A look into the new TDS provisions

– Penned by Sakshi Sharma

Ever thought of becoming an influencer while scrolling your Instagram feed? Do the 3Fs – freebies, fame, funds – entice you? Did the government drastically alter the future of influencer marketing? Read along to find out.

Introduction

Influencer Marketing is a social media marketing that uses influencers (people with a certain number of followers) to promote a brand. Unheard a decade ago, the industry was pegged at $6 billion globally in 2020 and is expected to grow to $16 million in 2022. The Indian counterpart is also in tandem to the global industry, having a value of Rs 900 crore and is expected to grow at 25% CAGR by 2025. However, the introduction of TDS (Tax deducted at source) could possibly stifle this growth.

What is TDS?

Tax deducted at source (TDS henceforth) is a specified amount that is reduced when a certain payment like salary, commission, rent, etc. is made. The person receiving the payment has the liability to pay this tax before the payment is received, which is why the nomenclature (tax deducted at source).

The new provision of TDS which came in effect on 1^st July, 2022 seeks to tax the non-monetary considerations – free hotel stays, vouchers, products – which influencers get during brand endorsements. The mechanism for the same involves the government mandating the brands to deduct 10% of total cost of freebies (if it costs more than Rs 20,000) and apportion it to the government. For instance, if Nike offers new sneakers worth Rs 75000 as a freebie to an influencer in exchange for promotion on the channel then the influencer will be required to pay 10% of the same, i.e. Rs 7500 before the sneakers are formally given for promotion. An exception to the rule, however, exists. The influencer will not be liable to pay the amount if the product is returned after promotion. Additionally, if the freebie is worth less Rs 20,000 then no payment is to be made.

What happens if two transactions less than 20,000 (Let’s say 15000 each time) are made by a company to an influencer? In this scenario, the aggregate value of benefits provided by company to influencer is Rs 30,000 and hence TDS of Rs 3000 will be deducted under Section 194R.

Is this new provision limited to influencers?

No, the new provision is equally applicable to doctors (in private hospitals) receiving free medicine samples. The tax liability can be the onus of the hospital or the doctor depending on who is the receiver of the benefit. The doctors which are consultants for a private hospital don’t have to bear the responsibility for tax liability.

Furthermore, crypto currencies are also under the purview of this reform. Going forth, the crypto currencies will also face a 1% TDS. This means, that an Indian citizen selling their assets (Bitcoin, Ethereum, Tether, etc.) will receive 1% less the value of its assets at the selling price.

Implications

The obvious reason for these new TDS reforms is increasing the sources of tax collection, resulting in higher tax revenue for the government.  Tapping into emerging industries, the government is making sure that it gets something out of all the growing pies!

The move, however, can have serious ramifications. The nano-influencers (1K – 10K followers) and micro-influencers (10K to 50K) are likely to be the worst hit as per the new provisions since they get a large proportion of the remuneration in the form of freebies. Under the new mandate, they are required to pay tax for brands when in effect they haven’t received any money. TDS seems regressive as it stifles the growth of small influencers, thereby impinging the industry growth. The brands that collaborate with these small influencers also seem to be at a loss. As opposed to earlier, they will now have to look for alternative strategies of promotions since the barter collaboration will become difficult (due to changing influencer demands of monetary transactions).

A silver lining from this provision seems to be the acceptance of the influencers’ work as a job. Additionally, this might promote the endorsement of only the most relevant brands, thereby helping consumers resolve the choice paradox.

On the crypto-currency front, a negative outcome is anticipated. The new TDS provisions of 1% would add to the tax burden (which is 30% currently), leading to a large fall in the volume of transactions. Consequently, the tax revenues would also fall as trading on Indian platforms will decrease. The very purpose of increasing tax revenue will fail. The efforts of depicting India as an innovation hub will be partly reversed.

Conclusion

The policy aims to capitalize the gains from two major growth hubs – influencer industry and crypto-currencies. The gains, though, seem to be largely government focused, having little advantage for the other stakeholders included. Owing to this, there are speculations of stakeholders using unfair means to evade these provisions. Also, another mounting concern for the people in these industries is an increase in the tax rates in the future. In the face of these events, developments and concerns, how the industry evolves remains to be seen.

References

• https://www.businessworld.in/article/Rise-Of-Influencer-Marketing-Creators-To-Commerce-/24-05-2022-429999/
• https://finshots.in/archive/taxing-the-influencer-economy/
• https://www.bankbazaar.com/tax/all-about-tds.html
• https://www.financialexpress.com/money/income-tax/tds-rule-for-social-media-influencers-under-section-194r-2022-explained/2577751/
• https://indianexpress.com/article/business/new-tds-rule-from-july-1-impact-doctors-social-media-influencers-7983512/
• https://www.livemint.com/market/cryptocurrency/crypto-tax-how-1-tds-will-be-cut-when-traded-in-bitcoin-ether-other-tokens-11656764427275.html
• https://www.livemint.com/

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