A new clause under the service tax rules, slated to come into effect from July 1, has upset the Rs 20,000-crore Indian advertising industry.

The Point of Taxation Rules, first introduced during the Union Budget in February, says service tax, which was so far paid after the collection of dues from clients, would now have to be paid on the 5th or 6th of every month once the invoice for the service was raised. In other words, irrespective of whether dues were collected from clients or not, agencies would have to pay service tax.

Ad and media agencies are upset because the rule does not take into account the principle of credit. Creative agencies provide a 30-day credit period to their clients to pay their dues, while media agencies provide a 45 to 60-day window.

According to industry insiders, the earlier rule did take into account the principle of credit. It was the month following the collection of dues from clients that we paid service tax, says Nagesh Alai, president of the Advertising Agencies Association of India (AAAI), the apex body of ad agencies in India.

The government move will allow convergence of the existing rules and regulations with the Goods & Services Tax (GST), which is likely to be introduced in April 2012.

Agencies said the new rule will result in a cash flow mismatch. It is not possible to raise an invoice within 14 days as indicated by the new rule, nor is there clarity on the date of completion of service, says Alai.

So far the AAAI has made representations to the Information & Broadcasting (I&B) Ministry, the Central Board of Customs & Excise and the Finance Ministry to convince them of the issues on hand. It had also released ads last week in leading dailies in an attempt to apprise the government of its contentions with the rule. But the government is yet to get back to them.

Agency sources said the new service tax rule is unlikely to be reversed soon. If a new rule has been put in place. I dont see it being reversed easily, said Mahesh Chauhan, earlier group chief executive officer, Rediffusion Y&R and the co-founder of Salt Brand Solutions. He added, Agencies would have to be careful when raising invoices. It will bring about some discipline there.