In a nutshell, the reader wants to know how to start a consultancy business in India?
Working as an Employee vs. Consultant: Income tax Implications
Location of Clients: In deciding whether to work as an employee or as a consultant, it is immaterial whether you work for a US client or Indian client.
However, if you work for US clients you also need to take into account US tax laws and DTAA between India and US.
Tax on Salary vs. Professional Income: As a consultant your income is taxed under the head “Income from business or profession” and accordingly you’re entitled for all the genuine expenses incurred for purpose of running your professional practice such as travelling, rent (even if working from home), depreciation (on car, computer etc) printing and stationary, telephone etc.
On the other hand, if you work as an employee, your entire salary doesn’t get taxed. You’re entitled for various exemptions and deductions such as HRA (for rent paid), transport allowance, medical reimbursement, LTA etc.
TDS: If you are a salaried employee, the entire tax on your salary gets deducted at source as per section 192 of the IT Act. But, if you’re working as a consultant, TDS @ 10% is deducted under section 194J (TDS on professional or technical services).
Non-Tax Consideration: As a consultant you can work for many clients but as an employee you can only work for one employer. Why? There are no statutory restrictions on engaging yourself in any other activity / trade while simultaneously working as an employee. However, usually as per the terms and conditions of employment contract (appointment letter), employees are barred from undertaking any business, profession or vocation directly or indirectly without prior permission of the employer.
Starting or opening a Sole Proprietorship Firm
Meaning: A sole proprietorship firm (also called proprietorship) is a form of business entity (other forms are partnership firms and Companies registered under Companies Act, 1956) owned and operated by an individual. It is the oldest, cheapest, simplest and most common form of business organization.
Registration: In India, a sole proprietorship firm has no legal existence separate from its owner. Therefore, there is no requirement of registration.
However, you might require registration under other regulatory authorities. For example, if you’re a professional, say, practicing as a CA, you require registration with ICAI; if selling mutual funds, registration is required with AMFI; if selling insurance need to have license from IRDA; if into import / export of goods or services, IEC (Import Export Code) is required.
Tax Status: From tax point of view, it is immaterial whether you run consultancy in your name or open a proprietorship firm. Unlike a partnership firm, which has a separate status than the partners running it and is accordingly a separate tax entity for tax purposes, the sole proprietorship firm and the sole proprietor are the same and there is only one tax assessment in the name of individual. Therefore, only one tax return is to be filed in the name of individual.
PAN: There is no need to apply for a separate PAN card for proprietorship firm and you can quote your individual PAN wherever required in your business dealings. In other words, PAN of the proprietor will be PAN of the proprietorship firm.
Conversion: In future, if required you can convert your sole proprietorship into partnership firm or a private limited company under Companies Act, 1956.