The advertising industry has hit out against the government. An advertisement in major newspapers appealed against the new rule that compels agencies to pay service tax before payment is received, reports CNBC-TV18's Nikita Rana.

As per the rule, the deadline for ad companies to pay service tax on each client’s media spends is the fifth or sixth day of the month. However, ad agencies say that it takes more than 60 days to receive payment from the advertiser. So they will now have to pay the tax from their own pockets.

Nagesh Alai, president of AAI said, “There will be a mismanagement of cash flows. Now, we are expected to pay before payment is received. For this, we will have to raise loan. Interest rates are high these days. Also, an agency cannot raise an invoice in the stipulated period of time, because it's not possible to gather information and bills of different media within two weeks. There are lots of lacunas; hence, it's not workable and the definition is not clear.”

Agencies also worry that the rule will mean a change in the established cash-flow and billing structures. This is likely to affect the way advertisers operate as well. Sam Balsara, chairman, Madison Media said, “If the government doesn't relent, we will have to go to our clients, advertisers and ask them to pay our service tax in advance.”

Margins have always been an issue for advertising and media agencies. The new rule will add pressure to margins because any loan they take to pay service tax will have an added interest cost.

However, the industry is not united on the issue. Some agencies feel that service tax has to be paid only on the 3-5% upfront payment they receive from advertisers. One can say the industry will remain on tenterhooks until government issues clarity.

CNBC-TV18