Académique Documents
Professionnel Documents
Culture Documents
consultant: Know
the tax implications
Written by Surajit Dasgupta | Last Updated: April 27, 2014 13:39 (IST)
EMAIL
4COMMENTS
You have got an offer from a company to either join as an employee or a consultant.
Before you decide, know the tax implications between the two options as they differ
significantly.
The income received as fees from professional or technical services rendered is
classified as income from business or profession, whereas in case of employment, it is
considered as salary income. A salaried employee can claim tax deduction on certain
components of the salary such as house rent allowance, leave travel allowance,
conveyance allowance and uniform allowance.
A consultant on the other hand cannot claim deduction on these perquisites that are
available to the salaried employees. However, all eligible business expenditure incurred
in providing consultancy services can be deducted from the consultancy income for tax
purposes. A consultant can even claim depreciation on assets like AC, furniture,
computer, phones and other business assets used for providing services.
In the past, job security was of paramount importance for a salaried individual. In today's economic
scenario, however, this may not be entirely true. Increase in employment options, especially due to
scarcity of the requisite skill sets, has changed the whole scenario. Another change being witnessed in
today is that professionally/ technically qualified personnel prefer to work as independent consultants
rather than as regular employees.
This option provides them an opportunity to be their own masters /employers and work as per their free
will and convenience. Further, they are not bound by the office routine and also free to take up
assignments with other companies and pursue their other interests. It is also beneficial when it comes to
tax matters.
telephone, conveyance expenses, repair running and maintenance, including depreciation of vehicles
used for business purposes, depreciation on assets like computers, photocopies, printers, etc.
Thus, the net income (gross receipts less all expenses) is taxable as professional income as profits and
gains of business or profession. In case the consultant is working as an individual (sole proprietor) the
said net income is taxable as per the slab rates applicable to individual tax payer. It is pertinent to note
that, in contrast to a consultant, a salaried individual is not entitled to any deduction for expenses like
depreciation on car, etc. from his salary income.
Caution on service tax
Another important factor to be kept in mind in case of consultancy arrangements is to examine whether
the services rendered by the consultant would attract service tax or not. If yes, then the consultant has to
charge service tax @ 12.36% on the consultancy fees.
The company paying the service tax to the consultant may avail credit for the service tax paid by it against
its own service tax liability. However, if the company's operations are such (say trading business) that it
cannot avail service tax credit then such service tax would result in an additional cost for the company.
Hence, levy of service tax by the consultant and eligibility to claim credit by the company are also
important factors to be considered before entering into any consultancy arrangement.
To sum up
Various factors like risk appetite, freedom to work independently, capability to organise and manage
resources, etc, should be considered while weighing the pros and cons of two options. While employment
provides job security, comfort and regular income, independent consultancy arrangements offer more
flexibility and independence; and may at times may be more tax effective. At the same time, consultancy
arrangement involves risks akin to those associated with any independent enterprise.
Office rent
Telephone (mobile and landline)
Electricity
Newspapers and journals
Books
Office stationery
Mail and courier service
Travel and conveyance
Car fuel
Vehicle insurance
Salaries (assistant, peon, driver)
You can also claim depreciation on the written-down value of the following
items:
Office furniture
Office equipment (AC, computers, phones, cameras & other gadgets)
Vehicle
Your
tax
Up to Rs 1,45,000Nil
Nil
Rs 1,45,001 to Rs
10%
1,50,000
Rs 500
Rs 1,50,001 to Rs
20%
2,50,000
Rs
20,000
Above Rs
2,50,001
30%
Rs
75,000
Total tax
payable
Rs
95,500