Content creators are making calls to tax experts, chartered accountants and influencer marketing agencies to understand what a new clause, Section 194R in the Income-tax Act which is applicable to social media influencers, means for them.
Ocean Sharma, an e-sports player with an Instagram following of 328,000, is reaching out to his CA friends to find out more about the new provision which mandates tax deducted at source (TDS) on freebies influencers receive from businesses for sales promotion.
It was Budget 2022-23 that had brought in the provision of TDS at 10 percent for any person providing any benefit or perquisite exceeding Rs 20,000 in a year to a resident arising from the business or profession of such resident.
For influencers, this means that they will have to disclose the free samples they receive from brands or companies while filing their income tax return and TDS will be applicable if the freebies are retained by them since such items will be deemed a perquisite. In case the influencer returns the free samples, TDS will not apply.
Hidden promotional expense
“People used to get benefits but there was no avenue for the government to track this because it was not reported in (income tax) filing and to plug this gap the tax authorities have introduced this new section,” said tax expert Ravishankar Raghavan, partner, tax and private client group, Majmudar & Partners.
He added that the new provision is to widen the tax base and to ensure that recipients declare the free samples they receive as income while filing their taxes.
Influencer marketing platforms that are the bridge between content creators and brands pointed out that many brands that offer influencers free samples or gifts as a goodwill gesture in return for a post on social media would not show it in their books as a promotional expense. While a promotional expenditure by brands, this remained untracked because influencers did not disclose it while filing income tax returns.
“Free samples often shared with the influencers are also shared with the expectation of them endorsing it, which benefits the company. By marketing the product the influencer is extending a service to the brand, making it a transaction. But now with such a provision, a lot of influencers may hold back from barter collaborations largely because of the lack of clarity around the subject,” said Ishan Jindal, founder and CEO, Wobb, an influencer marketing agency.
He added that barter collaborations are one of the primary go-to methods for both brands and influencers. “For brands because of the cost efficiency and for influencers because of the feasibility and availability of such collaborations,” he said.
Vaibhav Odhekar, Managing director India & Middle East, AnyMind Group which operates influencer marketing platform AnyTag said that while many brands and influencers had started complying with 10% TDS for commercial transactions like cost per post or brand endorsements, the same was not applied to barter deals.
Now, under the new rule, influencers can be asked to file advance tax if the value of the gifts received exceeds Rs 20,000 in a year, said Arpan Soni, head of client servicing and talent management, IPLIX Media, an influencer marketing firm.
According to the Central Board of Direct Taxes circular on TDS on benefits or perquisites, if a person is providing benefit in kind to a recipient and tax is required to be deducted under Section 194R, the person has to ensure that the tax that has to be deducted has been paid by the recipient.
Impact of new TDS rule
“This will affect micro-influencers negatively as they primarily do barter associations only. It is a way for them to build relationships with these brands while they are setting up their base in the field,” said IPLIX Media’s Soni.
Micro-influencers are categorised as those who have 100,000 to a million followers.
Soni added that the tax rule will also impact tech influencers as they get gadget review units from brands to keep. “Both the tech brands and influencers will now have to track these exchanges in detail. Travel influencers get flight or hotel tickets in exchange for promotion. It will be tricky for these people to work as it used to be mutually beneficial for both brands and influencers,” said Soni.
Ketan Dalal, MD, Katalyst Advisors, an advisory firm, said that the new section was not in keeping with the concept of ease of doing business. “This is going to be an extremely cumbersome process for everyone—the creators, the agency and the brand—to track and file these deals,” said Shivam Agarwal, founder, Deckster.Live.
Kunal Kishore Sinha, co-founder and COO, ClanConnect, an influencer marketing platform, pointed out that a lot of content creators are young professionals who are not aware about tax filing. “These people don’t have access to an accountant or CAs. In fact, a creator from Bhubaneswar who we were in touch was not able to give us a proper invoice.”
Validation for influencers
But he said the reason for the new rule is because it is an unorganised sector and the government wants to bring the entire industry under the tax ambit.
“There is a recognition at the government level that this is a new breed of professionals that are getting created. This means a massive validation for the (influencer) space. Generally, you have mention of professionals like CEOs but now you have an influencer also.”
Digital content creator Rasleen Grover said that given the strong growth the influencer space has been seeing in revenue, it became necessary to have regulatory framework.
In addition, Pranav Panpalia, founder, OpraahFx, an influencer marketing agency, said that the new tax rule is a wake-up call for creators and agencies who have been very actively working via barter deals. “While barter may be a good way to pay in kind, it definitely doesn’t help creators pay their bills. This regulation was a need because cash or not, an earning via any mode is an earning and one has to pay tax on it.”
Sharing similar sentiments, Vedant Rusty, who creates content on films and web series, said, “This method of collaboration (free samples) was fundamentally unfair to the creators since, in my experience, not all products are used, most of them are actually discarded, handed down or resold.”
Earnings and brand deals
Pranav Agarwal, co-founder, Sociowash, a digital marketing firm, expects such deals to decline due to the new tax rule.
Some, though, don’t expect any substantial financial implication due to the new tax rule. Influencer Paritosh Anand, who creates content on various subjects and has a social media following of around 200,000, believes content creators’ earnings will not be affected but adds that the new provision is a complication.
But agencies think that there will be some impact on earnings. “Such a provision is bound to affect the earnings of the influencers largely because a lot of collaborations are barter and sampling-based. The grey area might make some influencers hesitant about such collaborations altogether,” said Jindal.