- Are you an Affiliate marketer earning affiliate income from outside India?
- Are you aware of how your affiliate income is taxed in the foreign country and India?
- How to safeguard yourself from any risk of penalty or prosecution of wrong tax filing for affiliate commissions?
Note: This article is for affiliate marketers in India. If you are not from India, kindly browse through our archives to find a relevant article for your region.
Suppose Mr. A has an online property (Blog, YouTube, Podcast or any other) where he wants to promote products sold by a company, XYZ Ltd. Mr. A gets into a contract with XYZ Ltd. and they both decide that for every product sold through Mr. A’s blog, XYZ Ltd. would pay him an X amount of commission. This is the most common model of affiliate marketing. It is a service provided by Mr. A to XYZ Ltd.
What is the nature of Affiliate Marketing Income?
Suppose Mr. B (a Resident of India) enters into a contract with Bluehost (the USA) to promote their hosting services. In this case, Mr. B is providing affiliate marketing services to Bluehost and receiving commissions from it.
Where this income will be taxable?
Now, the question is whether this affiliate marketing commission (‘affiliate income’) earned by Mr. B is taxable in the USA or in India?
As discussed in our article on Royalty income, taxability
“Any country has a right to tax an income because of the following:
- The source of your income is in that country, or
- You are a resident of that country”
Further, the source of service lies in a country where it is performed.
Therefore, as Mr. B is a Resident of India and would perform these marketing services in India, the source of this service lies in India. Therefore, B’s affiliate income is not taxable in the USA.
However, to confirm the resident country of Mr. B, Bluehost would take a confirmation through Form W-8BEN (Form W-8BEN-E in case affiliate is a business firm / a company). For more information on Form W-8 BEN, refer to our article Link (Coming soon).
In case Mr. B does not submit a valid Form W-8 BEN, Bluehost may withhold tax @ 30% (similar to a US Resident affiliate).
How Affiliate marketing tax will be computed in India?
Income Tax – Direct Tax
In India, as the source of this affiliate income lies in India, this income is taxable as a normal business income. You would get deduction of all related business expenses while computing Net taxable income.
As per Section 14 of the Income-tax Act, 1961, there are five heads of income under which an income would fall:
- Income from House Property
- Profits and Gains of Business or Profession (PGBP)
- Capital Gains
- Income from other sources
The affiliate marketing income would fall under the head PGBP (can also be considered as income from Other Sources).
- Mr. C earns a total affiliate income of INR 10,00,000 during the Financial Year.
- Total cash business expenses are INR 2,00,000
- Total non-cash business expenses are INR 1,00,000
- There is no other income
|Particulars||Amount in INR|
|Less:||Cash Business Expenses||(2,00,000)|
|Less:||Non-Cash Business Expenses||(1,00,000)|
|Income under Head PGBP||7,00,000|
|Gross Total Income||7,00,000|
|Less:||Deduction under Chapter VIA (if any)|
|Section 80C (Investment to LIC, PPF, FD, etc.)||(1,50,000)|
|Net Total Income||5,50,000|
Now, Net Total Income of INR 5,50,000 would be taxable basis slab rates for the relevant Financial Year.
- Cash business expenses mean expenses for running a business such as domain hosting expenses, advertisement expenses, office electricity bills, office rent, the salary of employees, etc.
- Non-cash business expenses mean business expenses such as the depreciation of office computers and laptops, depreciation of furniture and fixtures, etc.
|So, let us summarise what we have discussed so far. Affiliate Marketing income received by you (an Indian resident) from a US registered company is not taxable in the USA.
Further, if you furnish Form W-8BEN, the US company would not withhold any taxes from you.
This income is taxable in India as a normal business income. While computing annual taxable income, you would be allowed the deduction for related business expenses.
Well, this is it for the direct taxes part in India and the USA. Think through what you have learned till now.
Do you have some questions?
Just hold on to them till we reach the end of this article as some of them may be answered by then. If not, don’t forget to write them down in the comment box.
Goods and Service Tax (GST) on Affiliate Income – Indirect Tax
Considering the above example only, Mr. C is also required to comply with the Indirect Tax Laws of India i.e. Goods and Service Tax (GST).
GST is based on two statutory acts i.e. IGST (Integrated Goods and Services Tax) Act, 2017 and the CGST (Central Goods and Services Tax) Act, 2017. Under the CGST Act, 2017, the affiliate marketing would qualify as a supply of service. Now, let us understand the nature of this service.
The above services would qualify as Online Information and Database Access or Retrieval services (OIDAR services). Basis section 13(12) of the IGST Act, 2017, the place of supply of an OIDAR service is the place where the recipient of service is situated.
Therefore, in this case, service has been supplied outside India.
The above service would be taxable @ 0% GST if the following conditions are satisfied:
|1||The supplier of service is located in India|
|2||The recipient of service is located outside India|
|3||The place of supply of service is outside India|
|4||The payment for such service has been received in convertible foreign exchange|
|5||The supplier of service and the recipient of service are not merely establishments of a distinct person|
In above case, as it would fulfil all conditions, a 0% GST is applicable on the service.
Please note that 0% GST does not mean that you do not have any other compliance requirement.
Under GST law, you have either of the two options:
- Export without payment of any tax – under a Letter of Undertaking (LUT) / bond (refer Confusion Over Export of Services without Payment of IGST for more details on LUT)
- Export along with tax payment and claim refund later
For the purpose of records, you should raise invoice for these export services. See: Best invoicing and accounting software.
Kindly refer Tax on Blogging income under Income Tax & GST with FAQs for further details.
|Thus, summarising the later part of this discussion.
The above service would qualify as export of service, therefore it would be taxable at 0% GST.
You can either furnish an LUT and export without paying any GST or you can pay GST at the time of export and claim a refund of the same later.
Conclusion – Tax on Affiliate income with GST
The purpose of this article is not to make you a tax expert with a 15-minute article but to make you more diligent and tax compliant. We hope that we were able to bring more clarity on the issue and help you to identify your action points.
We know that the above information overload would in no case answer all your questions, in fact, it would trigger some new ones.
Don’t hesitate to ask all of them, doesn’t matter how obvious you think the answers are, you may help someone else by asking a good question. Drop your thoughts or questions in the comment section below.
- In case you qualify as a Resident of the USA, the above analysis is not applicable to you.
- The above article only deals with income in the nature of affiliate income and does not cover any royalty income. Kindly refer to our article Link for the same.
- The above article is for information only, please check with your tax consultant before taking any decision basis above. The author or publisher of this article will not be responsible in any manner in case of any loss in any form is incurred by any individual or any organisation basis above information.