The rise of the internet has revolutionised how individuals generate income, allowing them to monetize their content across various social media platforms such as Twitch, YouTube, Instagram, and even X (formerly known as Twitter). However, as these platforms are often based abroad, questions arise about taxing their earnings. Here, we will delve into how income from social media sites is taxed, the applicable rates, deductions allowed, and the necessary steps for tax compliance.
Classification of Income: Business vs Other Sources
Taxation of income derived from popular social sites such as X, Instagram and YouTube depends on how one identifies the source of the earned. Primarily, this income can fall under two heads: This may also refer to either business and profession under ‘income from business and profession’ or other sources under ‘income from other sources’.
If the earnings are the only source of income for an individual, and he is wholly engaged in content creation, it will be taken as ‘Profits and Gains from Business or Profession’. Alternatively, if the income is incidental and additive compared to other payment sources, then it comes in the category of ‘Income from other sources’. The classification is based on activity level and the degree of income quantum generated.
Taxation Rates and Deductions for Social Media Earnings
No specific tax rate is designated for income derived from social media sites. Instead, these earnings are reported under the relevant income head and taxed according to the prevailing slab rates. Deductions, however, vary based on the classification of income.
For ‘Income from other sources’, only expenses directly and explicitly incurred to generate that specific income are eligible for deductions. In contrast, ‘Business income’ allows deductions for costs incurred to operate the business. For example, maintaining a verification tick on a profile might be seen as a business-related expense if it aids in maintaining follower thresholds. Yet, the necessity of the expense for income generation plays a vital role in its deductibility.
Maintaining detailed records of expenditures is essential to comply with potential inquiries from the income tax department. If income is treated as business income, an individual might need to fulfil certain compliances such as tax audits and bookkeeping.
Tax Deducted at Source (TDS) for Social Media Earnings
Whether an Indian or foreign entity makes the payments to the social media company, Tax Deducted at Source (TDS) is applicable. If the payment originates from an Indian entity, TDS follows Section 194J of the Income Tax Act, with a 10% deduction for payments exceeding Rs 30,000. TDS is subject to the respective country’s laws for payments from foreign entities. Double Taxation Avoidance Agreements (DTAA) can determine if tax credits can be claimed for deductions made outside India.
The applicability of TDS might differ based on the nature of the activity and the revenue-sharing terms defined by the social media company.
Goods and Services Tax (GST) Implications for Social Media Earnings
Considering the specific income threshold, GST registration might be required for incomes earned from social media websites. GST regulations categorize services influencers and content creators provide under Online Information and Database Access or Retrieval Services (OIDAR). If the annual income exceeds Rs 20 lakh (or Rs 10 lakh in special category states), GST registration becomes mandatory. A rate of 18% applies to services registered influencers and content creators offer.
A GST-registered individual must issue an invoice containing all relevant details, including the GST number.
Reporting Income from Social Media in Income Tax Return (ITR)
Reporting income in the Income Tax Return (ITR) form depends on whether the income originates from an Indian or foreign company. Payments from foreign companies are treated as foreign income and require ITR filing, irrespective of the basic exemption limit. Payments through Indian subsidiaries are not considered foreign income, eliminating the need for reporting in schedule FA.
Regarding foreign income, including company details in the FA schedule is crucial for ITR filing.
The taxation of income earned from social media sites involves classifying income, understanding tax rates, deductions, TDS applicability, GST registration, and proper reporting in ITR forms. Navigating these aspects ensures compliance with income tax laws and avoids potential issues with taxation authorities.