Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

EMPLOYEE OR CONSULTANT? MAKE YOUR SMART CHOICE!

Opting to be a Consultant gives the Privilege of claiming

Many Deductions not available from Employee Remuneration!

 

Anand Roy is offered a marketing work assignment by a company with an annual package of Rs.8,80,000 during FY 2010-11 and he is given the choice to either join the company as an employee or offer his services as a consultant. Weighing the income-tax implications in respect of the same, he is wondering what should be his best choice.

If Anand decides to accept the status of an employee, he needs to be aware of the fact that he would have a comparatively limited choice of exemptions that he can claim from his taxable salary income of Rs.8,80,000. These could possibly be structured in the form of Transport Allowance of Rs.9,600, Children’s Education Allowance of Rs.2,400, Reimbursement of Medical Expenses of Rs.15,000, Attire Allowance of Rs.18,000 and Food Coupons for a value of Rs.15,000, in all amounting to Rs.60,000. This would still leave his taxable salary at Rs.8,20,000 and even after deducting Rs.1,20,000 as the eligible deduction under Section 80C and 80CCF, income-tax of Rs.76,220 would be deducted at source by his employer on his Total Income of Rs.7,00,000.

However, if Anand goes for the choice of becoming a consultant to the company and accepts the consideration of Rs.8,80,000 as professional fees, he would enjoy distinct tax advantages as explained hereinafter.

 

TAX WRITE-OFF FOR PROFESSIONAL EXPENSES

 

The consulting income of Rs.8,80,000 being in the nature of his income from profession, he would be entitled to write-off all relevant expenses wholly and necessarily incurred for earning such income. Depending on the facts of his case, these could include motor car running and maintenance expenses of around Rs.90,000 (approx. Rs.7,500 per month), depreciation of Rs.75,000 on motor car (worked out at 15% on the car value of Rs.5,00,000), annual telephone landline and mobile phone charges of around Rs.25,000, depreciation of Rs.30,000 (at 60%) on his laptop purchased for a cost of Rs.50,000, and stationery, postage, printing books and magazine subscription expenditure of around Rs.20,000 in a year. He can also deduct salary of Rs.5,000 per month paid to his office assistant (annually Rs.60,000).

All this would total upto allowable business expenditure of Rs.3,00,000, leaving his taxable business income at Rs.5,80,000. After considering the deduction under Section 80C and 80CCF in respect of planned savings and allocations, the Total Income of Rs.4,60,000 earned in the case of Anand would attract an income-tax liability of Rs.30,900.

It is quite obvious that Anand would save a healthy Rs.45,320 in terms of his income-tax liability for the year (76,220 – 30,900) by opting for the right choice in selection of the status of his work assignment. However, he also needs to bear in mind that the company paying him the annual professional fees of Rs.8,80,000 will be required to deduct TDS at 10% amounting to Rs.88,000 under Section 194J of the I.T. Act and keeping in view his actual tax liability of Rs.30,900, Anand will be entitled to claim a tax refund of Rs.57,100 while filing his tax return.

 

KEEPING SERVICE TAX IN SIGHT

 

 While the status of a consultant is indeed income-tax friendly as clearly evident from the discussion hereinabove, the service tax angle of the matter should not be lost sight off. It needs to be noted that under the present service tax regulations, if the annual fees earned by a consultant exceeds the service tax exemption limit of Rs.10,00,000, he would be required to charge service tax  at the rate of 10.3% (on the entire amount) from the company paying such fees. In such an event, the company may insist that the concerned person offer his services as an employee rather than a consultant. However, for an annual package of upto Rs.10,00,000, drawing professional fees can indeed prove to be a much smarter tax option over salary!

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