India’s Influencer Tax: Formalisation Of Creator Economy Or Another Burden?

India’s Influencer Tax: Formalisation Of Creator Economy Or Another Burden?


It's not yet clear if the tax will be deducted by brands directly or whether it has to be accounted by influencers, but creator economy startups view this as a positive step towards professionalising the space

In the case of D2C brands and even large retail players, the TDS might add some additional compliance burden, but it does force them to be more measured and data-driven in their spending

Creators say there’s already quite a lot of cutbacks from brands and startups on the influencer marketing front, plus proposed changes to cross-border payments guidelines could hit the ecosystem hard

While the CBDT’s 10% TDS for influencers has brought up some concerns about stifling the growth of the creator economy, startups in the space and D2C brands have welcomed the move and called it the formalisation of the creator economy.

The contours of whether the tax will be deducted by brands or has to be accounted by influencers is not clear, which could yet complicate matters for the nearly 100 Mn creators and influencers in India. But the overall sentiment is that the government has finally recognised the creator ecosystem as a real contributor to the Indian economy.

A few months ago, a report by Oxford Economics claimed that the creator ecosystem on YouTube in India contributed an estimated INR 6,800 Cr to the Indian GDP in 2021.

Content-driven commerce has become a major force in the Indian consumer internet space over the past two years, and the Indian government’s TDS ruling is one way to tap this boom and increase the transparency in creator and influencer-driven models.

Startups in the creator economy say the tax trail will not only improve measurability of influencer marketing, but also force brands to allocate spending on the basis of performance data, rather than splurging blindly.

However, one cannot ignore the potential compliance burden on some D2C brands and influencers as a result of this accountability. Coming as it does amid major marketing spending cutbacks by startups and brands, the TDS ruling could create a perfect storm for the creator economy at the worst time.

Formalising The Creator Economy

Even though Indian creators and influencers are taking inspiration from their peers in the West to bring in revenue directly from consumers and other channels, more than 90% of the Indian creator market is reliant on brand tie-ups and startup deals, according to Backstage.Army (formerly CreatorStack) founder and CEO Deobrat Singh.

So the TDS will impact pretty much every kind of creator — big or small — as most of them work primarily with brands to promote and review products. But thus far, brands had very limited visibility on many data points and no idea of which influencers have brought in the sales.

“It was more of a sporadic approach by brands. They treated the influencer channel like a virtual billboard and things were being run on excel sheets. Brands would allocate a budget and just send products to influencers without tracking what’s happening,” HYPD Store cofounder Ashwarya Garg told Inc42.

From the point of view of creators, this is the first step in professionalising the field, he added. While earlier these creators might not have had the financial history to become creditworthy, the TDS records will give visibility to lenders as well.

Garg also believes that this step was necessary because even high-profile celebrities were using this loophole to earn extra income.

Now, creators will be treated on par with such big-name celebrities as far as the taxation is concerned, he added.

Social media influencers in India typically earn in the range of INR 10K to INR 50K per social media post, while creators with a larger following often garner even up to INR 2 Lakh per social media post, going up to INR 5 Lakh per post for a deal that involves multiple posts per month. But this can vary from platform to platform, and there’s no certainty about the potential income, or how much tax might be collected by the government through this means.

Will TDS Change Influencer Marketing Game?

In the case of D2C brands and even large retail players, the TDS might add some additional compliance burden, but it does force them to be more measured in their approach. The spray-and-pray strategy will no longer work for influencer marketing. Right now, though, brands are being cautious from taking any stance on how the TDS will impact their operations.

One insight we got was that brands will get visibility on where their products are being promoted by which influencers because there is a tax trail. Any kind of tax means greater accountability on spending. So brands will be forced to take decisions backed by data such as real engagement, conversion, retention and more, rather than just randomly seeding products.

“Now, with a more measured approach, which will be required due to tax reasons, brands can even understand which creators are bringing in the most impressions but are not converting those impressions into checkouts” HYPD’s Garg added.

There’s a fear that such performance-driven metrics might only favour the larger creators, but founders believe that it’s actually favourable to creators and influencers that have a small but loyal and engaged audience. This will actually resonate more with the brands from an ROI standpoint.

Who Will Bear The Compliance Burden?

The biggest consideration in understanding whether the TDS will have a negative chilling effect on creators and influencers, or whether the brands and the businesses leveraging them will do the heavy lifting.

According to one social commerce startup founder, the 10% tax will likely be deducted by the brands or retail businesses that supply the products to influencers for reviews or promotions.

“This is going to make brands more conscious about spending and will drive money to quality influencers and creators. But we don’t know yet whether the TDS process will be left up to the brands or the individual creators. Our hope is that it’s the former.”

If it’s the latter, the TDS does not change much for creators, however, if they have to account for taxes on the reviewed products themselves, the creator ecosystem might go through a slump. “Smaller creators might not have the resources to comply with taxation and accounting. Any additional compliance burden is likely to see casual creators exit the market, which can have some impact on the overall ecosystem.”

But the fact is it’s currently unclear. As per the CBDT notice, “The proposed new section provides that the 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, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or prerequisite at the rate of ten per cent. of the value or aggregate of the value of such benefit or perquisite.”

This can definitely be read as the entity that seeks to provide the benefit — in this case use of the products for reviews or content — has to deduct the tax.

But further it goes on to say that only if social media influencers retain the benefit (i.e keep the product), will they have to report that in their tax filings and pay 10% TDS on the same under section 194R of the Finance Act, 2022. On the other hand, if the product is returned after a promotion, TDS won’t need to be paid.

Creator Economy In The Funding Winter

So it is unclear whether influencers need to report the receipt of goods and products separately. There’s already quite a lot of cutbacks from brands and startups on the influencer marketing front, as per one creator who wanted to remain anonymous as they are currently discussing deals with some brands.

“With the funding winter, startups are cutting back on all kinds of spending. Layoffs are obviously the biggest step, but marketing spending was very high in all startups and D2C  brands till last year and now we are being told that some deals cannot be signed due to their internal changes,” the creator told us.

Then there are reports about the lack of penetration for the homegrown TikTok alternatives such as Moj, Josh, Chingari and others, even casual engagement seems to be dropping off. The sale of Times Internet-owned MXTakatak to ShareChat  indicates that further consolidation might be on the cards.

RBI’s Curveball To Freelance Professionals

Further the Reserve Bank of India (RBI) issued draft guidelines on ‘Processing and settlement of small value export and import related payments’ which does not include the term “export of services”.

While cross-border payments providers could earlier offer payments services for both goods and services, they can now only offer services for goods and digital products.

In simple terms, this means that a freelance writer or content provider or influencer in India associated with any foreign company may not be able to receive payments through existing cross-border payments services such as PayPal, Payoneer, and Stripe, as the two parties are indulged in “export of services”.

This could include creating a video without any product consideration in return or writing a blog post or any other kind of content. This is going to damage the flow of compensation to several freelance artists, writers, content creators and other independent workers in the internet ecosystem.

According to a blog by Nasscom, exclusion of export services will impact a plethora of small value services that are exported from India, such as yoga classes, chef/cooking classes, accounting services, bookkeeping, website designing, and online web services, consultancy, education, among others.

The 10% TDS, while being welcomed by social commerce platforms and brands, might become a bigger hurdle in the long run and could become a large tax outlay for D2C brands. Plus, as we mentioned earlier, without knowing where the compliance burden will fall, it’s unclear whether this ruling can indeed bring in the formalisation of the creator economy that many seek, or whether it will drive more marketing dollars to the larger creators.

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