A Comprehensive Guide on Tax for Freelancers

We had a lot of people ask us for this. Here's what we cover in this post:

 1. Example - GST v Income Tax
 

2. Income Tax provisions for Freelancers

• Income from profession

• The Legendary Section 44ADA

• What to do if you cross the magical INR 50 lakh number?

• Case Study - Freelance and Full-time Salary income

• Case Study - Services rendered to overseas Company

3. GST provisions for Freelancers

• Registration under GST

• Export of services and filing an LUT

• Case Study - Freelance and Full-time Salary income

• Case Study - Services rendered to overseas Company

• What to do if you cross the magical INR 20 lakh number?
   

First thing you need to understand is that Income Tax and GST are 2 completely different Acts and tax different things. Let's illustrate quickly with a simplified example.

Mr. India earns INR 1 crore by selling services to Indian parties. This is professional income for Mr. India. GST on these services applies at 18%.

GST

Mr. India will collect the following amount from his clients:

This INR 18,00,000 of GST collected will be paid to the Government. Accordingly, GST is an indirect tax - the clients bear the burden of this amount.

Note - In some cases, practically - you may end up paying GST out of your pocket. We'll explain that below in this article

Income Tax

Mr. India will be liable to pay income tax on this INR 1 crore at slab rates. This is a tax on your income - a Direct Tax. This goes out of your pocket.

Obviously, there's more to both of the Acts (which we will explain below), but this should help you understand the basic difference between the 2 types of taxes you need to worry about.

Your income from freelancing is taxable under the head Income from profession. Details of income and expenditure under the provisions of Income from Profession are available here.

We know you're not here for that. You're here because you heard of this mythical section called Section 44ADA.

Presumptive scheme of tax

Under the presumptive scheme of taxation, profits are presumed at 50% of the gross receipts.

Eligible Assessees

Any assessee resident in India.

Turnover Limit & Eligible professions

Professionals mentioned below, whose total gross receipts are less than INR 50 lakh (from FY 23-24 the limit has been increased to INR 75 Lakhs) in a year can avail benefit of the presumptive taxation scheme.

a. Movie artists including a producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designers

b. Authorised representative meaning a person who represents another person for a fee before a tribunal or any authority constituted under any law. It does not include an employee of the person so represented or a person who is carrying on the profession of accountancy

c. Any other notified professionals

So how does this work?

It's simple. You show only 50% of your revenue as income. Let us explain with a simple example.

Example:

Tony Singh, an Indian Resident, provides software development services to Avengers Inc. (A US Company). His revenue from services is INR 40,00,000. He incurs very little expenditure in India amounting to INR 2,00,000.

Income under Section 44ADA

 Income under Normal Provisions

Clearly, Section 44ADA is beneficial for Tony. He has to pay tax on this INR 20,00,000 at slab rates.

My actual expenses are much lower than 50% of my revenue. Can I still use Section 44ADA?

This is an established provision where your actual expenses are not reviewed by the Income Tax Department. You can show 50% as income, no questions asked.

Other Benefits under Section 44ADA

When shall an assessee maintain books and get the accounts audited?:

You've been using Section 44ADA for a few years now. But you expect your revenue to cross INR 50 lakhs next year.

You've come to the unfortunate conclusion that if your revenue from profession exceeds INR 50 lakh by even INR 1, your tax liability may triple. How do you fix this?

We've been able to work this out for clients. It's too specific and depends too much on the facts and circumstances of each case. However, some of the options we've explored with our clients include the following:

Mr. Multitasker works a day job at NetMeTube+ and earns salary of INR 50,00,000 in a year (after considering all deductions under the Income tax Act). He recently discovered the world of freelancing and receives INR 45,00,000 from freelancing work done in his spare time through sites such as Upwork and Freelancer. He also invests INR 1,50,000 in PPF account every year. This is his only deduction under Chapter VI-A.

We have avoided getting into the deductions for salary to keep this article at a readable length. For provisions of Income from salary - refer here.

How is his tax calculated?

He has to pay tax on this amount at slab rates.

 Note: We have avoided getting into the nitty gritties of old regime v. new regime for the sake of brevity.

Ms. Exporter provides services to only one company based in the US. She is employed full time with this company. However, the company does not have any presence in India and accordingly, pays her professional fees for her services. She earns INR 2,00,000 per month from these services.

How is this taxed?

First thing to note that while this is similar to salary, it will be treated as professional income. It must be taxed under the head profits from business/ profession. Income is calculated as under:

She has to pay tax on this amount at slab rates.

Like we discussed earlier, GST is an indirect tax that is paid by the customer. For the purpose of this article, we have assumed a GST rate of 18% (applicable on most services).

While GST is most often paid by the customer, as a freelancer, this might come out of your pocket too.

Example:

Let us explain. Let's go back to the example of Mr. Tony Singh. This time, an Indian Resident, who provides software development services to Shaktiman Private Limited. (An Indian Company). His revenue from services is INR 40,00,000.

The Company has unequivocally informed Tony that he shall have to handle all his taxes in India and the company will not be liable for any additional amount.

In this case, the 18% GST may have to be paid by Tony and will be reverse calculated as under:

Accordingly, Tony would have to pay INR 6,10,170 out of his pocket and actual income would reduce substantially.

A service provider is liable to register under GST if turnover exceeds INR 20,00,000 in a Financial Year.

Turnover includes domestic as well as export services. Also, note that there was a recent Gujarat AAR ruling that said that interest from savings bank account, fixed deposits, PPF, etc will count towards the INR 20 lakh threshold. While we (and other CAs) don't subscribe to this view and expect it to be overturned in the future, it's important for you to remember this point.

As such, export of services is zero rated. This means that effective GST liability on exports is zero.

There are 2 routes for non payment of GST on export:

We did a detailed post on this. You can read that here.

Mr. Multitasker works a day job at NetMeTube+ and earns salary of INR 50,00,000 in a year (after considering all deductions under the Income tax Act). He recently discovered the world of freelancing and receives INR 45,00,000 from freelancing work done in his spare time through sites such as Upwork and Freelancer. What is his GST liability?

Mr. Multitasker pays no GST on salary. For the freelance income, let's assume he earns INR 25,00,000 through domestic sales and INR 20,00,000 through export of services.

Mr. Multitasker is liable to register under GST since his turnover exceeds INR 20 lakh in a year.

GST liability will be 18% on INR 25,00,000 i.e. INR 4,50,000. On the exports of INR 20 lakh, net GST liability will be NIL. This can be achieved through one of two ways:

Ms. Exporter provides services to only one company based in the US. She is employed full time with this company. However, the company does not have any presence in India and accordingly, pays her professional fees for her services. She earns INR 2,00,000 per month from these services. What is her GST liability?

Ms. Exporter will be liable to register under GST since turnover exceeds INR 20 lakh in a financial year.

In such a case, we would advice Ms. Exporter to file an LUT to ensure that no cash flow is blocked. This allows Ms. Exporter to avoid paying any GST at all.

For most people, registration under GST might be the easiest option. Have your CA assist you with the compliances. If you need our assistance, we will be happy to help.

However, in certain rare cases (such as the Tony Singh case above), GST may a severe burden. In such cases, we have been able to work out arrangements for clients. It's too specific and depends too much on the facts and circumstances of each case. However, some of the options we've explored with our clients include the following:

Have any questions? Feel free to reach out to us using our query form.