Professional & Self-employed taxation
Taxation applicability, Presumptive Taxation, Records, Books, Accounts, Audit, Structuring, Entity Formation, Tax Return Filings, GST
India is an emerging market with wide scope and opportunities for both Indian and foreign investors. The Government of India offers entrepreneurial friendly policies which makes invasion and growth of businesses in India easier. Before starting a business it is very important for the entrepreneur to prepare a blueprint of his business.
The choice of a business organization is driven by a combination of several factors such as nature of activity, capital requirement, degree of independence required, etc. There is no ready made formula for selecting the particular type of business organization. Tax consideration is also an extremely important factor besides incurring recurring cost for particular business entity and restrictions imposed by parent law of the entity. You can select from simple one like Proprietorship, Partnership, or complicated one like LLP, Private Limited Company, Public Limited Company, Cooperative Society or AOP.
Books of Accounts, Records & Audit
Books of accounts including vouchers and receipts are required to be maintained under different statutory laws – Income Tax Act, Companies Act 2013 (applicable to Companies) & GST Act.
If the sale/turnover/gross receipts from the business or profession is more than Rs. 25 lakhs or the income from business or profession is more than Rs. 2,50,000 in any of the 3 earlier years, then books of accounts will be compulsorily required to be maintained.
Books of accounts, Statements & Records to be maintained
1) Cash Book
4) Copies of bills or receipts
5) Daily cash register with details of patients, services rendered, fees received and date of receipt (persons carrying on medical profession)
6) Details of stock of drugs, medicines, and other consumables used (persons carrying on medical profession)
7) Cash flow statement
8) Records of sales and purchases,
9) Records of assets and liabilities
10) Fixed Assets Register
11) Deeds, vouchers, writing, documents, minutes, and registers whether in physical or electronic mode
Under GST Act
Every registered person has to maintain GST records at the principal place of business.
Records to be maintained
· Production or manufacture of goods
· Inward and outward supply of goods or services or both
· Stock of goods
· Input tax credit availed
· Output tax payable and paid and
· Other particulars as may be prescribed
Advise: It is best to buy official software package from popular provider like Tally to maintain your Books of Accounts, Records, Statements and other Statutory compliances as these Software complies with all the requirements and updated regularly. You may like customize this to suit your day to day operational needs like Invoicing, Receipts, Purchase Orders etc. and sharing them electronically with your customers and suppliers. They would also provide Statutory compliance for GST, TDS etc. This software prepares Financial Statements for Audit and filing with Tax Authorities. Software could cost Rs.50, 000/- and customization can also cost similar amount but take 1-2 year AMC till your operations stabilizes.
Profession & Professional Receipts
For professionals, Income Tax has introduced a new scheme of presumptive taxation (Section 44ADA), under which professionals can file their return declaring 50% of their gross receipts (Professional Receipts must be up to Rs.50 lakhs) as income. Section 44ADA was introduced to extend the scheme of simplified presumptive taxation to “specified” professionals.
The term ‘Profession’ has been defined in Section 2(36) of the Act to include any vocation. In the case of a profession, the definition given in the Act is very much inadequate since it does not clearly specify what activities constitute profession and what activities do not. According to the generally accepted principles, the meaning of the term ‘profession’ involves the concept of an occupation requiring either intellectual skill or manual skill controlled and directed by the intellectual skill of the person. Profession involves an exercise of intellect and skill based on learning and experience. It requires purely intellectual skill or manual skill on the basis of some special learning. Profession includes services provided by the professionally qualified or technically qualified person according to their qualification.
A professional could arrive at his taxable “Income under the head Profits and Gains from Business or Profession” by arriving at this “gross receipts out of the profession”.
Professional Receipts would include Consultancy fees, visiting fees, Operation fees, Examiner’s fees, Advising Fees, other receipts incidental to the profession etc.
What is Presumptive taxation?
When you opt for presumptive taxation, your income is ‘presumed’. Actual profit is not calculated (that is Gross Income minus Expenditure incurred). You can assume your “presumed” taxable income to be 50% of your receipts. However you can opt for ‘Presumptive Taxation” if only you have annual receipts of Rs 50 lakhs or less. If your annual receipts exceed Rs 50 lakhs, you must report them and deduct actual business expenses to compute taxable income (or loss). This profit/income may be less or more than 50% of receipts. Those who opt for presumptive taxes do not have to compute or report actual profits or Net Income. This scheme is available to individuals only and if you are incorporated as a company or LLP, your profits cannot be presumptive. Also, you must be Resident in India to be eligible for this.
Section 44ADA of Income Tax Act, 1961 provides Special provision for computing profits and gains of profession on presumptive basis for Certain professionals referred to in section 44AA(1) of Income Tax Act whose total gross receipts from profession does not exceed Rs. 50 lakhs in a financial year.
Benefits of presumptive taxation:
If you opt for this scheme, you do not have to keep books of accounts and no audit is required. The intent of law is to encourage small taxpayers to file tax returns and make compliance easier. But it may be wise to continue to keep at least some record of the transactions of your business. You are also not required to pay advance tax in installments and pay your entire tax dues by 15th March of the financial year.
Working of Benefits to Professional in Presumptive Taxation Vis a Vis as Salaried Employee
As Employee As Consultant
Gross Income 45,00,000 45,00,000
Standard Deduction 50,000
Deductions in 44ADA as Consultant 22,50,000 50%
Net Taxable Income 44,50,000 22,50,000
Tax under old Regime 11,93,400 5,07,000
Tax under new regime 11,31,100 4,29,000
Save Rs.7.02 lakh
Thus, Professional can save substantial taxes in providing services as “Consultant” to clients.
Eligible assessee: Resident assessee who is Individual or Partnership firm (other than LLPs). In Budget 2021, Govt has clarified that LLPs are not eligible for presumptive taxation scheme under Section 44ADA.
Beneficiaries:Professionals (Individual or Partnership Firm) having gross total receipts from profession up to Rs. 50 lakhs in a financial year. However ensure that your Gross Receipts are below Rs.50 lakhs in a Financial Year.
Benefits: Need not maintain books, not give any details.
Those who opt for presumptive scheme are exempt from record keeping, but some basic bill book, receipt book, bank statements must be kept for cross-validation. Most important is Bank Statement showing receipts.
When shall the assessee be required to maintain books and to get the accounts audited? If both these conditions are satisfied:
1) Income from profession is offered at a rate lower than 50% of gross receipts, and
2) Total income of the assessee exceeds the basic exemption limit (which is currently Rs.2.50 lakhs)
If the assessee follows this section, following items shall be deemed to be allowed
· All deductions (mainly expenses) from sections 30 to 38 (including depreciation and un-absorbed depreciation / allowances) shall be deemed as allowed; and
· Written down value (WDV) of depreciable assets shall be recomputed deducting depreciation which is deemed as allowed.
No disallowance under any other provisions such as:
Ø Sec. 40(a)(ia) –TDS defaults
Ø Sec. 40A(3) –cash expenses
Sec. 43B –unpaid statutory dues
Section 44ADA of Income Tax – 5 Year Rule
As per this rule, if a taxpayer opts for the presumptive taxation scheme in a financial year, he/she should opt for it for the next 5 financial years continuously. However, if the taxpayer fails to do so, he/she would not be able to take the benefit of presumptive taxation scheme for the next 5 financial years. Example: A professional opts for Sec 44ADA for AY 2019-20 and AY 2020-21. However, for AY 2021-22, he does not opt for the presumptive taxation scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2022-23 to AY 2026-27.
Ø Professionals covered u/s 44ADA can pay the whole of advance tax by March 15.
Ø There is no provision in section 44ADA permitting a professional firm to deduct interest / remuneration paid to partners from the presumptive income offered.
Ø Whether or not the professional firm follows Section 44ADA, its partners can personally opt for Section 44ADA with respect to working partners’ salary / interest received from the said firm or in respect to their other Professional Income in addition to their share in firm.
Ø Ensure that your turnover reported in other returns (GST etc. if liable) reconciles with Turnover in Income Tax.
Eligible professionals: Persons engaged in any of the following professions:
ü Technical consultancy
ü Interior decoration
ü Other notified professionals
· Authorized representatives
· Film Artists
· Certain sports related persons
· Company Secretaries and
· Information technology
If you are claiming Income as Professional, ensure that TDS is deducted by client while making payment to you under Section 194J – Fees for professional or technical services- Rs. 30,000 during the year-@10%
Who can be treated as “Professional”?
The word “profession” & “vocation” have not been defined in the Income Tax Act while as per section 2(36) of the Income Tax Act, 1961, “profession” includes vocation. The word “vocation” is a word of wider import than the word ‘profession”. “Profession” is a word of wide import and includes “vocation” which is only a way of living and a person can have more than one vocation, and the vocation need not be for livelihood neither for making any income nor need it involves systematic and organised activity.
Courts have held that the expression “profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an occupation or business which is substantially the production or sale, or arrangements for the production or sale, of commodities.
Vocation simply means, a way of living for which one has special fitness. A vocation does not involve any organized or systematic activity like business. So vocation simply means any type of activity in which a person is engaged and he earns his livelihood from such activity. The practice of a religion may also amount to vocation. Writing of articles in the magazines is also a vocation.
In the advanced learner’s dictionary of current English printed at the Oxford University Press the word “Profession” has been meant (among other meanings) as the occupation especially one requiring advanced education and special training (e.g. the law, architecture, medicine, the Church, often called the learned profession). The word “vocation” has been given the meaning (among other meanings) as a certain kind of work (esp. social or religious).
In the absence of clear definition of ‘profession’ under the Income-tax Act, whether an activity will fall under the term of ‘business’ or ‘profession’ will depend upon the facts & circumstances of case in question.
Concept of profession: The word “profession” was subject matter of interpretation before the Hon’ble Rajasthan High Court in CIT v. Bhagwan Broker Agency (1995) 212 ITR 133 (Raj) Their Lordships have considered various decisions as well as definition given in the dictionary and after considering all these decisions and definitions, their Lordships have arrived at a conclusion that there should be some special qualification of a person apart from skill and ability which is required in carrying on any activity which could be considered as “profession”. This could be having education in a particular system either in the college or university or it may be by experience.
Delhi High Court in Vipul Medcorp TPA (P) Ltd. & Others v. CBDT dated 30.09.2011, On concept of profession : The term “profession” as traditionally understood involves the idea of an occupation requiring either purely intellectual skills or if any manual skill is involved such as in painting, sculpture or surgery, a skill controlled by the operator’s intellectual skill as distinguished from an occupation which substantially involves production or sale or arrangement for the production and sale of commodities (See Patridge v. Mallandine (1886) 18 QBD 276). The word “profession” as is currently known is wider than the old definition of learned professions such as the church, medicine and law. As per the definition clause section 2(36) of the Act, profession includes vocation. – [Vipul Medcorp TPA (P) Ltd. & Others v. CBDT dated 30.09.2011 (Del)].
The Allahabad High Court in P. Stanwill & Co. v. CIT (1952) 22 ITR 316 (All) observed that the main difference between ordinary commercial business and profession lies in the amount of knowledge or skill employed in carrying it on though that may not be the sole criterion.
‘Profession’ is associated with intellectual/technical exercises based on learning/service: A profession is normally associated with the exercise of intellectual or technical equipment resulting from learning or service – [CIT v. Bhagwan Broker Agency (1993) 70 Taxman 453 (Raj.)]
Intellectual/manual skill must be involved: Profession involves occupation requiring purely intellectual or manual skill – [CIT v. Manmohan Das (1966) 59 ITR 699 (SC)]
Fees for technical services: The term technical services have been explained as under:
Explanation  to Clause vii of sub-section 1 of Section 9: For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.]
(ii) “service” means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.
Meaning of "Professional Services":- Professional Services means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the CBDT for the purposes of section 44AA or of this section.
Meaning of "Fees for technical services":- Explanation (b) to section 194J provides that the term "fees for technical services" shall have the same meaning as in Explanation 2 to section 9(1)(vii). The term "fees for technical services" as defined in Explanation 2 to section 9(i)(vii) means any consideration (including any lump sum consideration) for rendering of any of the following services:- (i) Managerial services; (ii) Technical services; (iii) Consultancy Services; (iv) Provision of services of technical or other personnel.
Technical consultancy: In accordance to section 9 of the Income Tax Act, 1961 ("the Act"), Fees for Technical Services (FTS) is defined as any consideration for the rendering of any managerial, technical or consultancy services" including the provision of services of technical or other personnel. Dictionary meaning of the same comes to:
Ø Managerial: Services relating to a manager or to the functions, responsibilities, or position of management
Ø Technical: Services relating to, or involving the practical, mechanical, or industrial arts or the applied sciences
Ø Consultancy: the act of offering expert or professional advice in a field
Thus, “Profession” may be defined as a vacation, or a job requiring some thought, skill and special knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill.
Tax Audit [u/s 44AB(d)]
If your Income or turnover is more than indicated above, then you need to get your Accounts audited by CA. You also need to get Accounts audited if your Net Income is below % specified in Presumptive taxation or you have a loss.
Conclusion: Those Professionals earning up to Rs.50 lakh p.a. should opt to become a “Consultant” rather than become an “Employee” as their Taxable income is presumed to be 50% of their receipts and they don’t have to maintain any books of accounts. Your relationship & conduct should be that of a “Consultant” and not as an “Employee’ and hence no appointment letter, no Sick or privilege leave, no signing of muster roll and instead should have a contract purely as Consultant in letter & spirit. As against this, as an Employee, you receive Salary and entire receipt is taxable and what you get is a Standard Deduction of Rs.50, 000/-. However you have to charge 18% GST on your billing collect GST & pay GST to government, which the organisation will get back as input tax credit.