Taxation

Taxation Of Freelancers

By CA. Gaurav Gandhi    -   July 5, 2019

Freelancing is a growing industry in India and it becomes imperative to have an understanding of the taxability of such income earned.

Freelancer is another community in the Indian service industry which is paving its way in being a  recognised business in the economy. Many graduates are now pursuing freelancing as a part of their daily routine and seeing the potential of this industry, more entrants are becoming part of it each year. 

As per publicly available data, India ranks as the 2nd largest freelance workforce after US with over 1.5 crore people working independently in various sectors like IT, finance, sales and marketing, designing, animation, content writing etc. By 2020, 50% of workers are expected to go freelance.This is adding to the income of many households not in just rupees but community is gaining in Dollars ($). With each dollar being credited in your account from overseas, strict norms of government apply and it becomes imperative to be compliant with regulatory, taxation and compliance issues in home country.

This topic aims to brief out the following topics concerned with Freelancing:

  1. Manner of taxation of Income from Freelancing (Income tax)
  2. Deduction of Expenses from taxable income
  3. Maintenance of books of accounts by a Freelancer
  4. Determination and Discharge of tax liability by a Freelancer
  5. Applicability of GST on freelancers

 

1. Manner of taxation of Income from Freelancing (Income tax)

Freelancing income arises when one gets paid for his/her work done based on assignment done over a specific term rather than being appointed on payroll. The receipt of payment may be dependent upon the terms agreed with the grantor of work. You will not get perks (like PF) mandated by the Company Act. You are not required to come to the office – in fact, you can complete the work at leisure (by pre-agreed deadline) from any place convenient for you. 

Taxing Income as business/professional income

Any income earned by using one’s intellectual or ability is income from a profession according to income tax laws in India. Such income will be taxable as “Profits and Gains from Business or Profession”. The tax is levied on the net income accusing or arising from such freelance work after reducing expenses incurred on earning such income. 

Computation of net income from Freelancing: 

Gross receipts from the freelancing business or profession less expenses incurred in receiving/earning such amount. Accordingly, in computing net income provisions of income tax as applicable on business/profession would apply on freelancer as well subject to benefits available.

Determination of receipts from freelancing: The amount of receipts form freelancing can be determined through the credits in the bank account statement and total of receipts received in cash throughout the financial year (1 April to 31 March)

 

2. Deduction of Expenses from gross taxable income

A freelancer is entitled to deduct expenses incurred in earning from freelancing against the gross revenue earned to determine the taxable income. 

Income Tax  prescribed certain conditions which must be fulfilled to determine taxable income from freelancing:

  • These expenses must be directly related to the freelancing profile. e.g. rent of office, depreciation on furniture and equipments,  fuel bills, meals etc 
  • Expenses must be incurred wholly and exclusively for work
  • It should not be capital or personal nature
  • It is not incurred for any an offence or an expense which is prohibited by law

Types of Expenses which are generally available to a freelancer:

  • Rent of the property being used for personal as well as business purpose: In case a property is taken on rent only for official purpose, rent on such property would be deducted in determining taxable income. Further, where a property is being used for official as well as personal purposes, appropriate consultation should be made before appropriating deductions form gross income. 
  • Electricity/Fuel expenses: Expenditure incurred on electricity bills of office/ fuel cost in travelling for client meeting should be taken as an eligible expense in determining total income.
  • Cost of repairs and Depreciation on assets: Any expense incurred by way of repairs to the rented property/ owned property which are not capital in nature can be deducted. Where a capital asset, which has long term and enduring benefits, is used on the business, such assets are capitalised and are considered for expense over a period time by way of an expense called as Depreciation. As per Income tax, there are rates prescribed for claiming depreciation on assets use din the business, for example, rate depreciation on laptops is 40%. Also, expenditure like repairs to laptop, printer, plant and equipment are also allowed to be deducted, depending on whether repair is a normal repair or will provide long term benefits.

Other expenses like Office expenses, Travelling and conveyance Expenses, meal expenses, business promotion, registration charges etc.Expenses incurred to carry out works like printing, office supplies, telephone expenses, internet bills, conveyance expenses to meet clients inside or outside of India is allowed as a deduction.

Further, expenses on sourcing new business like client meetings and money has been solely spent with the intention of getting new business or retaining existing business is allowed as deduction Local taxes, insurance for business property are also allowed as expenses.

Apportionment of expenses for personal and business/professional purposes: 

When assets purchased or expenses incurred are used for both professional and personal purposes, a reasonable amount of the expenses and depreciation which is justifiable is allowed as a deduction instead of the full amount.

Example: Where personal car is used for both office and personal purposes, expenditure incurred on repairs, depreciation or fuel can be allowed for business purposes but on a reasonable basis. 

Applicability of other provisions of Income Tax under business and profession?

Since, the income form freelancing would be categorised as business/professional income, all the provisions applicable to normal businesses would apply to such freelancers, however various benefits like using presumptive methods taxation, exemption from tax audit can be utilised.

What are the expenses which are not allowed as deduction in computing income from freelancing?

Following expenses are explicitly disallowed while computing freelancer’s income as per the Income Tax Act:

  • Income Tax paid in any year
  • Any interest or penalty or fine for non-payment or late payment of income tax
  • Any expenditure incurred to related party (relatives) shall not be allowed to be deducted when payment is not in line with – either (a) the fair market value of the goods/services received (b) is considered as unreasonable in the eyes of tax authorities or (c) involves shelling out extra amount than with the third party at arm’s length price.
  • Any expenditure incurred in cash to a single person in a single day above Rs. 10,000 will not be allowed to be deducted.
  • Any payment made in cash for purchase of fixed asset (like plant and machinery) to a single person in a single day above Rs. 100,000 will disentitle claim of depreciation on such asset.

 

3. Maintenance of books of accounts by a Freelancer

Accounting under income tax is in following two ways:

  • Accrual Basis of Accounting (also called Mercantile Basis)
  • Cash Basis of Accounting

Basis

Accrual Basis of Accounting

Cash Basis of Accounting

Incomes

Accounted when the right to receive arises

Accounted when it is actually received

Expenses

Accounted when the obligation to pay arises

Accounted when they are actually paid

Tax liability

Arises in the period when income is booked even though actual amount has not been received

Arises in the year income is received

Example

Sales invoice was raised on client on 3rd March but payment is received on 4-Apr, revenue would be booked in month of March

Sales invoice was raised on client on 3rd March but payment is received on 4-Apr, revenue would be booked in month of April

It is to be note that accounting method once chosen is regularly followed on entire business on all revenues as well all expenses.

Factors to be considered to choose an accounting method

Method of accounting should be followed by giving due consideration to the nature of business. If the business is seasonal, cash method is the preferred method, however, where business receipts and expenses are not irregular/ uncertain/ unpredictable, accrual method should be followed. Section 44AA read with Rule 6F specifies books of accounts to be maintained if threshold of income of Rs 120,000 or sales of Rs. 10,00,000 is breached during the year.

 

4. Determination and Discharge of tax liability by a Freelancer

Apart form expenses, there are certain deduction eligible for a freelancer from his/her total income falling under Section 80

Example: Section 80C of the Income Tax Act offers relief upto Rs. 150,000 on various investments made taxpayers to save for the future like mutual funds, FDs etc.

Tax payable: Net Taxable Income* Rate of Tax* (education cess), where

Net Taxable income = Gross Taxable Income – Deductions

Rate of Tax: As per the slab rate applicable to individual

Education Cess: 4% of cess is levied on tax liability

Payment of Advance Tax: If the total tax liability during a financial year exceeds Rs.10,000, the taxpayer is required to pay taxes every quarter. This is called advance tax.

Due dates of advance tax are as follows:

On or before 15th June

Not less than 15% of advance tax

On or before 15th September

Not less than 45% of advance tax as reduced by the tax paid in the last installment.

On or before 15th December

Not less than 75% of advance tax as reduced by the tax paid till the last installments.

On or before 15th March

The whole amount (100%) of advance tax as reduced by the tax paid till the last installments.

 

5. Applicability of GST to freelancers

GST is applicable on supply which includes both goods as well as services. Rate of GST depends upon the nature of goods or services being supplied. For example, Rate of GST on food is 5% and 18% on most of the services

Important points for GST:

  • GST is applicable if the total revenue from freelancing work is more than Rs. 20 lakhs, else GST does not apply.
  • Registration is required if turnover exceeds Rs. 20 lakhs, except in certain cases condition of Rs. 40 lakhs is applicable. However there are certain persons who are mandatorily required to register under GST. (Rs 10 lakhs for North Eastern and hill states).
  • A composition scheme is also available on selling goods and services
  • GST does not apply on exports, however registration is mandatory.

How to file GST returns?

GST Returns have to be filed quarterly or monthly based on whether you have opted for composition scheme and your turnover. Composition dealers and those with annual sales below Rs. 1.5 crore can file quarterly returns.

Once you obtain a GST Identification number, return filing is compulsory for you.

Note: After logging into portal you an raise GST invoices for free. Kindly login and use!

Example

Where value of goods/services is Rs. 100,000 and rate of GST is 18%, invoice will be raised for Rs. 118,000. This amount of Rs. 18,000 has to be deposited with the government.

We hope you found the above analysis useful.

 

Regards,

TheTaxTellers Team

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