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Income Tax implications - employee v/s consultant?

Yo (Self) (28 Points)

10 October 2009

For an IT professional entering a new organization in India, what would offer better income tax benefits:

1. Join as a consultant .. get paid every month by cheque after TDS of 10.3% and file income tax return by claiming full deduction on professional practice expenses (salary to staff, phone bill, fuel, etc.)

2. Join as an employee and get paid monthly via bank transfer after TDS of 30% and file tax return to claim refund as per benefits under Section 80cc, etc.

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9 Replies

Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)
Replied 10 October 2009

while joining as consultant , u hv to registered himself with various govt. departments like income tax department, service tax deptt., PF deptt etc. as well as to maintain proper books of accounts regarding service providing to the client as well as maintenance of proper details regarding deposit of various TAXES as applicable from time to time. Despite above, u hv to maintain various accounts relating to employees & other various expenses that has to be incurred by u in providing consultancy. Tax rate is flat in comparison to tax rate applicable to employee as well.

As employee, u can refrain urself from above complexities and to show your investment details timely in order to protect yourself from tax criteria. In my opinion it is better to join as employee.

Disclaimer: It is only my opinion.

For ur kind information Tax Rates for individual is not as flat as 30%. For your kind information tax rates for individual is as below:

INCOME Tax Rates (Men)

till Rs. 160000 NIL

160001-300000 10%

300001-500000 20%

more than 500001 30%

Best Regards

ratan

Yo (Self) (28 Points)
Replied 10 October 2009

Thanks for your response, Ratan.

While registration with various departments should not be a problem, isn't it an attractive prospect that as a consultant I can use a host of normal expenses (dining, traveling, phone, depreciation on assets, bank charges/levies, salaries to staff, etc.) towards standard deductions as business expenses? Would it not help me effectively lower my taxable income.

In effect:

As an employee, good number of life-sustainance expenses are allowed on post-tax income
As a consultant, good number of life-sustainance expenses become fully deductible from taxable income.

What say?

-Yo

Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)
Replied 10 October 2009

Yes...... being a consultant is definitely an attractive prospects. But, in employment deductions u/s 80 , U/s 10(13A) in respect of HRA, Conveyance allowance etc. can be claimed. Such deductions can be claimed before calculating tax on income...... i.e. from pre- tax income.. Tax shall be calculated only after considering above deductions...

Best Regards,

Ratan

Sunil (Trader) (2611 Points)
Replied 10 October 2009

If you are able to maintain accounts (remember IT is specified profession and above 10 lakhs is audited u/s 44AB) and then service tax registration over Rs.9.00 lakhs.

On the other hand, as professional you can claim depreciation at 60% on computers and software as well as depreciation and fuel / insurance costs to some extent for your car.

There are provisions for businessmen to also claim some %age of house rent provided he or his spouse does not own any house property at the area of business.

More important in pofession, you are your own boss.

You can employ persons but you will have to comply with PTax etc.

Over 10 lakhs, you may have to deduct TDS on certain payments. That too will be an effort.

I think first you should estimate what your income will be and work out calculations both ways. Then take what is least cumbersome vis a vis efforts.

Rajeev (www.rkmco.com) (985 Points)
Replied 14 October 2009

I think the option to join as a professional will go away soon , ITD is tracking most of the cases where people are being employed as professionals instead of salaried employees to evade taxes . Some share broking companies are under radar

Yo (Self) (28 Points)
Replied 14 October 2009

Yes, service tax registration and returns procedures are definitely a headeache. Moreover, new tax code being discussed already talks about limits for non taxable limits now being further increased. So it appears that joining as a consultant is NOT that much of a good option.

Thanks everyone for caring to help.

Originally posted by :Sunil

If you are able to maintain accounts (remember IT is specified profession and above 10 lakhs is audited u/s 44AB) and then service tax registration over Rs.9.00 lakhs.
On the other hand, as professional you can claim depreciation at 60% on computers and software as well as depreciation and fuel / insurance costs to some extent for your car.
There are provisions for businessmen to also claim some %age of house rent provided he or his spouse does not own any house property at the area of business.
More important in pofession, you are your own boss.
You can employ persons but you will have to comply with PTax etc.
Over 10 lakhs, you may have to deduct TDS on certain payments. That too will be an effort.
I think first you should estimate what your income will be and work out calculations both ways. Then take what is least cumbersome vis a vis efforts.

Sunil Liladhar Kotak (Manager (F & A)) (2025 Points)
Replied 14 October 2009

Originally posted by :Yo
"	For an IT professional entering a new organization in India, what would offer better income tax benefits: 1. Join as a consultant .. get paid every month by cheque after TDS of 10.3% and file income tax return by claiming full deduction on professional practice expenses (salary to staff, phone bill, fuel, etc.) 2. Join as an employee and get paid monthly via bank transfer after TDS of 30% and file tax return to claim refund as per benefits under Section 80cc, etc.	"

one should not join as employee as joining as consultant is 100 times better.( as u can claim many expenses some of which are mentioned by u)

sunil

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Sunil (Trader) (2611 Points)
Replied 14 October 2009

I think there is a very thin dividing line between consultant and employee. I would use the same test as agent being PE for Non resident. An independent agent is considered dependent if he exclusively or almost exclusively works for one principal and is considered to be a PE of the Non resident. I think department would use the same test for employee vs. consultant. If you are working wholly or almost wholly for just one employer on a continuous basis and the entire routine is set by the employer and you are at all times in his premises, using his infrastructure for doing the work, it will be employment rather than consultant.

Normally the department should be consistent in its approach but it would be one sided. For TDS it would pursue the deductor that TDS ought to have been deducted at applicable slab u/s 192 instead of 194J. If the amount involved is low, say below tax exemption limits then the same department would pursue for 194J rather than section 192. For assessment of the recepient, if expenses are claimed they would contend it is a salary and hence no expenses should be allowed. Department is known very well for such inconsistencies and therefore too many litigations.

On the other hand a different arm of the same government under name CBEC would cry foul that professional receipts / business receipts that should undergo service tax is being shown as salary.

There really cannot be a fool proof consistent test for this. Each case would finally be assessed on its own merits.