In last two decade contribution of services sector in GDP of our nation has been increased significantly. After getting the professional degree, People start their carrier with the Multi-National Companies and after receiving few years of experience they start providing independent professional services to foreign companies as a freelancers.

Freelancer needs to comply with two type of taxes in India

 

(1) Scheme of Direct Tax i.e Income Tax

 

Brief summary of the provision applicable to Freelancer with respect to Income tax are as under:

  • Income from freelancing is considered as Self Employed Income. Unlike salary where in taxes already withheld by employer in the form of TDS, Self Employed person needs to assess his/her income and make the payment of Advance tax and self assessment tax
  • Income from Freelancing is chargeable to tax under the head of “Income from Business & Profession
  • Freelancer has the Option to go under Presumptive Vs Tax Audit scheme if he provide his services as an Independent Professional
  • Freelancer can for Normal tax return if he provide outsourcing business service 

A) Section 44ADA i.e. Presumptive Taxation Scheme for Professional

This is the easiest option available to Freelancer to get the income tax compliance done. Silent features of the scheme are as under:

  1. Books of accounts are not required to be maintained. Per Section 44AA if income exceeds INR 150000 or total receipt exceeds INR 2500000 in any of the 3 previous year then Books of accounts are compulsory to be maintained
  2. Minimum 50% of total receipt will be considered as taxable income
  3. Deduction for actual expense will not be allowed
  4. Minimum compliance and professional fees
  5. Advisable for total receipt less than 10 lakh

 

B) Section 44AB i.e. Tax Audit Scheme for Professional

This is complex option where in Freelancer needs to maintain detail record for all actual expense and income. Silent features of the scheme are as under:

  1. Books of accounts are compulsorily required to be maintained
  2. Tax Audit is required to be done by CA
  3. Deduction for actual expenses incurred for the purpose of profession are eligible for deductions
  4. No restriction to report minimum 50% profit
  5. Actual profit can be reported as taxable income and also loss can be claimed
  6. Advisable for gross receipt more than 10 lakh

 

C) Normal Taxation Scheme for Outsourcing Business Services Provider

If Freelancer providers outsourcing services then his income will be taxable as income from outsourcing business rather than independent professional and hence in such case restriction to show minimum 50% profit u/s 44ADA is not applicable to him. In such can freelancer should maintain the books of accounts and file the income tax return without tax audit as normal tax return. Silent feature of the scheme are as under:

  1. Books of accounts are compulsorily required to be maintained
  2. Deduction for actual expenses incurred for the purpose of profession are eligible for deductions
  3. No restriction to report minimum 50% profit
  4. Tax Audit is Not required to be done by CA
  5. Minimum 6% of all receipt through banking Chanel and Minimum 8% of all receipt through other than banking Chanel needs to be reported as profit. If Actual profit is less than 6% or 8% as mentioned ahead then Tax Audit is required to be done by CA 
  6. Advisable for those who are getting their work done through outsourcing from other freelancers.

 

(2) Scheme of Indirect Tax i.e GST

 

 Freelancer needs get a GST number once total service receipt exceeds INR 20 Lakh in financial year. The benefit of basic exemption limit of INR 20 Lakh is not available if the freelancer is located outside india and he is providing OIDAR services to client in India.

OIDAR Services

Following services have been classified as OIDAR Services for which if provided from outside India to recipient in India, basic exemption limit of INR 20 Lakh is not available

  • Online advertising service providers
  • Cloud service providers
  • Providing e-book, movie, music, software and other intangibles via telecommunication networks or the internet
  • Providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network
  • Digital data storage services
  • Online gaming services
  • Online supplies of digital content like movies, television shows, music, etc.

 

GST Scheme for Export of Services by Freelancer

Silent feature of the scheme are as under:

  • GST Rate on Freelancer services is 18% if services are provided in India or outside india but without filing of Letter of Undertaking
  • Letter of Undertaking can be filed for export of services without payment of IGST
  • GST paid on expenses are eligible for receiving refund
  • Monthly GSTR 3B return to be filed
  • Quarterly GSTR 1 return to be filed
  • Annual GSTR 9 return to be filed

Please feel free to contact us if you have any questions or clarifications or need help to understand any of the provision mentioned in this article.

 Best Wishes,

CA Virag