Today you will be reading about the things Freelancer should take care of from Tax Compliance point of view.
Due to increased pandemic model of gig economy has got lot of traction. Lot of overseas company have started to recruit human resource on contract basis. There are oversea company hire you on contact basis (upto a period of 6 months) and not of employment agreement. This is mainly because having such relationship will create tax liability on such establishment or company. This however works in favor of the service provider from Income tax point which we will be discussing.
Freelancer get mainly effected by Income tax and GST Laws.
1. Income tax
Freelancer income for the purpose of Income tax will be considered under the head Profit and Gains from Business and Profession. Having your income taxed under Business income has following benefits
- General Concepts
- Income tax will be calculated on the Profits i.e Gross Receipt - Expenditure
- Unlike salary income where tax is levied on Gross income here the tax will be levied on net income basis
- Income tax calculation Structure is follows (For your understanding).
- Presumptive Taxation Scheme
- Applicability
- The Benefit of Presumptive taxation is applicable only if your gross receipt does not exceeds Rs 75 Lakhs during the year)
- This scheme is applicable only to specified Professional u/s 44AA. Specified Professionals are as follows
- Medical
- Legal
- Engineering
- Architectural
- Accountancy
- Technical Consultancy
- Interior Decoration
- Authorized Representative
- Company Secretary
- Film artist
- Specified Professional has the option go for presumptive scheme u/s 44ADA, where freelancers can claim upto 50% deduction on their gross receipt without maintenance of books of accounts and filing of ITR 3 / 4 (simple return) at the end of the year.
- If your income tax exceeds Rs. 75 Lakhs you have to maintain proper books of accounts and get your accounts audited by a Chartered Accountants.
- Going with this scheme your average tax rate can be reduced from 30% to 15% i.e almost 15% Savings on your Gross receipts
- DTAA Implication
- If there is any tax with-held by your contractor company, After review of DTAA with the respective country you will be able to claim the benefit of DTAA agreement and claim rebate for the taxes paid outside India u/s 90 of Income tax act.
- This rebate can be claimed by filing Form 67 along with your Income tax return. Form 67 has to be filed before the due date and proof of such tax deduction should be attached when you file Form 67
- Advance tax applicability
- Freelancers who are opting for presumptive taxation has to calculate their tax liability for the year on self assessment basis and pay Advance tax.
- This Advance tax needs to be paid by 15th Mar of the respective Financial year (eg. If you are earning freelancing income for FY 2021-22, Then advance tax for the entire year needs to be calculated and paid before 15th Mar 2020.) Non Payment or short payment of Advance will attract penal interest of 1% pm u/s 234B and 234C
- Applicable Exemptions and Deduction for Freelancers
- House Rent Allowance (HRA) Exemption - No, This is applicable only for Salaried Individuals
- Standard Deduction - No. This is applicable only for Salaried Individuals
- Interest paid on Housing loan (Section 24(b) ) - Yes, Allowed
- Chapter VI-A Deduction - All are allowed
- Section 80C - LIC,PPF,Tution Fees, Principal Portion of Housing loan
- Section 80CCD(1B) - NPS Contribution
- Section 80D - Medical Insurance
- Section 80E - Interest on Education Loan etc
2. Goods and Service Tax (GST) :
Since Freelancer will be working on a contact basis and income is being considered business and profession GST compliance will also get attracted. Not complying with the same will attract high amount of penalty
- You will have to take GST Registration if your gross receipt exceeds Rs 20 Lakhs
- Freelancer receiving their income from outside India will have to apply for LuT - Letter of undertaking. If you apply for this then you can supply services at 0%. (To get the benefit of 0% rate make sure you receive the amount in convertible foreign exchange and not in INR from the oversea company)
- You will have to file your Monthly /Quarterly GSTR 3B and GSTR 1 declaring your receipt in your bank account
- If you have paid any GST towards supply of your service i.e GST Paid on Telephone bill, Internet Bill etc can be claimed as Input tax credit and freelancers can apply for refund of the same
Should I really take the GST Registration ?
Yes you should . Here is why ?
You will declare your Gross receipt in your Income tax return at the end of the year. Income tax and GST have signed MOU under which Income tax will share this data with the GST department.
Option of 0% GST is applicable only if you voluntarily take GST registration and apply for LuT. Thus if notice is issued from GST Department side there is a high possibility that they will demand 18% Liability out of your gross receipts which you will end up paying from your pocket.
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