How does it work? Influencers puzzled by freebie tax rule

Recipients of gifts in business situations have to pay a 10% levy on them

Social media influencers in Bengaluru are mulling the implications of a new tax on gifts that came into effect on July 1.

According to the latest Central Board of Direct Taxes (CBDT) guidelines, 10% tax will have to be deducted at source on any benefit or perquisite arising from a business deal or profession whose value adds up to over Rs 20,000 a year. It applies to benefits given in cash, kind or a combination of the two.

In the influencer economy, brands often send smartphones, watches and perfumes to content creators as free samples for review, as payment in kind, or as goodies for relationship building.

The rule states that no TDS will be charged if the benefit is ‘returned’ to the provider and that is where the confusion begins for travel vlogger Nivedith G.

“Tourism boards fly us to different countries to create content, for which they also pay our flight tickets, stay and food. How do we even ‘return’ these experiences?” he wonders.

“If the company makes these bookings, it becomes their expenditure, and influencers pay no tax. But if influencers make the bookings and are reimbursed by the company, TDS under Section 194R is applicable,” says Timmayya Hegde from accountancy Sethia Prabhad Hegde and Co.

Sahiba Dhandhania is the founder and CEO of Confluencr, a marketing agency that works with 3,000-5,000 influencers in Karnataka. “The rule suggests the tax will be levied on products sent out for sales and promotion and not as gifts. Brands can find ways to push them out as gifts instead. How will this be monitored?” she says, pointing to the ‘gaps’. Or, brands can understate the price of these gifts, others feel.

Prabhakar K S, founder and CEO, Shree Tax Chambers, says this tax applies to all kinds of benefits — goodies for promotion, sample products, and anniversary gifts.

‘Impacts small influencers, biz’

Tech influencer Giridhar Chandrasekar receives 10-15 products in a month, of which 80% are returned to the
brands. He is not upbeat about the paperwork the new rule may involve for the rest. Content creation is his side gig and he is a software professional.

Fitness athlete and coach Sonali Swami has over 4.5 lakh followers on social media. She is not clear how the taxes would be tracked since many influencers do not get these goodies from the brands but via third-party marketing agencies.

The rule could impact smaller influencers who rely on hand-outs and barter assignments in the initial stages of their career to “reduce their investments and establish their expertise”, opines Mangal D Karnad, cofounder, Fablesquare Business Services. Some young content creators don’t even have PAN cards to process taxes, an influencer observed.

Ashwini Dixit, fashion and beauty content creator, says local and small brands would also be hit because they don’t have big budgets to reach a large audience. To spread the word, they distribute free samples to hundreds of influencers.

“It’s impossible to expect us to buy everything we review,” seasoned fashion influencer Nilu Yuleena Thapa says, defending the community.

The bright side

Some influencers feel taxation is a way forward as it legitimises influencer marketing, a business valued at Rs 900 crore in India.

Clarks Exotica, a resort on Devanahalli Road, ropes in influencers for promotions. M Balaji, CEO, feels that rules like these will bring accountability to both sides as in other countries. “In Dubai, influencers need a licence to operate. In other countries, influencers are required to declare ‘paid partnerships’ even if it is barter,” he says. The tax implication could also bring down the practice of paying in kind. Fashion and lifestyle influencer Pranwesha Kundu says, “Influencer marketing is our bread and butter. Barter needs to end. We should be getting paid for every job.”

Why this tax?

While presenting this year’s budget, Finance Minister Nirmala Sitharaman said businesses pass on benefits which are taxable in the hands of the agents. In order to track such transactions, the need for a tax deduction mechanism at the source itself was felt. The new Section 194R has been inserted to the Income Tax Act of 1961 to allow for tax deduction by the company giving out these benefits. Those benefits or perquisites amounting to over Rs 20,000 a year are brought under the new provision, says financial expert Prabhakar K S.

An example...

A phone company hands a new model worth Rs 50,000 to an influencer. At 10%, the influencer pays Rs 5,000 to the company at the time of giving the ‘benefit’, and the company passes it on to the tax authorities on his/her/their behalf. If the company pays the tax without collecting it from the influencer, the influencer will have to eventually pay tax on Rs 55,000 — an aggregation of the price of the phone and the

Rs 5,000 the company has paid on the influencer’s behalf.