Should the new tax rules for influencer marketing, worry brands or creators?

A look at whether the new taxation rules affect the working relationship between brands and creators.

Starting tomorrow, July 1, social media influencers who receive gifts to promote brands, will be taxed at 10%. According to the new tax rules, influencers and doctors will have to disclose free samples and gifts given to them for sales and promotional purposes, while filing their taxes.

Tax deducted at source (TDS) will be applicable if they choose to retain the items beyond the promotional activities. In case they return the free samples, TDS won’t apply.

As per the provision introduced in the Finance Act 2022, section 194R of the Income Tax Act mandates that 10% tax be deducted at source, exclusive of surcharge and cess, on freebies and gifts exceeding Rs 20,000 in value in a year.

If the required TDS is not deducted by the brand or the TDS deducted is not paid by the recipient of such products or service within the stipulated time under the tax laws, then an interest / penalty will be payable as per the applicable rate.

Influencer remuneration

One of the most common ways for brands to collaborate with influencers, is to engage in what is called a barter deal - a gift/freebie is exchanged in return for content created with the brand’s products. There are brands that pay content creators money - but such deals are far more common.

Barter deals are more common with small businesses that may not be able to allot a huge share of their marketing budget to pay influencers or run mainline ads. Small businesses are one part of the fallout of the new rule.

The other side of the table to feel the impact, are brands. Those that gift influencers high value items, such as cars, expensive gadgets (like smartphones and smart watches) and paid trips.

However, Bare Anatomy co-founder Sifat Khurana points out that as long as the value of the gift is below Rs 20,000, small brands collaborating with influencers, don’t have to worry. “When you’re working with macro-influencers, who charge in lakhs for collaborations, the ticket size goes up and that’s when the transactions are taxable.”

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Khurana says the focus is now going to be more on quality than quantity. Brands will become more selective about the influencers they work with and vice versa.

Priyanka Khimani, founder at Khimani & Associates debates that the change in tax law might result in stricter accounting, additional paperwork, compliances, and an overall slowdown of the pace at which branded deals happen in the creator economy.

Khimani adds that in case of doctors receiving free samples, the tax can be deducted by the company providing such samples in the hands of the hospital, who can later claim it as salary expenditure.

“It might also affect the manner in which brands and influencers commercially engage with one another, including both parties reconsidering business arrangements. That being said, deduction of tax at source and the benefits/perquisites being taxable, is likely to streamline transactions which can otherwise be perceived as disorganised business arrangements,” she says.

Rajni Daswani, director - digital marketing at SoCheers, says that influencer marketing campaigns are designed based on client requirements. If it is sampling or driving brand awareness, the agency sends influencers hampers and extends barter deals. If the client wants the influencer to create content and expects certain deliverables - this is when a remuneration deal comes into place.

“Most clients now have influencer marketing budgets parked in their annual budgets. So, most deals work on paid collaborations,” she says.

While choosing influencers for a campaign, Daswani mentions, SoCheers looks at multiple metrics (followers, cohorts of followers, kind of content they create, engagement on their content and an overall brand fitment of the influencer).

Rohit Khanna, co-founder and COO at Eleve Media, a social media marketing agency, says that influencer marketing has made awareness the lowest hanging fruit. Many barter-led campaigns may get affected. PR packages sent to the creators, may reduce as a few (brands/creators) may abstain from engaging in additional paperwork.

As the space continues to evolve, he expects regulations to become more frequent in the industry.

Impact of new taxation rules

Vikas Bagaria, founder of personal hygiene brand Pee Safe, points out another pitfall that may come with the new rules. It may dissuade some influencers from working with brands, if they consider the technicalities involved with TDS filing systems, PAN Cards, etc.

“From a government point of view, they’ll be bringing a lot more people into the tax bracket because they have to file a return. Many small, middle class influencers who are doing it for the sake of learning (in social media), may consider it cumbersome and drop out,” says Bagaria.

Eleve's Khanna points out that influencers who already earn monetary compensation for their work might already be paying taxes for it. The new tax rules won't affect them except when brands decide to send them PR gifts, he says.

“Micro and nano-influencers may have to be careful or will need additional hand-holding from experts, such as tax lawyers or chartered accountants, who will pave the way for clarity and adherence. Influencers might also decide to opt for monetary compensation instead,” says Khanna

Bagaria adds that it is unclear as to how the gifts are going to be valued or taxed - especially in the case of a barter system deal. “We’ll have to wait and watch to see how this affects influencer marketing.”

SoCheers’ Daswani points out that the newly charged tax on such items, won’t stop the gifts. It will simply lead to a conversation between the brand and the influencers before any exchange of products.

“Social media is a substantial PR source for the brand, but influencer marketing strategies are hardly ever solely dependent on this aspect, because sending gifts doesn’t guarantee a brand mention,” she says.

Bagaria recalls a statistic from a report published by Statista: 3% of people will buy a product if other people buy it, but close to 50% of people will buy it if an influencer is promoting it.

“Influencer marketing is capable of replacing celebrity endorsements in a big way. Globally, the influencer marketing industry is worth $2 billion, but in India, it is only worth $120-130 million. In India, we’ve barely scratched the surface of what influencer marketing can do.”

Pee Safe has been working with influencers since 2017. Bagaria states that at the time, top influencers would not charge money for posting stories. But now, they charge up to Rs 1 lakh to post one story on Instagram.

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Fixderma is another brand that regularly engages with influencers via barter deals. Shraddha Mudaliar, head of brand and PR at Fixderma, points out that influencers proactively reach out to the brand for collaborations.

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"In case of barter, we won’t be remunerating monetarily, as the 10% TDS rule is applicable only where invoices are generated for deliverables. We do engage on few paid collaborations from time to time. We expect some surge in prices of content creators, but are yet to see the exact change.”

Mudaliar states that brands operating on ‘Spray and Pray' model of communication and marketing will now become selective and alert. “They will have to be more measured in their approach, basis the impact on brand and potential returns on the investment made on influencer collaborations.”

Khanna says that his agency (Eleve) mostly remunerates with cash. When it comes to more expensive products like smartphones, the influencers are normally asked to market the products and eventually return them.

Advertising Standards Council of India (ASCI) introduced last year to regulate ads by influencers on social media.

“There was a lot of brouhaha over the rules, but people in the ecosystem were cognizant. Self-regulation is the need of the hour.”

Daswani feels this could be a step in the right direction, when it comes to measuring the effectiveness of influencer marketing campaigns.

“The new rule can be a first step towards overcoming this very challenge, because it will now put a definite value to the transaction. So, far from adding to the challenge, it may very well introduce further processes that could lead to efficient means of measuring the success and effectiveness of influencer marketing.”

(Hero image via Pexels. Photo by Karolina Grabowska.)