How it works? Influencers puzzled by gift tax rule

Social media influencers in Bengaluru are pondering the implications of a new gift tax that came into force on July 1.

According to the latest guidelines from the Central Board of Direct Taxes (CBDT), a tax of 10% will have to be deducted at source on any advantage or advantage derived from a commercial transaction or a profession whose value amounts to more than Rs 20,000 per year. It applies to benefits paid in cash, in kind or a combination of both.

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

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

“Tourist boards make us travel to different countries to create content, for which they also pay for our plane tickets, our stay and our food. How can we even ‘return’ these experiences?” he wonders.

“If the business makes those bookings, it becomes its expense and the influencers pay no tax. But if the influencers make the bookings and are reimbursed by the business, TDS under Section 194R applies,” says Timmayya Hegde of accounting firm 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 that tax will be levied on products sent for sales and promotion and not as gifts. Brands can find ways to offer them as gifts instead. How will this be monitored? she says, pointing to the “gaps”. Or, brands may underestimate the price of these freebies, others think so.

Prabhakar KS, Founder and CEO of Shree Tax Chambers, says the tax applies to all sorts of perks – goodies for promotion, product samples and birthday presents.

‘Impacts small influencers, biz’

Tech Influencer Giridhar Chandrasekar receives 10-15 products in a month, 80% of which are returned to the
brands. He is not optimistic about the red tape the new rule may entail for the rest. Content creation is his side job and he is a software professional.

Athlete and fitness trainer Sonali Swami has over 4.5 million social media followers. She’s unsure how taxes would be tracked since many influencers don’t receive these goodies from brands but through third-party marketing agencies.

The rule could impact smaller influencers who rely on donations and barter missions in the early stages of their careers to “reduce their investments and establish their expertise,” said Mangal D Karnad, co-founder of Fablesquare Business Services. Some young content creators don’t even have PAN cards to process taxes, one influencer observed.

Fashion and beauty content creator Ashwini Dixit says local brands and smaller brands would also be affected as they don’t have big budgets to reach large audiences. To spread the word, they give away free samples to hundreds of influencers.

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

And, the bright side

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

Clarks Exotica, a resort on Devanahalli Road, is using influencers for promotions. Mr. Balaji, CEO, believes that rules like these will bring accountability on both sides as in other countries. “In Dubai, influencers need a license to operate. In other countries, influencers are required to declare “paid partnerships” even if it is barter,” he says. The tax implications could also reduce the practice of payment in kind. Fashion and lifestyle influencer Pranwesha Kundu says, “Influencer marketing is our daily bread. The barter must stop. We should be paid for every job.

Why this tax?

In presenting this year’s budget, Finance Minister Nirmala Sitharaman said companies pass on taxable benefits to agents. In order to track these transactions, the need for a tax deduction mechanism at
source itself was felt. New Section 194R was inserted into the Income Tax Act 1961 to allow a tax deduction by the company granting these benefits. Such benefits or perquisites amounting to more than Rs 20,000 per year are covered under the new provision, says financial expert Prabhakar KS.

An example…

A phone company hands over a new model worth Rs 50,000 to an influencer. At 10%, the influencer pays Rs 5,000 to the company when giving away the “profit”, and the company passes it on to the tax authorities on their behalf. If the company pays the tax without collecting it from the influencer, the influencer will eventually have to pay a tax of Rs 55,000 – an aggregation of the price of the phone and the

Rs 5,000 which the company paid on behalf of the influencer.

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