New TDS Rules for Social Media Influencers: What You Need to Know

With the increasing popularity of influencer marketing in India many social media influencers are constantly sent gifts, freebies, and promotional materials by companies. These are frequently given in exchange for promoting products or services on social media platforms such as Instagram, YouTube, and TikTok. Beginning July 1, 2022, influencers will be subject to a new tax system under Section 194R of the Income Tax Act of 1961. This rule necessitates Tax Deducted at Source (TDS) on the benefits and perquisites they receive.

In this blog, we’ll break down everything influencers need to know about these new TDS rules, how they function, the potential impact on influencers, and practical tips for managing taxes.

New TDS Rules for Influencers

The rise of influencer marketing has completely changed the marketing strategies of brands. Today, marketers get influencers to promote their products on platforms like Instagram, YouTube, and TikTok by offering gifts, free goods, or services. While these freebies were frequently neglected in terms of taxation, the new rule under Section 194R will ensure that they are considered taxable income.

Starting from July 1, 2022, influencers must be aware of the tax obligations related to the non-monetary benefits they receive from brands, as these will now attract TDS. Brands and companies will have to deduct 10% of TDS before giving such benefits or gifts, and influencers will have to show these deductions in their income tax returns.

What Is Section 194R?

Section 194R was introduced in the Finance Act 2022 and became effective on July 1, 2022. The clause requires any entity that provides benefits or perquisites to a resident individual that exceeds Rs 20,000 in a financial year to deduct TDS at 10% of the value of those benefits.

The rule especially applies to influencers who acquire goods or services in exchange for promoting them on their social media platforms. The purpose is to include non-cash benefits in the tax system, ensuring openness and conformity with income tax regulations.

How the New TDS Rules Impact Social Media Influencers

Taxes Are Now Due on Freebies, Gifts, and Promotional Items.

The most significant impact of Section 194R is that gifts and freebies received by influencers are now considered taxable income. Brands that provide promotional products must deduct 10% TDS of the fair market value of the product before providing it to influencers. This means that all non-cash compensation, whether in the form of electronics, clothing, services, or other things, will be subject to tax.

Example:

• If a brand gives away a smartphone worth Rs 50,000 to an influencer as part of a promotion, the brand must deduct 10% TDS (Rs 5,000) and report it to the tax authorities. Following this, the influencers will have received a net of Rs 45,000 in gifts.

TDS on Non-Cash Payments

Influencers who get amenities like hotel stays, travel packages, or event tickets as remuneration will also be subject to the new TDS rule. These advantages are now considered part of the influencer’s taxable income, and brands who provide them must deduct TDS before providing them.

Exemptions and Non-applicability of Section 194R

While the new TDS rule covers a broad variety of advantages obtained by influencers, there are a few key exemptions and non-applicability conditions:

1. Benefits under Rs 20,000.

If the value of the benefits or perquisites offered to an influencer throughout the fiscal year does not exceed Rs 20,000, the TDS deduction is not required. This guarantees that influencers receiving low-value gifts are not burdened with tax compliance.

2. Returned Products

If the influencer utilizes the goods or service for promotional reasons but then returns it to the company, no TDS will be applied. This is significant for influencers who may get stuff such as clothing, gadgets, or luxury goods for promotional purposes and then return them after their campaign.

3. Non-residents.

Section 194R does not apply to non-resident influencers. Instead, Section 195 will apply, which requires a distinct set of regulations for non-residents to deduct tax at the source.

4. Personalized gifts.

The TDS rule does not apply if the gifts or freebies offered to influencers are solely for personal use and are unrelated to any professional involvement. Section 194R would not apply to a birthday gift given by a friend or family member.

Valuation of Benefits and Perquisites

One of the most critical aspects of the new TDS rule is the valuation of the benefits or perquisites. The fair market value (FMV) of the goods or services delivered to the influencer shall serve as the foundation for the TDS deduction.

Valuation Process:

• Purchased Items: If the company providing the benefit has purchased the item, the purchase price will be the basis for TDS.
• Manufactured Goods: If the company creates the goods, the cost of production or retail value will be used for TDS purposes.
• Mixed Transactions: In cases where the compensation is in the form of both cash and kind, TDS will be deducted from the value of the non-cash component.

Influencers must keep precise records of the fair market value of any gifts and perks they receive.

Compliance: What Influencers Need to Do

To avoid tax concerns, influencers must take certain actions to comply with the new rules:

1. Keep detailed records.

Influencers should keep detailed records of all gifts, freebies, and perks received from brands, including the fair market value. This will assist with tax filing and ensure suitable calculation of the TDS amount.

2. Understand Your TDS Liability.

Brands are responsible for deducting TDS from the gifts they provide to Influencers, but Influencers must be aware of the amount deducted and include it in their income tax returns.

3. Filling up TDS returns

Ensure that any TDS deduction is entered correctly on Form 26AS. If the brand does not deduct TDS, the influencer will have to calculate and pay advance tax.

4. Consult with a tax professional.

Given the intricacies of TDS deductions, influencers should consult a tax professional or chartered accountant to ensure complete compliance and avoid penalties.

Impact on Influencer Marketing in India

It would have a considerable impact on India’s influencer marketing business as the sector is expected to grow at a 25% CAGR and would reach a valuation of Rs 2,200 crore by 2025. The cost of TDS deductions has to be worked out and considered while negotiating agreements by the influencers as well as the brands.

Key Insights:

• A Facebook study across five verticals in the Asia-Pacific region found that pairing branded content ads with regular campaigns increased the likelihood of content views by 87% and purchase conversions by 80%.
• According to GroupM INCA’s India Influencer Marketing Report, the market was valued at Rs 900 crore by the end of 2021 and is expected to grow exponentially.

While the brands and influencers will have to change their financial plans, influencer marketing is here to thrive as brands now increasingly realize that their target groups are being reached by it.

Conclusion

The TDS guidelines for social media influencers under Section 194R mark a shift in the taxation of non-cash incentives, which includes gifts, freebies, or other promotional materials. As influencer marketing grows in India, influencers must now comply with the new tax regulations, which require them to account for TDS deductions on all products and services received in exchange for advertisements.

While this may increase the administrative burden for influencers and companies, it is critical for ensuring transparency and compliance in the rapidly changing digital marketing ecosystem. Influencers can successfully navigate these changes and grow in their professions by maintaining accurate records, understanding their tax obligations, and contacting tax professionals.

As influencer marketing expands rapidly, this new TDS rule ensures that the industry remains regulated and accountable, while also encouraging a more formalized and professional approach to brand partnership.