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How gifts given to social media influencers from July 1 will be taxed

Often, companies remunerate social media influencers in kind. Such gifts or perks will be taxed from next month. However, if an influencer returns a gift, there will be no tax on the item

June 29, 2022 / 10:36 AM IST

The Union Budget introduced a provision mandating deduction of tax at source by a person providing any benefit or perquisite to a resident. The benefit or perquisite provided should arise from a business or profession conducted by such a resident. This provision, introduced through new section 194R of the Income Tax Act, will be effective July 1, 2022.

The reason this rule is being so talked about these days is because it will impact social media influencers in a big way.

Tax that iPhone, Prada, Louis Vuitton

In this age of internet and social media, influencer marketing has gained prominence. Social media influencers play a crucial role in marketing products and services. They subtly or openly influence purchasing decisions of their followers and fans.

Social media influencers could be celebrities, persons with expertise or authority in a particular field, or those having a social relationship with their audience. Open any social media platform or app, be it Facebook, Instagram or YouTube, and you will find influencers present everywhere through their blogs, posts, videos or reviews.

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These influencers typically get to retain the products they endorse or review. At times, these products could be of substantial value like an expensive new model of a smartphone, a piece of jewellery, clothing or even a car.

Social media influencers may also get other benefits from their endorsements. For example, a travel or hotel company may provide free flight tickets or holiday packages to the influencers, restaurants may provide free meals, or the influencer may receive tickets to a fashion show or a film awards’ function. This kind of remuneration in the form of barter is everywhere, and the list is endless.

Though such benefits are taxable in the hands of the influencer receiving them, they could rarely be tracked and so went tax-free.

But the party is ending. The new section 194R hopes to cover all such transactions. This section provides for Tax Deduction at Source (TDS) at the rate of 10 percent for any benefit or perquisite provided if such benefit or perquisite arises from business or profession and the total value of such benefit or perquisite exceeds Rs 20,000 in a year.

Tax only if the influencer does not return the gift

The Central Board of Direct Taxes (CBDT), the apex body implementing the income tax Act, recently issued guidelines in the form of a circular "clarifying" the new provision.

Often, the benefit provided to the social media influencer is in kind. In such a case, how will the benefit provider deduct the tax? The circular issued by the CBDT clarifies that in such a case, the provider of the benefit must ensure that the tax that was required to be deducted has been paid by the recipient influencer.

So, the influencer will have to pay 10 percent of the value of the benefit by way of advance tax and present the provider with evidence of payment in the form of a challan and a declaration before receiving the benefit. However, if the influencer returns the product—say, a smartphone—to the company, there will not be any benefit and the provision of section 194R will not apply.

Valuing the gift

How will the benefit or the perquisite be valued for this section? The circular issued by the CBDT states that where the provider has purchased the product or service given to the social media influencer as a benefit, the purchase price will be considered for the valuation.

If the provider itself manufactures the item provided as a benefit or perquisite, then the provider of the benefit has to consider the price that it charges customers for such a product as the value of the benefit. For example, if a company manufacturing, say, beauty products provides a make-up kit to the influencer, then the price at which the make-up kit is generally sold to the customers of the company will be considered for valuation and TDS will be on such value.

In other cases, the fair market value of the benefit or the perquisite will be considered for TDS. However, the circular does not give any further guidance to determine the fair market value.

Bringing social media influencers within the tax net

With this provision coming into effect, the benefits received by social media influencers will come on record and they will have to consider it as part of their income while filing their own tax returns.

When the new provision takes effect, in many cases it is likely influencers will want remuneration in monetary terms rather than retaining the products endorsed, particularly if the product is not of any specific use to them.

Not just social media influencers

The application of the new provision is not restricted to social media influencers but has a wider application. It will cover all benefits provided under various situations.

For example, many companies provide incentives in the form of holiday packages to dealers who achieve sales targets or to top-performing distributors. Companies will have to comply with TDS provisions under the new section and the dealers and distributors have to include the value of these benefits in their tax returns.

Even in the case of business conferences of dealers or other business associates, to the extent there are expenses attributable to the leisure component or expenses attributable to family members, such expenses will be considered as benefits or perquisites and attract the provisions of section 194R.

The provision will also apply to the distribution of free samples; for example, free samples of medicines received by doctors from pharmaceutical companies.

There is a view that the circular issued by the CBDT possibly expands its scope beyond what is contemplated by section 194R itself. The circular, while clarifying a few points, raises many more issues. One wonders if the provision as it will be implemented will result in increased disputes between the tax department and taxpayers. Whether there is benefit or perquisite in a particular transaction, and if so, what its value is for tax purposes will be matters of dispute and litigation.
Sanjeev Pandit is a Chartered Accountant
first published: Jun 27, 2022 10:45 am
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