Clarification on GST Treatment for Advertising Services Provided to Foreign Clients

Introduction

The Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 230/24/2024-GST on September 10, 2024, to clarify the GST implications on advertising services provided by Indian advertising agencies to foreign clients. This clarification comes in response to requests from the trade and industry, as some GST field officers were treating such services as supplied within India, thereby denying export benefits.

This article outlines the key aspects of the circular, addresses issues that were raised, and provides a comprehensive understanding of the GST treatment for these services.

Background: The Confusion Over Advertising Services to Foreign Clients

Many Indian advertising companies offer services to foreign entities, including media planning, content creation, and purchasing media space for advertisements targeted at Indian audiences. While these services are rendered to foreign clients, there was ambiguity regarding the place of supply of these services under the GST regime, leading to confusion over whether they could be classified as exports and thus qualify for tax benefits.

Some tax officers argued that since the advertisements were shown in India, the place of supply should be considered within India, and the advertising services should be taxed accordingly. The circular was issued to address these concerns and provide uniformity in how the law is interpreted and implemented.

Key Clarifications in the Circular

The circular addresses three major issues related to the treatment of advertising services under GST:

1. Whether Advertising Companies Are Considered Intermediaries

Issue: Are Indian advertising companies acting as intermediaries when they provide services to foreign clients?

• Explanation: According to Section 2(13) of the IGST Act, an intermediary is a person who arranges or facilitates the supply of goods or services between two parties but does not supply them on their own account.

• Clarification: Indian advertising companies providing end-to-end services to foreign clients, including media planning, purchasing media space, and managing the advertising campaign, are not intermediaries. In such cases, the advertising company is the principal supplier of services to the foreign client. These companies are entering into two separate contracts: one with the foreign client and another with the media owner for procuring ad space. Since the advertising company is directly responsible for the service and not merely facilitating a transaction, it is not an intermediary.

• Conclusion: The services provided by the Indian advertising company are treated as principal-to-principal supplies. Therefore, the place of supply is determined based on the location of the foreign client, which is outside India. As a result, the services are considered exports and qualify for export benefits under GST.

2. Who is the Recipient of the Services: Foreign Client or Indian Representative?

Issue: Can the foreign client's representative in India or the Indian audience of the advertisement be considered the recipient of the services?

• Explanation: Section 2(93) of the CGST Act defines a "recipient" as the person who is liable to pay consideration for the supply of goods or services. In cases where an Indian advertising company provides services to a foreign client, the foreign client is liable to pay for the services.

• Clarification: The recipient of the services in such scenarios is the foreign client, not the Indian audience of the advertisement or any representative of the foreign client based in India. Even if the advertisements are aimed at the Indian market or a subsidiary of the foreign client is interacting with the advertising company, the foreign client remains the actual recipient, as they are the ones paying for the service.

• Conclusion: Since the foreign client is the recipient of the services, the place of supply remains outside India, and the services are treated as exports.

3. Whether Advertising Services are Performance-Based Services

Issue: Are advertising services provided to foreign clients considered performance-based services under Section 13(3) of the IGST Act?

• Explanation: Section 13(3) of the IGST Act states that the place of supply for performance-based services is the location where the services are performed, provided that the recipient or their representative is physically present during the service delivery. This applies to services that require the physical presence of goods or individuals.

• Clarification: In the case of advertising services provided to foreign clients, there is no requirement for the physical presence of the foreign client or their representative in India. The services are provided remotely, and the advertisements are managed and displayed without the foreign client's involvement in India.

• Conclusion: Advertising services provided by Indian companies to foreign clients do not fall under the category of performance-based services. Hence, the place of supply cannot be determined based on the physical location of the recipient. Instead, the place of supply is the location of the recipient, which is outside India.

Place of Supply and Export Benefits

The circular makes it clear that in cases where an Indian advertising company provides comprehensive services to a foreign client, the place of supply is the location of the foreign client, i.e., outside India. As per Section 13(2) of the IGST Act, the place of supply is determined by the location of the recipient if no specific provisions of sub-sections (3) to (13) apply.

Therefore, these services are considered exports under Section 2(6) of the IGST Act, subject to fulfilling the conditions of export, such as receiving payment in convertible foreign exchange. This means the services qualify for tax exemptions and export benefits.

Special Case: When an Advertising Agency Acts as an Intermediary

The circular also addresses situations where an Indian advertising company acts solely as an intermediary. In some cases, the Indian agency may only facilitate the purchase of media space between the foreign client and the media owner, without directly supplying the advertising services.

Intermediary Scenario: If the advertising company merely facilitates the transaction between the foreign client and the media owner, where the media owner invoices the foreign client directly, the Indian advertising company is considered an intermediary under Section 2(13) of the IGST Act. In such cases, the place of supply is the location of the supplier (the Indian advertising company), and the services are not considered exports. Consequently, the services are taxable in India.

Conclusion

This circular provides much-needed clarity on the GST treatment of advertising services provided by Indian companies to foreign clients. It establishes that when Indian advertising companies provide comprehensive services, they are not intermediaries, and the place of supply is outside India. Therefore, these services qualify as exports and can benefit from the corresponding tax exemptions.

However, in cases where the advertising company acts only as a facilitator, the place of supply is within India, and the services are taxable under GST. Businesses providing advertising services to foreign clients should carefully review their contracts and agreements to ensure they meet the conditions for export benefits under GST.

This clarification helps ensure uniformity in the application of GST provisions, reducing confusion and helping Indian businesses navigate the complexities of cross-border service transactions.

Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.