The new TDS (tax deducted at source) rule for social media influencers will not only hurt content creators but also increase the cost for businesses.
Brands say that barter deals, which are a cost-effective way of associating with influencers to promote their products, will drop as influencers will opt for more paid deals.
Jag Chima, Co-Founder, IPLIX Media, a talent management agency, said that post the new rule number of barter collaborations will reduce.
"Not doing barter deals will affect brands as such deals save money and cut costs, extend your marketing reach, eliminate risks and promote mutual benefits," said Shrey Luthra, co-founder, FreeCultr, an apparel brand. The company worked with 100 influencers during FY22.
Jayati Goel, founder of Hanoor, a skincare brand, explained how barter deals are cost-effective for brands. “If an influencer charges $100 per post, the respective brand could give them hard cash, or they can provide $100 worth of their products. Rewarding the retail equivalent value of the products means the brand only pays for the products. In reality, $100 worth of products may only cost $60 to the brand. This simply means the brand saves $40 in cash," she said.
Many brands prefer giving products, as paid deals are more expensive, said Vidit Patni, founder, Madake Bamboo Solutions. “Earlier, we could send out freebies in bulk but now we will rethink because we will have to deduct TDS," he added.
Rahul Dayama, head of marketing, Urbanic, a clothing brand, said that the expense of brands will increase with the new rule. “We do barter deals with micro and nano influencers and we are analysing how much return on investment (RoI) will get impacted. We have decided that as a brand, we will be paying the TDS. So, the expense will be higher and our RoIs will get impacted." The company works with around 300 influencers per month.
The new provision mandates 10 percent TDS on freebies influencers receive from businesses for sales promotion. The tax is applicable only if influencers retain the products and if the value of the benefit exceeds Rs 20,000 in a year.
Explaining how tax will be applicable under this new rule, Harshit Vij, co-founder, FreeCultr, said: "Since we will be collaborating with the influencers on a barter basis, we would need to book the TDS on the total value of the product sent to the particular influencer. We will be filing the amount on our own, in the name of the influencers, and not directly charge from them."
Slowdown in spends
Dayama estimates that the overall spend on influencer marketing will slow down as smaller brands that do more barter deals will hold back such associations with content creators.
Tarandeep Singh Sekhon, Marketing Director, Kidzania India, thinks that, in the short run and till the time the new provisions set in, spending by brands on influencer marketing will drop by 5-10 percent.
In the last two years, influencer marketing became one of the most preferred ways of raising brand awareness and sales. This led to more spending by brands in this space. The influencer marketing industry, which grew 40 percent in 2021, is estimated to keep up its growth this year, with its revenue increasing from Rs 900 crore last year to Rs 1,200-1,300 crore in 2022.
However, this growth will see a bit of a slowdown because of the new rule.
"As a lot of people don't know the details of the rules yet, influencers' barter deals are going to get a bit tougher," said Shrenik Gandhi, co-founder and CEO, White Rivers Media, an ad agency that works with both brands and influencers.
"Overall, the flow of gifting will reduce. But there are different types of gifts given to influencers, like gifts given to high performers. Will that be taxable? Will PR packages also be taxed,” asked Dayama.
No freebies, please
While brands continue to look for more clarity on what the new TDS rule means for them, they are certain that micro and nano influencers will be avoiding barter deals.
"Smaller influencers might not be interested in such deals because they have to show it in their source of income. They will be hesitant which will lead to significant drop in barter deals. Also, many brands may not consider smaller influencers," said Patni.
Amit Mondal, Founder, Pulpkey, an influencer marketing company, noted that micro-influencers sometimes accept continuous barter deals without getting paid in cash, just to maintain relationships with brands.
"But now many influencers may deny barter collaborations because the amount of the product will be booked as their income and they’ll have to pay taxes on the same," he said.
Gandhi added that if influencers fall in the larger tax bracket, they will have to pay 30% tax on free gifts that will now be disclosed in their income tax returns. "It (new TDS rule) has a lot of merit but it also has a lot of ambiguity. So, instead of worrying about TDS, brands must focus on how to make influencer marketing more effective now that it is a legitimate business."
He added that while barter deals make a lot of sense as they are a win-win proposition for everyone involved in smaller transactions, with the introduction of the new TDS rule influencers will become more selective in their collaborations.
Chima said that the new TDS rule will make space for paid and more thought-through collaborations and brands will make a closer note on the analytics of the creator.
Brands bet on barter
When it comes to brands, they look at continuing with barter collaborations. "Barter deals sometimes help to gain traction as content from such collaborations can turn passive followers into raving fans," said Goel.
Urbanic's Dayama said that they have to give products to micro and nano-influencers as that's the way they can get content. "So now, what we can do is pay them for the content and ask them to return products. But all this will take time to settle in," he added.
Mondal said that brands will need to invest in more paperwork and time, educating influencers. "A majority of the micro-influencers who are in the younger age bracket are still unfamiliar with how TDS and taxes work. So, we can expect things to take some time."While the process will be lengthier than before, FreeCultr's Luthra said that the company will do barter collaborations. "Lot of influencers have become our customers who also promote and talk about the products. We do barter collaborations every now and then and will continue to do so because of the benefit that it brings," he added.