From Instagram to Investigation: I-T Department Issues Notices in Rs 10,000 Crore Tax Scandal

🔍Insights

Nadeesh Kareemdathil, Apoorva Bajj

Dec 4, 2023 — 4 min read

From Instagram to Investigation: I-T Department Issues Notices in Rs 10,000 Crore Tax Scandal

The income tax (I-T) department has reportedly uncovered instances of tax evasion totaling around Rs 10,000 crore over three years, as per credible sources. The evasion is believed to have been perpetrated by online retailers marketing their products through social media channels like Instagram and Facebook. Notices have been issued to 45 brands operating nationwide, and it is anticipated that additional companies will receive similar notifications in the near future. These companies are alleged to have either neglected tax payments or provided inaccurate information regarding their incomes, according to insider information.

A high-ranking official, discussing the issue, shared insights with a publication, declaring, "Beyond significant eCommerce entities, we are actively overseeing operations on Instagram and Facebook, revealing a suspected evasion amounting to roughly Rs 10,000 crore." Notifications from the Income Tax (I-T) department were sent out from the final week of October to November 15, covering evaluation periods from 2020 to 2022.

The report identifies the 45 companies involved in sectors such as apparel, jewelry, footwear, bags, and gift items. This roster comprises well-known retailers utilizing social media platforms for consumer outreach. Several of these companies, which received the I-T notices, were also involved in international product sales.

India boasts over 230 million active Instagram users, the highest globally, and more than 314 million Facebook users. Government sources assert that the 45 entities in question exhibit significant turnovers. An official elaborated on the sales activities of these companies, revealing, "They operate small shops and warehouses, primarily selling through Instagram, with turnovers exceeding Rs 110 crore, while their reported income tax returns were only Rs 2 crore."

Following the impact of COVID-19, there was a noticeable upswing in the number of retailers utilizing these platforms, known for their substantial user engagement. The official noted that three Mumbai-based saree eTailers attracted the attention of the tax department after sponsoring a high-profile fashion show.

Most of the transactions involving these online retailers were conducted through UPI, facilitating the I-T department's ability to trace these financial activities. Despite the increasing trend of individuals leveraging social media for retail purposes, such income often goes unreported, leading to the non-payment of taxes.

In 2022, the projected market size for social commerce in India stands at seven billion U.S. dollars, with expectations of an increase to 84 billion U.S. dollars by 2030. eCommerce has dominated the market for over a decade, leading to a discernible shift towards social commerce, which is poised for significant advancement.

Market Size of Social Commerce in India in 2019, With Forecasts From 2022 Until 2030

Social commerce involves the direct selling and purchasing of products or services through social media platforms, encompassing every aspect from product discovery to the entire checkout process, shaping a holistic shopping experience for consumers.

The prominence of social commerce is evident in the State of Social Media Investment Report, revealing that 77% of consumers are likely to favor enterprises offering a superior social media experience. Surprisingly, four-fifths of social media marketers anticipate consumers will increasingly buy directly from social apps rather than brand platforms or third-party eCommerce portals in 2023.

While many companies engage in sales through both eCommerce sites and social media handles, in India, the bulk of social commerce transactions are propelled by new brands and first-time entrepreneurs. With the continuous surge in social media users, brands are innovating strategies to convert captive audiences into customers.

Given that people spend an average of three hours daily online—engaging in activities such as posting, scrolling, viewing videos, and messaging—this presents a crucial window of opportunity for brands to target consumers through their marketing tools.

Unlike transactional buy-and-sell models, social commerce focuses on building a dedicated community around a brand. Brand development hinges on loyal fans or followers who praise and promote the brand, contributing to a robust community or consumer base in a short period. Social commerce differentiates itself by leveraging influencers for product marketing, fostering community creation efficiently.

The authenticity of feedback within social commerce is bolstered by a strong presence on social media and community connections, providing organic and genuine feedback. With its distinct advantages over traditional eCommerce methods, there is a growing global belief that social media represents the future of eCommerce.

The trajectory of social commerce indicates sustained growth in the years to come, driven by approximately 70% of the nation's population actively using social media. Presently valued at $2 billion, industry analysts anticipate the social commerce market in India to grow at a CAGR of around 50 to 60% over the next five years.

In light of these statistics, it is evident that brands adept in social commerce are strategically investing time, money, and resources to enhance their success through this evolving platform. This increased success, however, has also attracted the attention of the income tax department.