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Lean times coming for ad industry?
By Duruthu Edirimuni
Sri Lanka’s advertising industry is reeling from the proposed new tax in the Budget on the spending of companies on advertising but there may be some relief at hand.

The government has promised relief - possibly even 100 percent exemption - on advertising of locally produced products and value added items in an apparent bid to promote consumption of local products, according to Rohan Rajaratnam, President of the 4As, the advertising industry’s professional body.

“On clarifying this issue from the Treasury, we were told the government is prepared to provide relief on locally manufactured products or value added products,” he told The Sunday Times.

On Thursday the industry and its partners after a meeting to discuss the crisis and its implications decided to write to the government seeking relief for a sector they say is an intrinsic part of any growing economy.

Among those present at the meeting were representatives of radio/TV stations, ABC, MBC, Rupavahini, the Press Council, heads of advertising agencies and their finance directors, representatives of the Outdoor Advertising Association and IAA.

Advertising and promotion have been listed in the budget as a taxable item with only 50 percent of the cost non-taxable. The move could see companies cutting advertising budgets by 15 to 25 percent but is unlikely to impact on seasonal advertising next month as the proposal is effective only next year.

There was speculation that the move was politically motivated to dilute revenues of the private media often perceived by the government as pro-opposition. “To some extent this may be true since state media like the Lake House group and Rupavahini with their wide reach won’t be affected as companies would be compelled to advertise there,” one media specialist said.

However Commissioner, Large Tax Payer Unit, Department of Inland Revenue, R. P. L. Weerasingha denied this was the reason saying the main aim of the budget is to collect revenue and not to resort to indirect practices.

He said this tax would apply only to above the line advertising (ATL) such as the print and electronic media and below the line advertising (BTL) such as billboards and poster campaigns and not for tenders and recruitment ads.

“Capital expenditure is incurred in advertising because when a product is publicised there is a certain amount of goodwill that is created which is treated as capital expenditure,” he said. Another reason for this budget proposal is that the cost of goods has increased due to advertising spending. “There are social concerns such as the rural poor not being able to afford the goods that are advertised on a daily basis,” he said.

J-Biz Chairman Kingsley Bernard said marketing and publicity efforts of companies would be affected. “I do not know the intention behind it, but certainly private media will be affected. In the marketing context, it is not such a progressive proposal,” he said.

CEO of Grant McCann-Erickson, Neela Marikkar felt this would force firms to cut back on advertising on an issue that not only distressed the advertising industry but also the packaging and marketing sector.

“The whole gamut of industries relating to advertising is going to be affected,” she said. She said ad agency clients are looking to slash their advertising budgets by half because of this proposal to cushion their profits. “The margins are dropping, industry has become extremely competitive and the 50 percent tax on advertising expenditure is a huge amount for a company,” she said.

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