The Ministry of Finance (MoF) on September 11th 2024 issued a clarification in respect of advertising services provided to foreign clients. This crucial clarification is regarding the Goods and Services Tax (GST) treatment of advertising services provided by Indian advertising companies to foreign clients. This clarification also aims to address concerns raised by trade and industry regarding the place of supply and export benefits for such services.
The Scenario
Indian advertising agencies often provide comprehensive advertising services to foreign companies. These services include everything from media planning and content creation to procuring media space and monitoring ad campaigns. In these transactions, the advertising agency may invoice the foreign client for the full suite of services while also handling payments to media owners within India.
Key Issues Addressed
The CBIC has clarified three major issues regarding the GST treatment of these services:
- Is the Indian Advertising Company an “Intermediary”?
- Who is the “Recipient” of the Services?
- Are the Advertising Services Performance-Based?
1. Is the Indian Advertising Company an “Intermediary”?
Definition of Intermediary: According to section 2(13) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), an intermediary is defined as a person who arranges or facilitates the main supply of goods or services but does not involve themselves in the main supply on their own account.
Clarification: In the case of Indian advertising companies providing services to foreign clients, the CBIC has clarified that these agencies are not acting as intermediaries. Here’s why:
- Principal-to-Principal Relationship: The advertising agency enters into a direct agreement with the foreign client to provide a comprehensive suite of advertising services. This agreement involves the agency directly supplying services and not merely facilitating a transaction between the foreign client and media owners.
- Separate Agreements: The advertising agency enters into two distinct agreements: one with the foreign client for the advertising services and another with media owners for procuring media space. The agency handles payments to media owners and invoices the foreign client directly.
Therefore, in this scenario, the advertising company is not considered an intermediary but is providing services on its own account.
2. Who is the “Recipient” of the Services?
Definition of Recipient: Under section 2(93) of the Central Goods and Services Tax Act, 2017 (CGST Act), the “recipient” of the services is the person who is liable to pay for the supply of goods or services.
Clarification: In the context of advertising services provided to foreign clients, the foreign client is considered the recipient. Here’s why:
- Liability for Payment: The foreign client is responsible for paying the consideration to the Indian advertising agency, not the target audience in India or any representative of the foreign client in India.
- Invoice and Payment: The advertising agency issues invoices to the foreign client and receives payments directly from them. Even if the foreign client has a representative in India, this representative is not considered the recipient of the services.
Thus, the foreign client, not the Indian representative or the target audience, is the recipient of the advertising services.
3. Are the Advertising Services Performance-Based?
Definition of Performance-Based Services: Performance-based services are those where the place of supply is determined based on the physical presence of the recipient or their representative with the supplier. This is outlined in section 13(3) of the IGST Act.
Clarification: The CBIC has clarified that advertising services do not fall under the performance-based category for the following reasons:
- No Physical Presence Required: The provision of advertising services does not necessitate the physical presence of the recipient or their representative with the supplier. The services are provided based on a contractual agreement without any requirement for physical interaction.
- Not Covered under Specific Clauses: The advertising services do not meet the criteria specified in sections 13(3)(a) or 13(3)(b) of the IGST Act, which are related to performance-based services.
Therefore, the place of supply for advertising services is not determined under these provisions but is based on the default rule.
Determination of Place of Supply
Given that the advertising services do not fall under the specific provisions of section 13(3) to (13) of the IGST Act, the place of supply is determined under section 13(2). According to this provision, the place of supply is the location of the recipient of the services.
For Foreign Clients: Since the recipient (foreign client) is located outside India, the place of supply for these services is also outside India. This makes the services eligible for export benefits under section 2(6) of the IGST Act, subject to compliance with the conditions specified.
Exception: When the Indian Company Acts as an Intermediary
In some cases, an Indian advertising company might only act as an agent facilitating the procurement of media space for the foreign client. In such scenarios, the media owner directly invoices the foreign client, and the advertising company only facilitates the transaction.
In these cases:
- The Indian advertising company is considered an “intermediary” as per section 2(13) of the CGST Act.
- The place of supply for these facilitation services is determined based on section 13(8)(b) of the IGST Act, which refers to the location of the supplier (the Indian advertising company).
