Jigar M. Patel
International Tax Attorney
How & When Professional Retainership can prove to be a much Smarter Tax Option over Salary?
Singh is offered a professional consultancy assignment by a company with an annual package of Rs. 18 lakhs, with a choice to either join the company as an employee or offer his services as a consultant. He is wondering what could work out as a better choice for him, from the tax point of view.
Tax Implications as an Employee!
Say Singh prefers to join as an employee and opts for the salary package of Rs. 18 lakhs. Under the new tax scheme, he can avail benefit of lower rates as compared to the old tax scheme, but in this case, his entitlement of deductions and exemptions from his salary of Rs. 18 lakhs would be restricted only to standard deduction of Rs. 50,000. On the taxable salary of Rs. 17,50,000, the appropriate tax would work out to Rs. 2,34,000. Under the old scheme, equivalent tax of Rs. 2,34,000 would be attracted on a taxable salary of Rs. 13.75 lakhs, which would mean that he would need to plan suitable deductions or exemptions of up to Rs. 4.25 lakhs out of his gross salary package of Rs. 18 lakhs.
Benefit of Sec. 44ADA for a Consultant
However, if Singh prefers the option to join as a consultant and receives Rs. 18 lakhs as professional fees, he can enjoy a sizeable tax gain as explained hereinbelow.
Singh can choose to be governed by the provisions of the presumptive income scheme u/s. 44ADA of the Income-tax Act. Out of his gross professional receipts of Rs. 18 lakhs, he would even be eligible to claim actual expenditure incurred of up to 50% of such receipts. This can cover a wide range of expenses like motor car fuel and repairs, telephone, travelling, maintenance of office set up, salary to supporting staff and the like, even without the requirement of maintaining any formal books of accounts.
With a maximum claim of up to Rs. 9 lakhs from the gross receipts of Rs. 18 lakhs, Singh’s taxable consultancy income of Rs. 9 lakhs would attract income-tax liability of only Rs. 46,800. Just making a right choice could thus reap a hefty tax saving of up to Rs. 1,87,200. This may be lower in a case where the expenditure is less than 50% of the gross receipts, but still the effective tax liability would be comparatively much lower than in a case of a straight jacket salary package.
GST Liability on Consultancy?
While the status of a consultant is indeed income-tax friendly, the liability for Goods and Service Tax (GST) should not be lost sight off. However, in a case above, such as that of Singh, the good news is that GST liability is attracted only if the gross receipts exceed the basic exemption limit of Rs. 20 lakhs. Moreover, if the company paying professional fees is able to set off the GST collected by its consultant by way of input tax credit, it may not have any reservation for offering its consultant a package of more than Rs. 20 lakhs plus GST thereon.
