Taxation of Social Media Influencers

Current Context

Social media influencers are individuals who are engaged online in building a community platform via social media channels like Instagram, Facebook, Youtube, TikTok and many others.

During the 2020 Covid pandemic, there was an exponential increase in the number of influencers and content creators surfacing on these platforms. They were seen garnering a huge number of followers and brand partnerships.

With TV advertising decreasing and companies wanting to increase their digital brand awareness, brands nowadays reach out to influencers for promotions. Typically influencers receive freebies consisting of branded products as “PR packages” or affiliate coupon codes (customised with the influencer’s name) in exchange for the influencer promoting the brand’s product on their social platforms. This is referred to as a “Barter Collaboration” wherein an influencer receives a PR package and in return tries out the product or service and reviews it for the public. There is no money involved in this entire process.

New Development

Section 194R of Income Tax Act, 1961 : Deduction of tax on benefit or perquisite in respect of business or profession

194R. (1) Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall ensure that tax has been deducted in respect of such benefit or perquisite at the rate of 10% of the total value of such benefit or perquisite before providing the benefit or perquisite to such resident:

Businesses are not required to withhold TDS under the provisions of this section in the following cases: If the total value of the benefit or perquisite provided or likely to be provided to a resident does not exceed INR 20,000/- in a financial year.

If such benefit or perquisite is being provided by an individual or Hindu Undivided Family (HUF) with total sales, receipts, or turnover less than INR 1 crore (for businesses) or INR 50 lakhs (for professions) in a financial year.

This section was inserted in the Finance Act, 2022 and shall be effective from July 1, 2022.

“Person responsible for providing” means the person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer.

Analysis of the new provision

In an interesting development, social media influencers will now receive PR Packages after the brand deducts tax at 10% of the value of the products sent (provided the influencer decides to keep the products). This regulation has come as a response to the fact that many influencers were not showing gifts received from brands as promotional income since no actual payment was made to them.

Impact on Influencers

Universally, individuals prefer being paid in cash than in-kind. Many influencers believe that this is a positive change since the content creation industry was not recognised as a “serious” profession. Now that it has finally come within the purview of the Indian Government so as to adapt a concrete framework for it, it reflects a change in the perspective towards the industry.

Impact on Brands

Up until now, the process was fairly smooth for brands, social media managers or management agencies would share a list of suitable influencers with the brand; the brand would approve and accordingly then send PR packages to influencers to promote. Since barter deals were very common in the industry, companies used to send products out to multiple influencers ranging from micro-influencers to big names in the industry with over 1-2 million followers. Now brands will have to prepare a curated list of influencers and content creators that they wish to partner with, and carefully vet and send their products to an exclusive list of influencers owing to requisite tax compliances, and needing to keep a track of which influencer has decided to keep which product or which one has sent it back to the brand.

In conclusion, be aware of the TDS implications and comply with the necessary regulations while engaging in any digital marketing services, gifting activities, or influencer marketing.

FAQs

Q: What is the significance of social media influencers in today’s digital landscape?

A: Social media influencers play a significant role in building online communities and promoting brands through popular social media platforms like Instagram, Facebook, YouTube, TikTok, and others. They have gained immense popularity and influence, especially during the COVID-19 pandemic, and are sought after by brands for digital brand awareness.

Q: How do social media influencers collaborate with brands for promotions?

A: Social media influencers collaborate with brands by promoting their products or services on their social media platforms. This collaboration can take various forms, including sponsored posts, product reviews, giveaways, and brand partnerships. Influencers may receive freebies or affiliate coupon codes from brands in exchange for promoting their offerings to their followers.

Q: What is a “Barter Collaboration” in the context of social media influencers?

A: A “Barter Collaboration” refers to an arrangement where social media influencers receive PR packages or free products from brands in exchange for promoting the brand’s products or services on their social media platforms. In this arrangement, no money is exchanged between the influencer and the brand.

Q: What is Section 194R of the Income Tax Act, 1961, and how does it apply to social media influencers?

A: Section 194R of the Income Tax Act, 1961 is a provision that mandates the deduction of tax on benefits or perquisites received by residents from businesses or professions. It applies to social media influencers when they receive benefits or perquisites from brands, even if those benefits are non-monetary in nature.

Q: When does Section 194R apply to social media influencers?

A: Section 194R applies to social media influencers when the total value of the benefits or perquisites they receive from a brand exceeds INR 20,000 in a financial year.

Additionally, this section applies if the benefits are received from any person [other than an individual or Hindu Undivided Family (HUF) having total sales/ receipts/ turnover of less than INR 1 crore (for businesses) or INR 50 lakhs (for professions) in a financial year.]

Q: When did the new provision regarding taxation of social media influencers come into effect?

A: The new provision regarding the taxation of social media influencers, Section 194R, was inserted in the Finance Act, 2022 and became effective from July 1, 2022.

Q: What is the impact of the new provision on social media influencers?

A: The new provision requires brands to deduct 10% tax on the value of the products provided to social media influencers as PR packages. This change ensures that influencers are taxed on the promotional benefits they receive, even if no actual payment is made to them. This may lead influencers to prefer paid partnerships over barter deals and brings the content creation industry under the purview of the Indian Government.

Q: How might the new provision change the way influencers engage with brands?

A: The new provision may lead influencers to prefer paid partnerships over barter collaborations since both types of income are now taxable. Influencers may also view this change positively as it brings the content creation industry into a recognized framework and reflects a change in the industry’s perception.

Q: How does the taxation rule affect brands working with social media influencers?

A: Brands will need to adapt to the taxation rule by preparing curated lists of influencers they wish to partner with and carefully vetting and sending products only to those influencers. Brands will also need to comply with tax regulations and keep track of which influencer keeps the products and which ones return them.