Influencer marketing blues: New tax policy inconvenient for small businesses with lower campaign budgets

Experts are saying the government’s new tax policy for influencers will make it difficult for businesses to get promotions for their products. They also say it will impact smaller businesses that don’t have high budgets for big influencer campaigns and rely on barter collaborations.

The influencer marketing industry has been surging in the past two years and the rise continues at a rapid pace. During this thriving and expanding industry, businesses often offer free gifts, dealing in barter collaborations with influencers in exchange for promotions for their product/service.

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However, the recent taxation policy that the Government of India announced is about to change that all.

According to the provision introduced in the Finance Act 2022, section 194R mandates a 10% tax deducted at source (TDS), exclusive of surcharge and cess, on freebies exceeding INR20,000 in a year that influencers receive and retain from sales promotions. This indicates that influencers will have to disclose information about the free samples they obtain from brands or companies when they file their income tax return.

Also, TDS will apply if they decide to retain the freebies, because these kind of items will be considered a prerequisite. If the influencer returns the free samples, TDS will not apply.

Pushppal Singh Bhatia from the popular influencer duo, That Couple Though, shares that businesses will face difficulties in getting promotions for their products unless the influencers return them or create a particular budget for influencer marketing.

Businesses will have it harder to get promotions for their products unless the influencers agree to return them or they manage to create a separate budget for influencer marketing

“The taxation has definitely come as huge news for all. With this change, influencers will now be able to charge a fair share for their promotions instead of barter collaborations. However, this also implies that businesses will have it harder to get promotions for their products unless the influencers agree to return them or they manage to create a separate budget for influencer marketing.

“Although a lot of this looks blurry right now as the rules have just been announced, we are optimistic that once we start conversations with business, both them and the influencers will be able to negotiate on a fair exchange respecting the Government regulations.”

Bhatia’s wife Ravneet Kaur further adds, “A big impact of this policy will also fall upon the smaller businesses that highly rely on barter collaborations as they do not have high budgets for a massive paid influencer campaign.

A big impact of this policy will also fall upon the smaller businesses that highly rely on barter collaborations as they do not have high budgets for a massive paid influencer campaign

“Now that these barter products/services will be taxed, it will become difficult for these small businesses to reach out to influencers as they will have to pay for the collaboration else the influencers would not agree to go ahead with the promotion unless they agree to return the product. Hence, in a situation like this, communication between businesses and influencers plays a very important role.”

As this industry has grown, influencers have been compelling for several businesses. According to the Influencer Marketing Hub, the global influencer market is worth approximately US$13 billion, and is projected to expand to US$16 billion by this year end.

According to a Collabstr report, the influencer market has grown by 42%, from US$9.7 billion in 2020 to US$13.8 billion in 2021, with the average initial spend on an influencer and user generated content going up.

India alone enjoys a creator market worth US$120 million. A study found that 3% of consumers would consider buying a product when it’s sponsored by a celebrity. Although 60% will lean towards buying it when an influencer promotes it. Thus, the taxation rules by the GoI pose as a huge game-changer for influencers as well as businesses.

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Indian micro-influencers with social media following of 5-10,000 people, usually charge up to an average of INR6,500 per post. Content creators with 50,000-80,000 followers charge around INR14,800 per post, while those with 250,000-500,000 followers can charge about INR49,700 per post.

Apart from these payments, influencers often keep the products they promote, a significant part of the influencer economy. These freebies can include bags, clothes, fashion accessories, skin care products, and even vacations and front row seats at fashion shows.

The current policy change will mean a bit of thought provoking inconvenience for both influencers and small businesses.