💎Taxes & Trust (31 July 2022)


What better time to cover stories on taxes than 31st July? Trust, Windfall gains, and Influencers made some news with regard to taxes lately.

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Last week, we celebrated the tax day and also the fact that direct tax collections jumped by 49% in Financial year 21-22 from a year before to hit a record Rs 14 trillion. Thanks to the robust collections from individuals and corporates.

The Finance Minister attributed it to the trust-based tax system that the government has built through reforms in recent years.

The Slippery Slope Theory

This popular study digs deeper into the psychological aspects of tax compliance. It says that there are two routes that authorities can implement to improve tax compliance: coercive or persuasive.

Coercive would entail strict audits and fines for noncompliance and persuasive would build a trusting relationship with taxpayers by enabling support. The Indian government lately has been trying to enhance the system through persuasive trust measures.

The trust framework in the current context

  • The government transitioned the tax assessment process from face-to-face to electronic assessment and now to a complete faceless assessment.

  • As the first step to tax filing, the current tech-enabled portal is easy to understand and lets one finish the entire process within a few minutes.

  • Next step, the faceless e-assessment has eliminated personal contact to the extent that the name of the assessing officer is not visible and hence proceedings are held in a transparent manner.

Our take

Broadly, there are two taxpayer personas: compliance-minded and evasion minded. The trust-building approach works well for the former. And lately, the Indian government has been firm about staying away from extreme coercive measures.

The improved tax collections indicate that the strategy is working well for them. Maybe India is advancing towards more compliance-minded citizens and corporates.

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Finally, the booming influencer marketing business model took the tax department's attention. Starting this month, the social media influencers will be required to pay a 10% tax deducted at source (TDS) on freebies above ₹20,000 in a financial year. In case they return the product to the brands, they are exempt from taxes.

Currently, they were already paying tax on the cash earnings that they had from the collaborations. And the free gifts, because of no existing paperwork were mostly not mentioned by the influencers when they file income tax returns.

More power to the influencers?

The Indian influencer market is at present valued at Rs 900 crore. It is expected to grow at 25% to reach Rs 2,200 crore by 2025.  

A study found that 3% of consumers would consider purchasing a product if it’s sponsored by a celebrity. Whereas 60% will be inclined to buy it if an influencer promotes the product. Maybe consumers are able to relate more with the influencers than the celebrities.

What all might change with a tax on freebies?

  • Influencers might retain the product and end up paying taxes only if they intend to use the product. This can gradually lead to the influencers promoting only those products that they believe in

  • A detailed paperwork process might now come into the picture with proof of the value of gifts and if or not they were retained by the influencers

  • Influencers might want to decide between gifts or a cash payment that they deserve from the brands

Our take

Brands will now have a recorded spend that they would have incurred on influencer marketing as a whole. Might be easier for them to analyze the returns obtained and also streamline the right influencers where ROI was higher.

For the influencers, this is a positive shift in the government's perspective toward the content creators. Also, now with the value of gifts recorded, it would help the influencers understand their actual income levels and not just the cash component that they earned.

Sudden Windfall Taxes

This month we heard the Indian government first imposing and then doing away with windfall taxes on oil companies. Wondering what is a windfall tax? It is a one-off tax on companies with all of a sudden abnormal increase in profits not because of any smart investment decision, but simply because of favorable market conditions.

It's not a new concept. Even during the 1980s, the US levied a windfall tax on oil companies when oil price controls were removed and companies were booking very high profits.

In our Finance Minister's words

Last month, when the global oil prices went as high as $120 per barrel, many private Indian oil companies shifted the oil supplies from domestic buyers towards exports and earned superb profits. And that's when windfall taxes were introduced.

Three weeks after, when the crude prices fell to $90 per barrel, the government reviewed the rupee-dollar exchange rates and local prices of crude and made changes in the windfall taxes.

Tax one month back and now

  • The government then imposed a windfall tax of Rs 6 per liter as export duty on petrol and aviation turbine fuel, Rs.13 per liter on diesel, and a cess of Rs. 23,250 per ton on domestically produced crude oil.

  • Last week the government rolled back the tax on petrol exports and reduced the tax on diesel and aviation fuel by Rs. 2 per liter. Also, the cess on domestically produced crude was brought down to Rs. 17,000 per ton.

Our take

As investors in oil companies, one has to already deal with the unpredictability in global and local macro scenarios basis which the il prices move. Now further, this unpredictable windfall tax might be a put-off.

What could be of help is the government define how they would categorize "extraordinary" profits and also further what would be the associated tax-related impact in such scenarios.