Content creators and digital influencers are buys in calling chartered accountants, tax experts, and influencer marketing agencies to decode the impact of newly drafted Section 194R of the Income-tax Act, which applies to social media influencers, on their earnings.
Influencers are reaching out to their CA friends in order to learn more about the new provision that requires tax to be deducted at source (TDS), for freebies received from businesses to promote products and services.
For Union Budget 2022_23 the government of India has introduced the provision of TDS at 10% for all persons providing benefits or perquisites exceeding Rs 20,000 per year to residents arising out of their business or profession.
Influencers will also need to disclose details of any free samples received from companies or brands while they file their income tax return. TDS will be applicable if they retain the freebies as they are considered prerequisites. TDS, however, will not be applicable if the influencer returns the samples in a stipulated time frame.
“People used to receive benefits, but it was difficult for the government to track this because it wasn’t reported in (income tax filing). To fill this gap, the tax authorities have created this section,” Ravishankar Raghavan a tax expert, Majmudar & Partners partner, tax and private clients group, Majmudar & Partners.
The new provision was intended to broaden the tax base and ensure that recipients declare any ‘retained’ free samples received as income when filing taxes.
The bridge between content creators and brands is influencer marketing platforms. Many brands who offer free samples or gifts to influencers in exchange for posting on social media will not record it as a promotional expense. This was a promotional expense by brands easily get away with it as it was not tracked because the influencers didn’t disclose it when they filed their income tax returns.
The company benefits from the free samples that are often given to influencers. The influencer extends service to the brand by marketing the product, which is considered a transaction. However, many influencers might be reluctant to barter with brands due to such a provision in place now.
Barter collaborations are a common choice for influencers and brands these days. Especially the budding and micro-influencers who want to clinch a deal with brands at any cost easily agree to such an ‘arrangement’. Barter collaborations make a win-win situation for all parties involved as these are a cost-efficient option for brands and a feasible and affordable option for influencers as well.
The new rule allows influencers to file an advance tax request if the gift value exceeds Rs 20,000. Arpan Soni, head, client servicing, IPLIX Media (an influencer marketing company), said that the new rule applies.
The onus of influencers disclosing such benefits is on brands now. The Central Board of Direct Taxes Circular on TDS on Benefits or Perquisites states that if a person provides a benefit in kind to a recipient, and Section 194R requires that tax be deducted, that person/brand must ensure that the recipient has paid the tax.
New TDS rule: Impact on micro-influencers
This will negatively impact micro-influencers as they heavily rely on barter deals. It’s an easy way for them to build relationships with these brands as they set up their base in the market.
Micro-influencers can be defined as those with 100,000 to one million followers on any social media platform.
The influencers market is primarily dominated by tech influencers. These Tech influencers will be affected by the tax rule as they receive gadget review units from companies and are entitled to keep them forever in most cases. Both tech brands and influencers must now track the exchanges in detail.
Similarly, travel influencers who are fast becoming popular as the world is coming out from the grip of the pandemic, receive hotel or flight tickets. Going further it’s going to be tricky, rather difficult, for them to form an association as it was mutually beneficial for both brands and influencers.
Ketan Dalal (MD, Katalyst Advisors), an advisory firm believed that the new section isn’t in line with the idea of ease-of-doing-business. Deckster.Live founder Shivam Agarwal stated that this would be a cumbersome process for all parties–the creators as well as the agency and brand–to track these deals and file them.
ClanConnect’s Kunal Kishore Sinha, a platform for influencer marketing, stated that many content creators are young professionals and are not well-versed with tax filing. These people don’t have the ability to access an accountant or CAs.
Validation for Influencers
The new rule was necessary because the sector is unorganized and the government wants the whole industry to be taxed.
“There is recognition at the government that there is a new breed of professionals that are being created. This is a huge validation for the influencer space. You have mentioned CEOs, but now you have an influencer.
Undoubtedly, the new tax rules are a wake-up call for agencies and creators who have been actively involved in barter deals. Bartering is a great way to pay in cash, but it doesn’t help creators pay the bills.
Many people believe that the barter system is anyway fundamentally unfair to creators. Not all products get used, most are discarded, handed down, or resold.
As the government is mulling such policies, many influencer management agencies expect that such deals will decline because of the new tax rule. Brands would start preferring starlight and clean payout system which is easy to account for and manage for tax purposes as well.
The new rule is likely to impact micro-influencers as brands may become selective while forming an association with influencers now.