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Will ad agencies shift to net billing system?

The Advertising Agencies Association of India (AAAI), the apex body governing advertising in the country, is set to decide if all agencies should shift to a net billing system.

Shamni Pande        Last Updated: May 2, 2013  | 23:19 IST

Shamni Pande
The Advertising Agencies Association of India (AAAI), the apex body governing advertising in the country, meets on Thursday to decide if all agencies should shift to a net billing system.

This follows a spat involving ad agencies and television channels where many channels blanked out all advertising on Wednesday to protest over the Income Tax department holding them liable to pay tax on the gross amount they bill advertising agencies.

Until now, broadcasters would generate a gross bill for agencies charging for the advertising that ran on their channels. This billing included the 15 per cent commission that agencies are supposed to recover from clients.

However, much has changed in the industry in the last decade.

This practice of charging a flat commission was initiated many decades ago when agencies were mere 'agents' of media owners. Now, agencies are seen as much more - marketing partners of advertisers, or consultants.

Thus agencies, for over a decade now, no longer charge their clients a flat 15 per cent commission, but a fee. For one, there is a split between creative agencies and media agencies. Most advertisers have both, and each kind charges its own fee.

On average, media agencies charge about 2 to 3 per cent the total bill as fee, while creative agencies charge about seven per cent.

"Together this cost, on average, is only around 10 per cent. There are some small clients, who end up paying a fee that amounts to 15 per cent cost of the bill generated. But such instances are very few," says Meenakshi Madhavani, Managing Partner, Spatial Access - a company specializing in media audit.

Agencies typically submit their bills to their clients (the advertisers) only after deducting the 15 per cent amount from the bill generated by broadcasters. They charge a mutually decided fee instead.

So, what is the problem?

Agencies still cling to a system that perhaps allows them some room for negotiation or show value to their clients. There is fear among agencies that right now the diktat has come from television channels, but this could soon come from other media as well.

According to industry sources, some agencies do charge clients on the gross bill value and this still allows them a little room to manoeuvre - given that this industry is under huge growth pressure. And there is no reason why broadcasters should end up forking out payment of tax on an amount that really does not come into their kitty.

Besides, agencies need to remember that despite their protest, they have ended up footing the service tax bill. There is little that can be done if the law of the land demands a straightening of accounting procedures. After all it is not the taxing authorities job to figure out the real bill cost and who pays, how much.

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