now, India’s estimated Rs.13,000 crore television broadcasting industry has been in negotiations with the advertising agencies to switch from a ‘gross’ billing method to a ‘net’ method. Given the state of their finances though, it’s not clear how many television channels can actually afford to take a stand on the issue by pulling advertising.
Television channels, both news and entertainment, approached the advertising agencies seeking the change after receiving notices from the Income Tax department for non-payment of TDS, or tax deducted at source, on 15% agency commission shown on the bills presented to the media agencies.
The broadcasters claim they list the 15% commission on the bill at the behest of the agencies although no such transaction takes place and no money is actually paid. They were therefore not deducting tax on this amount.
Gross billing is the value of the bill including the 15% agency commission; net billing is the value of the bill minus the commission
Tax experts advised the channels that they could be liable for the amount.
“So we decided to clean up the system,” Shankar said. “We will now raise a bill for Rs.85 (and not Rs.100 as before) and get paid Rs.85 only. It will be a transparent system.”
The media agencies—both independent firms and those that are part of large advertising conglomerates—have so far not agreed to the change in billing pattern, leading to a standoff.
The head of a prominent media agency in Delhi said that discussions with broadcasters were still on as the agencies object to the net billing system.
“If the deadlock continues, advertisements may go off air tomorrow,” she said.
The television channels had given adequate warning to the advertising agencies, said Shailesh Shah, secretary general of the Indian Broadcasting Foundation (IBF) industry grouping.
“I am not saying that all the ads will be switched off today, but if they do not find a solution, we will be left with no choice but to go without advertising,” Shah said.
The total tax liability runs into more than Rs.1,000 crore due over the last three years. At least 30 channels in Delhi, Mumbai, Chennai and Kolkata have got the notices and Shah expects more to receive them.
He also said that the order didn’t reflect reality: “Channels do not receive this money nor do they pay this amount to the agency. We pay tax on what we receive. The tax order on us is ridiculous.”
A top news broadcasting company executive said: “The agencies are asking for more time. One, we do not understand what their issue really is in making this change. Secondly, why should we take on a tax burden just to do them a favour? It’s crippling for the industry.”
The executive requested anonymity owing to the sensitivity of the matter.
IBF last week sent out an advisory to members to send bills on a “net” basis to the agencies even as talks continue with the Advertising Agencies Association of India (AAAI) industry lobby.
Meanwhile, the channel owners are also planning to appeal against the I-T department’s order. “Except that even for the appeal we have to deposit 50% of the money upfront. It is a huge cash flow issue,” said Shah.
The 15% ‘commission’ dates back to a time when full-service agencies actually worked on commission, before the media and creative duties of an agency were split.
Traditionally, agencies functioned as agents of the media outlet, booking ads on behalf of media owners—print or television, explained Meenakshi Menon Madhvani, managing partner at Spatial Access, a media audit company.
They would bill advertisers the full amount and show 15% as a commission from the media owners.
“What they told their advertisers was that their commission was coming from the media owners and not the clients,” she said.
The media owner got taxed on the 85% while the agency was taxed on the 15%.
That practice has remained on paper even though it doesn’t exist any more. For the last 10 years, the practice is that media agencies receive a 1-3% commission while creative agencies work on a 6-9% commission depending on how these are negotiated.
Madhvani said former Star India CEO Peter Mukherjea was the first to raise the issue and broadcasters have been attempting to change the practice for the last four years.
A senior media buyer said on condition of anonymity that the agencies are not willing to change their accounting practice.
A top executive at an consumer goods company explained why net billing may affect the agencies adversely.
“Even the 2-3% media commission and 8% commission to creative agencies is charged on gross billing. If channels insist on net billing, the agencies will lose revenue as we will then pay them commission on net billing which is much lower,” this person said.
Advertising agencies say some of the channels are more amenable to keeping the current situation going.
“Some individual channels realise that the decision to shift from gross to net billing was not well thought through, and that it is unviable. These channels are willing to continue with the gross billing system. Discussions are still on with others,” said a top AAAI member who declined to be named.
Added another media buyer in Delhi: “It’s a blackout situation for the business. This should not be the stand we all take. These are age-old practices… All our accounting software is based on this and that will have to undergo major changes to adjust to the new billing system.”

slmu
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