In today's Finshots we see how the government intends to tax the influencer economy
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The Story
The past few years have been amazing for influencers. An Influencer Marketing Benchmark Report revealed that between 2016 and 2020 the market grew from $1.7 billion to a massive $9.7 billion. And it’s expected to hit $16 billion in 2022!
It’s what we now call the influencer economy and it’s booming. Depending on their social media following, influencers in India can earn anywhere from ₹10,000 to ₹2 lakhs for a simple social media post. And each day, you’re seeing more people join the party. However, there is a problem. See, whenever there’s a booming industry making tons of money, the government wants its cut. Sure, you could argue that the government can easily tax monetary income influencers earn through these brand deals. But what about non-monetary considerations — freebies that brands throw in just to get influencers to endorse their product?
Well, the tax department hasn't been able to get its dues since the rules weren’t all that clear.
But that’s going to change now. From July 1, social media influencers will have to deal with TDS (Tax Deducted at source). And the income associated with all those freebies will be taxed. In effect, the government will have a new source of revenue.
But wait — How will this actually work?
Okay, imagine you’re a social media influencer with a few thousand followers. A fledgling hostel for backpackers slides into your DMs and makes a proposal. They want you to visit their hostel and promote the brand on your Instagram handle. Obviously, you want to know what’s in it for you. And that's when they make a rather compelling offer. They offer you a 1-week stay at their hostel for free. An outing that would have cost you ₹25,000. In return, you’re expected to splash your Instagram profile with pictures, reels and thought-evoking captions about your stay. It’s a nice offer but you have a massive following. So you’re still considering this proposal. And that’s when they sweeten the pot some more. They offer you a swanky new mobile phone that costs ₹65,000 so that you can document your journey in all its glory.
You take the offer.
The only problem — It’s a barter. Money isn’t changing hands. And herein lies the problem. Creators pay a tax on their income just like everyone else. But these freebies are a lot more complicated. Nobody reports them to the tax authorities. And to make matters worse, the hostel will report it as a business expense. After all, they spent this money to advertise their offering and as such, they can reduce their taxable income.
So the government is now telling the hostel to deduct 10% from the total cost and apportion it to the government. This is the tax the creator was liable to pay.
But wait…how can you deduct tax on a free hostel room?
Well, you can’t. But there is a way. The hostel knows what the room is worth. They also know what the phone costs. They can establish the total price now — ₹90,000. Once again, the hostel can’t withhold 10% on this sum considering there’s no money involved. So the government could technically mandate that the influencer pays the tax in advance — 10% of ₹90,000 — before the hostel hands over the keys to the room. So technically, the influencer has to pay ₹9,000 to avail the freebies now.
Can they somehow get around this?
Well, if the total sum doesn't exceed ₹20,000 during any financial year or if they return the freebies, then they could potentially get away with paying this sum. But if you’re getting a nice new phone, you’d like to keep it no? So yeah, most influencers will have to pay up, even when they get freebies and that’s likely going to change a few things.
For starters, influencers will probably think twice before entering into a barter deal now. Who wants to pay money to promote something, even if they are getting something in return, no?
On the flip side, this could get influencers to think twice about the kind of brands they’re promoting. Maybe they’ll only endorse products if it’s truly worth it. And this could potentially help consumers weed out the more frivolous options.
Maybe.
We will just have to wait and see.
Until then…
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