Tax treatment of royalty payments from YouTube (Google Ads)

Introduction

Wireless connection technology, specifically in the form of mobile devices, has grown in leaps and bounces over the past decade. Ever since smartphones were introduced, the world has drastically changed, not just in terms of connectivity, but also in terms of the global economy. There has been an explosion of potential digital methods of performing diverse economic tasks, including the creation of new sources of income. The demographic of users who utilize mobile phones has significantly increased after the introduction of smartphones.

One such source of digital income is YouTube, an online social media and video sharing platform. YouTube is currently owned by Google, and like most of its other applications that fall under the category of intangible properties, YouTube makes money via advertisements. After the advent of the 3G and 4G internet, the usage and users of the internet have quadrupled around the globe. Almost half of the world’s population, i.e., 3.4 Billion people, were using mobile internet by the end of the year 2019.[i] Thus, on account of an abundance of internet data, the trend of searching for content on Google has now largely shifted to YouTube. This has led to a substantial increase in YouTube channels, as these content creators get a decent share of the advertisement income that YouTube earns. The increase in such content creators around the globe has increased the complexities involved in collecting tax revenue, especially due to the fact that YouTube is a U.S based company, whereas the content creators are scattered around the globe.

Sources of income for Content Creators on YouTube

The major source of income for content creators is the share from the Ad revenue that YouTube earns from the advertisers. YouTube has developed various other tools and mechanisms for creators to earn more money, such as the YouTube program. This program has an option for the subscribers to pay an additional amount to the content creator and get additional benefits, such as exclusive content, super chats, and so on[ii].

Tax Liability on YouTube Income in India

The income tax on income that is received in India is subject to Indian law. Thus, the Indian content creators have to pay tax on their earned money as per the Income-tax law of India. However, the rules of TDS are not applicable to Indian content creators because of the way the contract is drafted for the YouTube Partner Program. Under this agreement, the Google entity that is contracting with the Indian content creators is Google Asia Pacific Pte. Ltd, a Singaporean entity. When any transactions are made with foreign companies, the tax liability on the same shall be decided based on the provisions of the Double Taxation Avoidance Agreement. Thus, as per Article 7 of the DTAA between India and Singapore, the income earned by YouTube content creators shall be taxed in the country in which the content creator is present, which in this case would be India.

The income earned from YouTube in India can be treated in two ways, one is Income from Business and Profession and the other being Income from Other Sources.

YouTube Revenue as “Income from Business and Profession”

If creating content on YouTube, such as Vlogs, game streaming, and so on, is the primary source of income of the resident entity or a person, the same shall be treated as an Income from Business and Profession. In such a scenario, the resident entity or person will be allowed to claim the benefit of deducting the expenses incurred in earning such income. Hence, expenses such as marketing expenses, promotion charges, travelling expenses, Internet connection charges, expenses associated with purchasing computer equipment, purchasing a car, depreciation on such assets, and so on, shall be considered as an expense while calculating the net income of the resident entity or person.

This net income will be taxed at the applicable rates of Income Tax in India, which are as follows:

1. If the content creator is a Private Limited company, the tax rate would be normally 25% (if the turnover in the FY doesn’t exceed Rs. 400 Crores).
2. If the content creator is a Partnership firm, the tax on net YouTube income would be levied at the rate of 30%.
3. If the business is not registered as a Company or a firm, the person would be taxed as a sole proprietor as per the following slab rates,

Paying taxes under the presumptive taxation scheme u/s 44AD of Income Tax Act, 1961

Presumptive taxation u/s section 44AD is an option for small taxpayers whose income is at a level where maintenance of books of accounts is not required. A presumptive profit is considered for calculating the tax amount. A total of 8% of tax is required to be paid under this section or 6% in cases where income is received via digital sources. Following are the conditions to be fulfilled by the content creators to opt for this scheme[iii]:

1. The turnover from YouTube income doesn’t exceed Rs. 1.5 Crore
2. Deduction of expenses (covered under sections 30 to 38 of the Income Tax Act, 1961) cannot be undertaken.
3. The content creator must be a resident individual, part of a Hindu Undivided Family, or a Partnership firm (other than a Limited Liability Partnership firm)

Thus, small content creators who are individuals, HUF, or partnership firms, earning less than Rs. 1.5 Crores from YouTube can opt for the presumptive taxation scheme. They would be free from the hassle of maintaining the books of accounts.

Treating it as an Income from Other Sources

Most of the content creators, treat the income earned from YouTube as an additional income and do not consider it as their main source of income. In such a scenario, the expenses incurred directly to earn the revenue shall be liable for deduction from the income. However, the capital expenditure incurred, such as purchasing of Camera, Car, Computer, depreciation on these assets, and so on, will not be allowed as a deduction against the YouTube income, as Capital expenditures cannot be claimed as a deduction under Section 57 of the Income Tax Act, 1961.

Advance Taxes on YouTube Income

The advance tax is payable by every person in India, whose tax liability is estimated to be more than or equal to Rs. 10,000, as per section 208 of the Income Tax Act, 1961. However, people who are senior citizens or who don’t receive any income from Businesses and Professions are exempted from the requirement of paying advance taxes.

These rules apply to Indian content creators as well. Hence, if the content creator’s tax liability is more than Rs. 10,000, and they are not exempt from paying the advance taxes, as mentioned above, the advance tax would be levied from them as follows,

Additional requirements under the US Tax laws

As per the revised United States taxation laws, Google on 9^th March 2021 announced that they will be required to withhold the taxes from all the income earned by the content creators, for their content consumed by viewers from the United States. The tax rates would vary from 0% to 30% on the earnings generated from the US viewers. The withholding of tax amount will differ based on the residency of the content creator and the Double Taxation Avoidance agreement of such country with the United States. The claim of the taxes deducted by Google can be made as per the guidelines of the DTAA established between the USA and the country of residence of the content creators[iv].

Withholding tax rate for Indian creators

Based on the Double Taxation Avoidance treaty between India and United States, the Indian content creators will have to pay approximately 15% of the withholding taxes from their YouTube income that is generated from their viewers in the United States. Google has also demanded various tax information specifics from YouTube content creators which need to be submitted in a specific time. If such tax information is not submitted as per the United States taxation laws, the withholding tax rate may increase to 15%-24%.

To avoid paying the 24% tax that can be levied on content creators publishing to YouTube, filling out the W-8BEN form is crucial. According to the specifics mentioned within the W-8BEN Form, which is the Certificate of Foreign Status of Beneficial Owner for US Tax Withholdings, taxation of foreign income can occur under the following circumstances:

1. When the income concerned is not connected directly with trade conducted within the territorial boundaries of the USA
2. When the income concerned is not liable to be subjected to income tax within the USA
3. When the income concerned is a share associated with the partner’s earnings as a part of the connected income of a partnership.

The above-mentioned clauses regarding the types of income covered under deductions filed through the W-8BEN form make it clear that most foreign YouTubers can utilize the said form for avoiding the 24% tax rate that has been implemented as per the new amendments.

These new amendments are still not a concern for the Indian content creators, mainly because a majority of the Indian content creators have local audiences. Also, most of the top YouTubers from India make 20% of their income from YouTube ad revenue, whereas the rest of the 80% comes from brand associations.

[i]https://www.gsma.com/r/wp-content/uploads/2020/09/GSMA-State-of-Mobile-Internet-Connectivity-Report-2020.pdf

[ii]https://www.youtube.com/intl/ALL_in/howyoutubeworks/our-commitments/sharing-revenue/

[iii]https://www.incometaxindia.gov.in/Documents/Students/Learning/Section%2044AD%20(Theory).pdf

[iv]https://economictimes.indiatimes.com/tech/technology/indian-creators-neednt-panic-about-new-youtube-tax-rules/articleshow/81451725.cms