Introduction
Due to the novel coronavirus pandemic, many companies are grappling with decrease in business and unavoidable layoffs. This does not mean that the company suddenly has no work for their employees, instead they are looking out for more economically viable options to do the same work. This is where the employees who are good and confident at what they do are opting to work as Independent consultants or Freelancers. Companies in various sectors such as IT and IT-enabled services, Fast-Moving Consumer Goods (FMCG), Health care, Education and Professional services are now looking at utilising freelance talent and Independent consultants more than ever before. Virtual work-force is the need of the hour. Companies such as Infosys, Tech Mahindra, Accenture, EY, Deloitte, and Simplilearn admitted that roles that require niche skills and are in demand for a short duration, will transition to gig jobs (i.e. temporary and flexible jobs performed by Independent consultants, Independent contractors and freelancers instead of full-time employees) much faster. “Companies are now much more used to having a virtual workforce, and traditional boundaries between full-time employment and freelancers will blur,” said Richard Lobo, Executive Vice President and HR Head at Infosys.
So, the people who have made this transition or intend to make this transition need to understand the tax implications that are applicable to consultants or freelancers.
In this article, I will try to explain the various tax implications for freelancers or consultants.
Why do freelancers or consultants have to pay tax?
As per the Income Tax Act, 1961 Charging section 28(i) ‘the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year is taxable under the head Profits and Gains from Business or Profession.’ Income tax laws in India state that any income generated by an individual through implementation of their intellectual or manual skills is considered an income from a business or profession.
Every Individual, Hindu Undivided Family (HUF), Artificial Judicial Person (AJP), Association of Persons (AOP), Body of Individuals (BOI), Companies both Domestic and Foreign, Partnership Firms, Limited Liability Partnerships and Local Authorities have to pay tax if their income in a particular year exceeds certain basic limits which will be explained in the later part of the article. Freelancers and consultants fall under one of the above categories as per the size and scale of its operations and thus liable to pay tax.
Computation of taxable income
Freelancer or a Consultant can acquire income from more than one employer who is willing to hire them for their services and expertise on a particular subject.
- Step 1: Calculate the Gross total income* in a particular financial year (i.e. from 1st April to 31st March)
*Gross total income is the total revenue earned by the freelancer or consultant from various employers through all the assignments he/she was involved with.
- Step 2: Reduce the expenses related to profession from the Gross total Income.
- Step 3: Deduct depreciation expenses E.g. depreciation on computers and laptops, cars, furniture etc. However all these things must be used in the course or furtherance of completion of assignments or projects by the consultants or freelancers.
- The resultant amount is the Taxable Income i.e. the amount on which tax is chargeable by the Tax Authority.
Let’s understand this Computation of taxable income with an example:
Mr. A is a Chartered Accountant providing a range of services relating to taxation and accounting. In the financial year 2018-19 he earns Rs.10 lakhs from various sources
The expenses were as follows:
Staff expenses (related to the services provided) – Rs.10,000 per month
Depreciation on computers and laptops – Rs. 15,000 per annum
Rent of office premises – Rs, 15,000 per month
Computation of taxable Income:
|
Particulars |
Amount 
|
Amount2 |
|
Gross total income (given) |
|
10,00,000 |
|
(less): Expenses related to profession: |
|
|
|
Staff expenses (10,000×12) |
-1,20,000 |
|
|
Rent of office premises |
-1,80,000 |
|
|
(less): Depreciation: |
|
|
|
Depreciation on computers and laptops |
-15,000 |
|
|
Total of all expenses |
|
-3,15,000 |
|
Gross Taxable Income |
|
6,85,000 |
Continuing with the above example Mr.A can choose one of the 2 tax regimes in order to determine the amount of tax which must be paid.
|
Option 1
|
Option 2
|
Option 1 is the traditional tax slab which is coupled with various exemptions and deductions to reduce the tax liability of the taxpayer. However, option 2 is the new tax slab where the facilities of such exemptions and deductions are not claimable as the tax rates have been lowered.
“Under the new tax regime, the individuals can opt to pay tax at the reduced rates without claiming the various tax exemptions and deductions. The individuals will have to work out their tax liability under the old and new tax regime before deciding which one is more beneficial. While the new regime seems simple on account of no exemptions, there would be individuals who have already made commitment in recurring tax savings instruments who may still want to avail exemptions and get taxed under the old regime,” said Shalini Jain, Tax Partner, EY India.
All deductions under Chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) will not be claimable by those opting for the new tax regime. There are about 70 exemptions and deductions which cannot be claimed under the new regime.
Compulsory maintenance of Books of accounts
As per section 44AA of Income Tax Act, 1961 maintenance of Books of accounts was compulsory in following 2 cases:
Specified/Notified profession
As per the Income Tax Act Specified Professions are as follows:
- Medical
- Legal
- Accountancy
- Film artist
- Engineering
- Technical consultancy
- Architectural
- Interior decorator
- Company secretary
- Any other profession which may be notified by the CBDT
In case of specified profession,
If Gross receipts are more than Rs. 1,50,000 in all 3 years immediately preceding the relevant previous year
or
The Gross receipts are likely to exceed Rs. 150,000 in case of newly set-up profession
Then,
The assessee is required to maintain Books of accounts as per Rule 6F.
Rule 6F– Following Books must be maintained:
- Cash Book
- Journal
- Ledgers
- Copies of bills exceeding Rs. 25
- Original bills for expenditure exceeding Rs. 50
- In case of Medical practitioners, additional books i.e. Daily case register with details of patients, services rendered, fees received and date of receipt and details of stock of drugs, medicines, and other consumables used.
Other Assessee
In case of other assesses,
If Profits and Gains of Business or profession (PGBP) is more than Rs. 1,20,000
Or
Total sales or Gross receipts are more than Rs. 10,00,000 in any of the 3 years immediately preceding the relevant previous year
Then,
The assessee is required to maintain books of accounts or documents from which the Assessing Officer (AO) is able to complete the assessment.
However, in case of Individual and HUF, the limit will be Rs. 250,000 for total income for business or profession and Rs. 25,00,000 for Turnover or Gross Receipts.
Tax Audit
As per section 44AB of the Income Tax Act, 1961
Tax Audit is compulsory in following cases:
- In case of business, if turnover is greater than Rs. 1 crore during the previous year
- In case of profession, if Gross receipts are more than Rs. 50 lakhs during the previous year
- In cases where assessee is covered by Presumptive Taxation
Section 44AD: Profits and Gains of Business on Presumptive Basis
Where the assessee has claimed income less than 8% or 6% as per the provisions of the section and the total income is more than the basic exemption.
Section 44ADA: Profits and Gains of Professionals on Presumptive Basis
Where the assessee has claimed income less than 50% as per the provisions of the section and the total income is more than the basic exemption.
Presumptive taxation
Section 44ADA of Income Tax Act, 1961: Profits and Gains of Professionals on Presumptive Basis
- This section is applicable if Gross Receipts of resident assessee (who is engaged in profession as per section 44AA) is upto Rs. 50 lakhs.
- As per the provisions of this section PGBP income will be 50% of Gross Receipts. Income tax will be calculated on the 50% income on the basis of slab rates.
- Deduction of business expenses shall not be allowed as it is assumed that all the deductions are included as only 50% of the total gross receipts are taken for tax purposes.
- There is no requirement of maintaining Books of Accounts as per section 44AA and get it audited as per section 44AB of the assessee declares income on Presumptive basis.
- However, if the assessee declares income lower than 50% but its Net Taxable Income is more than basic exemption limit then such assessee is required to maintain Books of Accounts and get it audited.
Advance tax
Advance tax is calculated by estimating the current year income and then applying tax rates on it. Tax deducted at source (TDS) / Tax Collected at source (TCS) and Minimum Alternate Tax (MAT) credit shall be deducted to arrive at Advance Tax Liability.
Any assessee who’s advance tax liability is more than Rs. 10,000 is liable to pay advance tax on the following due dates.
|
Due dates |
Amount of Advance Tax |
|
Upto 15th June of the current year |
Upto 15% of Advance tax liability must be paid |
|
Upto 15th September of the current year |
Upto 45% of Advance tax liability must be paid |
|
Upto 15th December of the current year |
Upto 75% of Advance tax liability must be paid |
|
Upto 15th March of the current year |
Upto 100% of Advance tax liability must be paid |
If assessee opts to file the Income on Presumptive basis under section 44ADA then due date of Advance tax shall be 15th March of the Current year i.e. only one instalment.
TDS deductions
All the Income that a freelancer or a consultant obtains in the course of the year a certain amount of tax is already reduced by the employer concerned. Any Individual/Company who is a resident in India having a Tax Deduction Account Number (TAN) and who is employing such freelancers or consultants on contract basis or for their expertise or for any other matters have the authority to deduct TDS.
There are situations where freelancers and consultants are employed by individuals who do not have a TAN, in such cases the individuals concerned have no right to deduct TDS and the liability to pay tax is on freelancers or consultants by way of advance tax.
The following are the sections with the help of which the employers can deduct TDS of freelancers or consultants:
Applicability of TDS on contractors [Section 194C]
This Section states that any person (other than Individual or HUF not liable to tax audit in the previous year) responsible for paying any sum to the resident contractor for carrying out any work (including the supply of labour), in pursuance of a contract.
TDS is required to be deducted on payments made to contractors if,
- Single payment is more than Rs. 30,000 or
- Aggregate payments to such contractors is more than Rs. 100,000 in the previous year.
The rate of TDS shall be 1% in case of an individual or HUF and 2% in other cases. Whether a person is considered to be a contractor or a professional depends upon the nature of work undertaken by them.
In case of Individual and HUF, TDS is required to be deducted only if last year turnover is greater than Rs. 1 Crore in case of business or gross receipts are more than Rs. 50 lakhs in case of profession
The expression, “work” in this section would include-
- Advertising
- Broadcasting and telecasting including production of programs for such broadcasting or telecasting
- Carriage of goods and passengers by any mode of transportation, other than railways
- Catering
- Manufacturing or supplying of any product according to the requirement or specification of the customer by using the materials purchased from such customer In case of the above, the TDS shall be deducted on the invoice value excluding the value of material, if such value of material is mentioned separately in the invoice. But, if such value of materials is not mentioned in the invoice separately then TDS shall be deducted on the whole of the invoice value.
Applicability of TDS on Professional Services [Section 194J]
This Section states that any person (other than Individual or HUF not liable to tax audit in the previous year) responsible for paying any sum to any resident person for carrying out any professional services.
In case of Individual and HUF, TDS is required to be deducted only if last year turnover is greater than Rs. 1 Crore in case of business or gross receipts are more than Rs. 50 lakhs in case of profession.
TDS must be deducted if –
- Fees for Professional services is more than Rs.30,000 per annum (p.a).
- Fees for Technical services is more than Rs.30,000 p.a.
- Non-compete fees is more than Rs.30,000 p.a.
The rate of TDS is 10%, however if payment is made to the Call Centre then the rate of TDS is 2% instead of 10% with effect from 01.04.2017.
TDS on Contract, Commission or Brokerage or Fees for Professional Services (Section 194M)
This section was added by Finance Act, 2019 and was in effect from 1st September, 2019. This section states that any payment made for Contract, Commission or Brokerage or Fees for Professional services by any Individual or HUF and if such payments are not covered under section 194C, 194H &194J then TDS on such payments will be deducted at 5% as per section 194M.
TDS is not to be deducted under this section if sum or aggregate of sum paid or credited is less than Rs. 50 lakhs.
Understanding the aspect of ITR filings
In order to file the Income tax return freelancers or consultants need to file either ITR-3 or ITR-4.
ITR-3 applies when income of freelancers or consultants are earned by providing professional services, Proprietary business or any other income which is chargeable to tax under “profits and gains of business or profession” in the nature of, interest, salary, bonus, commission or remuneration.
ITR-4 applies when taxpayers have opted for a presumptive income scheme under section 44ADA and declare 50% of their gross receipts as their income by filing ITR-4.
Is GST registration required for freelancers or consultants?
If the total aggregate turnover in the year from freelancing or consulting work does not exceed Rs.20 Lakhs (or Rs.10 Lakhs in certain states as specified by the Income Tax Act) then, GST does not apply and hence it is not mandatory to be registered under GST.
Points to remember:
- If the total aggregate turnover exceeds Rs. 20 lakhs then 18% GST is applicable on most services. So, for freelancing or consulting services the taxpayer must charge 18% GST from his clients.
- The taxpayer can provide inter-state services upto Rs.20 Lakhs without registration.
- If GST is applicable to the taxpayer then, all the invoice issued by the taxpayer must be GST compliant.
Conclusion
Any person or group of person venturing into freelancing or into providing professional services must have adequate knowledge about all the above factors explained in the article.
References
- Income tax Department, Government of India website, Income tax Act,1961 https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx
- Institute of Chartered accountants of India, CA Final study material
- Should you choose to be an Employee or Independent Consultant from a Taxation Perspective? https://www.apnaplan.com/employee-consultant-tax/
-
How freelancers, consultants can save taxes while filing ITR https://www.financialexpress.com/money/income-tax/income-tax-return-filing-how-freelancers-consultants-can-save-taxes-while-filing-itr/1547469/
-
Deductions, exemptions not available in proposed new tax regime https://economictimes.indiatimes.com/wealth/tax/what-you-will-lose-if-you-opt-for-the-reduced-tax-rates-and-new-tax/articleshow/73839079.cms
-
How to determine TDS liability for contractors, consultants and employees https://taxmantra.com/how-to-determine-tds-liability-for-contractors-consultants-and-employees/#:~:text=Applicability%20of%20TDS%20on%20contractors%20%5BSection%20194C%5D,-This%20Section%20states&text=of%20a%20contract.-,TDS%20is%20required%20to%20be%20deducted%20on%20payments%20made%20to,and%202%25%20in%20other%20cases.
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