A LEGAL INSIGHT INTO BRAND DEALS AND ROYALTIES: DECODING THE TAXATION OF SOCIAL MEDIA EARNINGS BY - PIYUSH KUMARENDRA
A LEGAL
INSIGHT INTO BRAND DEALS AND ROYALTIES:
DECODING THE TAXATION OF SOCIAL MEDIA EARNINGS
AUTHORED BY - PIYUSH KUMARENDRA
Research
Scholar
Dr. Ram
Manohar Lohiya National Law University
Abstract
The tax system plays
a crucial role in a country's economic growth, ensuring equitable revenue
generation and fiscal responsibility. With the rise of social media as a
dominant marketing platform, new dimensions of taxation have emerged. Social
media collaborations—strategic partnerships between individuals, brands, and
organizations—serve as vital tools for enhancing brand recognition, audience
expansion, and credibility. These partnerships leverage authenticity and social
proof, fostering brand loyalty and driving long-term business success. However,
income generated from such collaborations through endorsements, royalties, and
partnerships presents unique challenges for tax authorities. This paper
explores the complexities of taxing social media income, analyzing its implications
for economic growth, compliance, and legal frameworks. It addresses the dynamic
interplay between social media marketing and taxation, offering insights into
the regulatory challenges posed by the digital economy.
Keywords
Social Media Influencers,
Digital marketing, Brand collaborations, Income tax, Professional Tax
Introduction
In recent years,
the rise of social media as a powerful marketing platform has introduced new
dimensions to taxation. Social media collaboration refers to the strategic
partnerships between individuals, brands, or organizations to co-create content
and leverage each other’s audiences for mutual benefit. In other terms, it is
collaboration with another individual or corporation to create a unified front,
promote shared ideals, or make profit, thereby making it a vital source for
digital marketing and thereby enhancing brand recognition, expanding audience
reach, and building credibility. Such collaborations offer authenticity and
social proof, as consumers often trust recommendations from influencers,
thereby strengthening the bond between businesses and their customers. It
leverages the popularity and influence of collaborators to engage with a wider
audience and foster brand loyalty. Brand loyalty is a customer's steadfast
commitment to a particular brand or company, characterized by a consistent
preference for that brand's products or services over alternatives. It
signifies strong and enduring relationship between the consumer and the brand,
often leading to repeat purchases and positive word-of-mouth promotion[1].
Social media
collaborations and brand promotions, which involve influencers and content
creators earning substantial income through partnerships, endorsements, and
royalties, present unique challenges for tax authorities.
While these
digital collaborations boost economic activity and brand visibility, they also
raise questions about the regulation and taxation of income derived from such
activities. Governments worldwide are grappling with how to accurately
classify, monitor, and tax this income, especially in the face of globalization
and the decentralized nature of digital platforms. This paper delves into the
complexities of taxing income from social media collaborations and brand
royalties, examining its implications for economic growth, compliance, and
legal frameworks.
The interplay
between social media collaborations and brand loyalty is a dynamic relationship
where businesses strategically partner with influencers, organizations, or
customers on social media platforms to enhance their brand’s recognition and
trustworthiness, consequently contributing to long-term business success. The
income generated through such means is, however, still subjected to tax. The
specific tax implications can vary depending upon various factors such as the
nature of collaboration and brand partnerships, characteristics of the earnings
as well as individual circumstances. A suitable example of the same would
include any influencer who earns a part of the revenue as a reward when someone
buys a product using their purchase link or discount coupon. The income
received thereupon, or through any other similar means of benefiting by the
collaboration, is taxable under the Income-tax Act of 1961. Understanding and
adhering to tax laws is critical for social media collaborators in order to
fulfil their tax obligations and avoid penalties or legal concerns. In India,
the income earned through social media collaborations is considered taxable
income, and should therefore be reported on the income tax return, and the
applicable income tax rates shall apply for the same. Apart from income tax,
social media collaborators may also have to fulfil other tax obligations, such
as Goods and Services Tax (GST).
Interplay Between Social Media Collaborations and Brand
Loyalty
With the dramatic evolvement of the Internet over the
past thirty years, there has been a worldwide explosion of electronic commerce
and interactive digital media. Today, companies are vigorously trying to use
social media to engage with their customers and, by doing so, facilitate
increased revenues, efficiencies as well as cost reductions. Social media
provides companies with great possibilities in terms of for instance, brand loyalty,
and it also puts them under a lot of pressure to engage where customers are
paying attention.[2]
Positive Impacts
of Social Media influence and Collaboration
1.
Extended
Reach and Visibility: One of the most evident impacts of social media
collaboration is the immediate expansion of a brand's reach. Collaborators,
often having substantial followings, introduce a brand to a broader audience
that may not have been reachable through traditional marketing efforts. This
increased visibility allows brands to tap into new markets and demographics,
increasing their brand recognition.
2.
Personalization and Targeted Advertising: Social media algorithms allow brands to deliver
personalized content and advertisements to specific user segments, increasing
the relevance and effectiveness of marketing efforts.
3.
Trust and
Authenticity: Trust plays a pivotal role in brand loyalty. Social
media collaborations, when done authentically, can build trust and credibility.
When influencers or organizations endorse a brand, it signals to their
followers that the brand is reputable. Moreover, authenticity is vital in this
context. Followers are more likely to trust recommendations when they perceive
them as sincere.
4.
Customer
Engagement: Social media
collaborations often lead to increased customer engagement. Collaborators and
brands can create interactive content that encourages customer participation.
5.
Cost-Effective Marketing: Compared to traditional media, social media
offers a cost-efficient way to promote products, services, and campaigns. Paid
promotions and organic content can yield significant results even on limited
budgets.
6.
Brand Advocacy:
Brand
loyalty often transforms into brand advocacy. Loyal customers who have been
positively influenced through social media collaborations become vocal
advocates. These advocates share their positive experiences with the brand,
effectively marketing it to their social circles, further strengthening brand
loyalty.
7. Crisis
Management and Reputation Building:
Social
media offers a platform to address customer concerns, manage crises, and
maintain a positive brand image. Transparency and timely responses can mitigate
negative publicity.
In today's marketing landscape, brand
loyalty is more important than ever. With numerous competitors vying for
consumers' attention, retaining existing customers is often more cost-effective
than acquiring new ones. Social media collaboration has become a powerful tool
to achieve this objective. It not only enhances brand recognition and trust but
also fosters a community of loyal customers who actively engage with and
advocate for the brand.
According to Reichheld and Schefter
(2000), there are economic and competitive variables that show the value of
loyalty is even higher on the web than in the physical world.[3]
The challenge is that creating and retaining client loyalty on e-markets is a
complex and difficult process. Some of the primary reasons are that it is
difficult to build trust because companies do not have direct contact with
their customers, and it is also easy for customers to switch to another company
because competition is only one click away. From the point of view of many
researchers, profit will be enhanced when companies focus on retaining existing
customers.[4]
Negative Impacts of Social Media
influence and Collaboration
1. Conflict or Controversy
Collaborators may become
embroiled in controversies or face public backlash, which can negatively affect
the brand by association. Any personal issues or controversies involving the brand
or collaborator can harm the brand's reputation. Influencers or collaborations may
unintentionally or deliberately propagate inaccurate information, damaging
brand reputation and misguiding consumers.
2. Audience Mismatch
Choosing the wrong
collaborator can lead to an audience mismatch. If the collaborator's followers
have no genuine interest in the brand's products or services, the collaboration
may be ineffective and may even alienate the audience.
3. Loss of Control: Collaborating with external parties
means relinquishing some control over the messaging and content. If the
collaborator misrepresents the brand or creates content that doesn't align with
the brand's values, it can lead to negative brand perception
4.
Fraudulent
Influencers and Fake Metrics: Some influencers use fake followers or
engagement metrics, leading brands to invest in collaborations that fail to
reach genuine audiences. Addressing these challenges requires careful planning,
ethical considerations, and a focus on fostering genuine, transparent, and
meaningful engagements.
Analysis of the Overall Impact:
On an overall analysis of the impact
of social media collaboration on brand loyalty of consumers it can be stated
that while there can be challenges and potential negative impacts, when social
media collaborations are well-planned, genuine, and effectively executed, the
positive impact on brand loyalty tends to outweigh the negative. Brands and
influencers should carefully select collaborators and maintain authenticity to
ensure the success of their collaborations. It is important to note that the
success of social media collaborations depends on the strategy, the
authenticity of the partnership, and the alignment with the brand’s values.
Strategies for Social Media
Collaborators to develop Brand Loyalty:
According to Oliver and Yin (1999), a
customer who consistently purchases goods from the same company demonstrates
brand loyalty. According to Reichheld (2003), however, there is an essential
aspect lacking in this description, and that involves gaining the consumer's
trust. A company must first acquire the trust of its consumers before they can
become loyal. A relatively easy action that companies can do to earn trust and
reduce the risk of being seen as manipulative and insincere is to always have
abundant information available. A consumer who believes that information is
inadequate can immediately suspect that something is wrong and that the company
has something to hide.
Companies that want to run effective
social media collaborations should take into consideration the benefits,
values, advantages they offer to the consumers, what makes the consumers more
likely to become loyal to their brands, and so forth. Relevancy is another
important factor affecting brand loyalty; therefore, companies have to keep
themselves updated about what customers are interested in, their activities,
and current perspectives in life. Companies may conduct qualitative research or
observations to understand the lifestyle of their customers and transfer this
knowledge on social media platforms, while entering into collaborations based
on the conclusive information. Moreover, the popularity of the content among
friends also increases brand loyalty of the consumers.
Tax Implications for Social Media
Collaborations
Social media has become ingrained in
our lives as a result of the digital revolution, and influencer marketing has
emerged as a new means of reaching out to individuals. Influencer marketing
refers to a form of social media marketing involving endorsements and product
placement from influencers, people and organizations who have a purported
expert level of knowledge or social influence in their field. In other words, a
collaboration between popular social-media users and brands to promote brands’
products or services. The customer base has shifted substantially to social
media platforms. The number of users has grown, but so has the amount of time
they spend on these platforms. With such a vast user base, social media has
provided the way for social media influencers and collaborators to market
products and make huge amounts of money.
According to the Income-tax Act of
1961, an income earned by exhibiting a person’s intellectual or manual
capabilities is considered as earning from a profession. Such income is
considered as ‘profits and gains from business or profession’ as the income is
treated as earnings from self-employment. Income gained from social media
collaborations is deemed “Income from the Profession,” and as a result, tax is
applied according to the slab rates.
Income tax can be levied under two
schemes[5]:
1) INCOME FROM BUSINESS AND PROFESSION
a) During the fiscal year, an aggregate
of gross receipts is computed, and then all expenses are adjusted against the
gross receipts. However, only those expenses that are authorised under Section
37 of the Act are deducted from gross receipts.
b) Following the adjustment (Gross
profit – Expenses*), the difference is the Net profit, on which tax is due.
c) For exclusions, as provided by the
Act, deductions as provided by Sections 80C, 80D, and other sections of the
Act, and disallowances as provided by Section 37 of the Act, all other
provisions of the Act apply. When gross receipts in an F.Y. exceed 1 crore, a
taxpayer is required to get his books of accounts, according to the rules of
the Income Tax Act.
2) PRESUMPTIVE SCHEME
Residents with gross receipts of less
than 50 lakhs in a fiscal year are eligible. Then 50% of total gross receipts
will be considered taxable income, and tax will be paid at the required slab
rates under the Income Tax Act.
The taxation of social media
collaborators and influencers in India works in a similar way to the taxation
of any other self-employed individual. The tax rate in such a case depends on
the income bracket.
·
Annual
income of up to Rs 2.5 lakh: nil.
·
Annual
income above Rs 2.5 lakh up to Rs 5 lakh: 5 per cent.
·
Annual
income above Rs 5 lakh up to Rs 10 lakh: 20 per cent.
·
Annual
income of more than Rs 10 lakh: 30 per cent.
Additional Tax Implications
Apart from income tax, social media
collaborators may also have to fulfil other tax obligations, such as Goods and
Services Tax (GST). Individuals earning more than Rs 20 lakh in a fiscal year
are required to register their services under the GST law. Influencer services
are classified as Online Information and Database Access or Retrieval Services
(OIDAR), and are subject to an 18% GST rate. They may also be required to pay
this tax, which is based on the value of the services they offer, including
consulting services and training services. Such individuals ought to maintain
accurate records of their business costs, travel expenses, and other related
expenditures in order to claim deductions and reduce tax liability. These data
will be required when completing their income tax return, and they may be able
to minimise their overall tax burden as a result.[6]
Understanding and adhering to tax
laws is critical for social media influencers in order to pay their tax
obligations and avoid penalties or legal concerns. Social media influencers may
develop a profitable and legally compliant business while giving their fair
amount to the country's income by remaining informed and abiding to tax
requirements.
TAX
DEDECTUION AT SOURCE ON FREE GIFTS FOR SOCIAL MEDIA INFLUENCERS
Previously, Section 28 of the Income
Tax Act (ITA) required that the value of any benefit or perquisite, whether
convertible into money or not, be included in the taxpayer's total income. This
income was taxed under the category of "profits and gains from business or
profession." However, there were instances where taxpayers failed to
report such benefits in their income tax returns, leading to incorrect income
disclosures. To address these
discrepancies, Section 194R of the ITA was introduced. The provision was added
through the Union Budget to curb tax revenue leakage by amending the Income Tax
Act, 1961, via the Finance Act 2022.
Section 194R mandates that any person providing a benefit or perquisite
to another person in connection with their business or profession must deduct
tax at source (TDS) at a rate of 10% on the total value of such benefit or
perquisite. This applies regardless of whether the benefit or perquisite is in
cash or kind. However, if the aggregate value of the benefit is less than
?20,000, TDS is not applicable under this section.
Section 194R: Tax Deduction on
Benefits or Perquisites Related to Business or Profession
(1) Any individual responsible for
offering a benefit or perquisite to a resident, whether it can be converted
into money or not, and arising from business or professional activities of that
resident, must ensure that tax is deducted at a rate of 10% on the value or
total value of such benefits or perquisites before providing them.
(2) If any difficulty arises in giving
effect to the provisions of this section, the Board may, with the previous
approval of the Central Government, issue guidelines for the purpose of
removing the difficulty.
(3) Every guideline issued by the Board
under sub-section (2) shall, as soon as may be after it is issued, be laid
before each House of Parliament, and shall be binding on the income-tax
authorities and on the person providing any such benefit or perquisite.[7]
Social media influencers are offered
products by various manufacturing companies to promote them on digital platforms.
Any such freebies or benefits and perquisites in cash or in kind, such as a
car, television, computer, gold coin, mobile phone, foreign trips, and free
tickets for events given to promote sales, will require taxes to be deducted
accordingly under Section 194R of the ITA. However, if such products are
returned to the manufacturing company, then they will not be treated as a
benefit or perquisite.
All these freebies, benefits, and
perquisites will have to be disclosed while filing the income tax return,
adding that it shouldn’t be avoided based on the fact these items are not being
sold.
Illustration:
For instance, a collaborator X
receives a mobile phone from Company A valued at Rs. 1,18,000 (mobile phone Rs.
1 lakh + GST Rs. 18,000), a car from Company B valued at Rs. 15 lakh, and
cosmetics from Company C valued at Rs. 15,000.
X charges fees of Rs. 15,000 to
Company A,B,C each. Now, X promotes all these products and retains the mobile
phone and cosmetics with him. After the promotion, he gives the car back to
Company B. Since X did not return the goods to Companies A and C, it would be
considered a benefit or perquisite provided for the purpose of business/profession.
Company A is required to deduct TDS
in accordance with Section 194R on the mobile phones worth (excluding of GST).
The TDS liability would be of Rs 10,000, which shall be retained from the fees
payable to X. For Company C, the value of benefit provided does not exceed Rs.
20,000 and hence, no TDS liability would arise to Company C. Moreover, since X
returns the car to Company B, there is no further advantage supplied to him
beyond the costs he charges, hence there is no need to deduct TDS.
Balancing Taxation and Brand Loyalty
in Business Operations
Taxation primarily serves a
regulatory and revenue generation purpose for the government. It is designed to
collect funds that support public services and infrastructure. It directly
affects the financial aspects of a business. It involves calculating and paying
taxes, including income tax, GST, and TDS, based on the financial transactions
related to social media collaborations. Moreover, businesses and corporations
must ensure compliance with tax laws to avoid penalties or legal issues. The
impact of taxation is a financial obligation and liability that can affect a
company's bottom line.
Brand loyalty, on the other hand,
focuses on building and maintaining a positive relationship between a brand and
its customers. It aims to create a strong emotional connection and trust.
Furthermore, qualitative impact on a business. It involves customer
perceptions, emotions, trust, and engagement with the brand. It's not measured
solely in financial terms. Building brand loyalty requires trust, consistent
customer experiences, and a genuine connection. Social media collaborations
play a role in enhancing trust and building these relationships. It is a
long-term strategy that focuses on customer retention and advocacy. Loyal
customers are more likely to stick with a brand over time and recommend it to
others.
While taxation is a regulatory
requirement and a necessary aspect of business operations, brand loyalty is a
long-term strategic goal. Effective social media collaborations can contribute
positively to both taxation, through legitimate deductions and revenue growth,
and brand loyalty, by enhancing trust and engagement. However, inauthentic
collaborations can have negative effects on both taxation, due to potential
penalties for non-compliance, and brand loyalty, as customers may feel deceived
or alienated. Businesses need to balance these considerations when engaging in
social media collaborations to maximize the benefits and minimize potential
downsides.
In summary, taxation and brand
loyalty serve different purposes and have distinct impacts on a business. While
taxation is a financial obligation and compliance matter, brand loyalty is a
strategic goal that focuses on customer trust and long-term success. Social
media collaborations can influence both areas, with potential positive or
negative effects, depending on how they are executed and perceived by customers
and tax authorities.
Conclusion
In conclusion, the juxtaposition of
taxation and brand loyalty within the context of social media collaborations
underscores the multifaceted nature of business operations in the modern age.
Taxation, primarily concerned with fiscal accountability and government
revenue, exerts a tangible and often immediate influence on the financial
facets of a company. Conversely, brand loyalty, operating within the realm of
perceptions, emotions, and trust, crafts an intangible yet profound link
between a brand and its customers, fortifying long-term success. While taxation
ensures that businesses meet their fiscal obligations and contribute to public
welfare, brand loyalty contributes to the brand's reputation and sustains a
loyal customer base. This distinction is not only one of objectives but also of
mandatory compliance versus strategic intent.
Effective social media collaborations
can bridge these two realms, as they have the potential to enhance a brand’s
reputation, encourage trust, and promote authentic engagement with customers.
However, the manner in which these collaborations are executed is crucial.
Inauthentic collaborations may lead to a loss of trust and brand loyalty, while
judiciously conducted ones can create long-lasting connections with a customer
base. In this dynamic landscape, businesses must recognize that financial
compliance is essential but not the sole determinant of their success.
Achieving a balance between meeting taxation requirements and cultivating brand
loyalty is the key to thriving in the interconnected world of social media
collaborations. Ultimately, success lies in recognizing the value of both, as
they coexist to shape the multifaceted narrative of contemporary business
operations. As the digital era evolves, the interplay between taxation and
brand loyalty in the realm of social media collaborations will continue to be a
critical consideration, impacting the present and future of businesses in our
increasingly interconnected world.
[1] Yogesh K. Dwivedi , Elvira Ismagilova , Setting
the future of digital and social media marketing research: Perspectives and
research propositions, International
Journal of Information Management
Volume 59, August 2021, 102168
[2] Baird, C.H. and Parasnis, G.
(2011) From Social Media to Social
Customer Relationship Management. Strategy and Leadership, 39, 30-37
[3] Reichheld, F. and Schefter, P.
(2000) E-Loyalty. Harvard Business Review, 78, 105-114.
[4] C. Fornell and B. Wernerfelt,
“Defensive Marketing Strategy by Customer Complain Management”
[5] Tax Implications on Social Media
Influencers under Income Tax Act. (2021, December 20).
https://studycafe.in/tax-implications-on-social-media-influencers-under-income-tax-act-111749.html
[6] Maiti, supra note 1 at 6.
[7] Income-tax Act, 1961, s. 194R.