One of the oft repeated queries that I receive from clients is related to the tax and other government compliances affecting a person working as a freelancer in the fields of Engineering consultancy, IT consultancy, IT education and training etc. If you are a freelancer and cater to both Indian and foreign clients, read on to find out what compliances are required from your end.

INCOME TAX COMPLIANCES

Step 1. Compulsory Maintenance of accounts u/s 44AA & Rule 6F of I.T. Act

  • The consultant may compulsorily be liable to maintain accounts if he meets any of the following conditions w.r.t. specified professions.

First it is important to understand the definition of a specified profession. As per I.T. Act, a specified profession is any of the following professions:

  1. Medical
  2. Engineering
  3. Architecture
  4. Accountancy
  5. Technical Consultancy
  6. Interior Decorator
  7. Authorised representative
  8. Film artist
  9. Company Secretary; and
  10. Other professions as may be notified by Government from time to time.

The criteria laid down under Sec. 44AA for Compulsory Maintenance of accounts are:

[A] If a person carries on a ‘Specified Profession’,

AND

In any of the 3 years immediately preceding the financial year or In the year of start-up,

  1. his gross receipts exceed Rs. 1,50,000 – COMPULSORILY required to maintain books
  2. his gross receipts are less than Rs. 1,50,000 – Such books are required as may enable the Assessing Officer to compute his taxable income

[B] If a person carries on a ‘Non – Specified Profession’,

AND

In all of the 3 years immediately preceding the financial year or In the year of start-up,

  1. Income from business or profession exceeds Rs. 1,20,000 OR Total Sales/ Gross receipts exceed Rs. 10 lakhs – Such books are required as may enable the Assessing Officer to compute his taxable income
  2. If they do not exceed the above limits – no accounts are required to be maintained.
  • The specified books to be maintained under Rule 6F are:
  1. Cash book
  2. Journal Register
  3. Ledger
  4. Carbon copies of bills & counterfoils of receipts issued exceeding Rs. 25
  5. Original bills for expenses above Rs. 50 and payment vouchers for petty expenses.
  • The accounts books should be maintained at the principal place of business or profession.
  • The accounts books need to be maintained for a period of 6 yrs. from end of relevant assessment year.
  • Non – compliance of Section 44AA can attract penalty u/s 271A of Income Tax Act. The penalty so imposed by the Assessing Officer or CIT(A) can amount up to Rs. 25,000.

Step 2. Tax Audit Requirement U/S 44AB

Under the existing provisions of section 44AB, every person carrying on business is required to get his accounts audited if the total sales, turnover or gross receipts in the financial year exceed 1 crore rupees. Similarly, a person carrying on a profession is required to get his accounts audited if the total sales, turnover or gross receipts in the previous year exceed twenty five lakh rupees.

Therefore if the freelancer is earning more than 25 lakh rupees in a financial year, he is required to

  1. get tax audit done and obtain tax audit report from a chartered accountant
  2. file Form 3CA/ 3CB (as applicable) and Form 3CD by 30th September of the relevant assessment year.

Step 3. Determine what Incomes attract tax.

The thumb rule in I.T. says that: Global Income of a Resident person in India is taxable in India. These include:

  • Income received or deemed to be received in India in previous year; OR
  • Income accrued or deemed to accrue in India in previous year; OR
  • Any Income accruing outside India in previous year.

Any or all of the above incomes are taxable in India in the hands of an Ordinary Resident of India.

The incomes may again be classified into the five sources of income – House Property (Rental) Income, Capital Gains on sale/ transfer of Capital Asset, Salary, Business or Profession Income and the Residual head – Income from other sources including Interests, Commissions received.

Step 4. Pay Advance Tax/ Self-Assessment Tax and File Income Tax Return on time

Clubbing all heads of Income earned in the financial year and after deductions availed under Chapter VI-A, and any TDS as per Form 26AS & Form 16/16A, the net tax payables should be paid by the freelancer. He can estimate the income to be earned in the financial year and pay advance tax. The challan so obtained should be preserved.

Find out about the due dates for payment of advance tax and penalty provisions here.

Alternatively, at the time of filing the Income tax return, self-assessment tax can be paid (along with interest u/s 234B and 234C) and after deduction of any TDS. The challans so obtained in both the cases should be preserved for information in I.T. return.

Due date for filing income tax returns is 30th July of the relevant assessment year. If the consultant requires his accounts to be tax audited u/s 44 AB, due date for filing the income tax return along with tax audit reports is 30th September of the relevant assessment year.

SERVICE TAX COMPLIANCE

With the introduction of Negative List in Service Tax in Finance Act 2012, all the services included in the negative list are exempted from Service Tax. This has widened the scope of the Service tax net considerably since those services not included in the negative list are now taxable.

As a service provider of I.T. Services or engineering/ technical services which is a taxable service under Service Tax, you are liable to

* Register yourself if gross receipts or ‘aggregate value of taxable service’ in a financial year exceeds 9 lakhs rupees.

* Compulsorily charge service tax on bills raised on clients once ‘aggregate value of taxable service’ in a financial year exceeds 10 lakhs rupees.

* Once registered, file service tax returns – ST 3 on a quarterly basis. Here it is to be noted that even if gross receipts in a quarter are NIL, you should file a NIL return. E filing of service tax is mandatory for all assesses.

* Payment of service tax can be made both offline through banks using GAR 7 challan or online.

Next up, I will covering these topics for your reference:

  1. Find out what services are not taxable as per Negative List here.
  2. To know the steps for applying for Service Tax Registration, click here.
  3. For procedure on payment of service tax, due dates etc. click here.
  4. Different forms of Business Organisation to conduct business.
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