The employee can save some tax by opting for the old regime if he can make tax-saving investments and has expenses of at least ₹4.84 lakh. Now, only ₹1.5 lakh worth of investments are allowed as tax deductions, while ₹3.35 lakh or more has to come from expenses like home loans, house rent allowance and medical insurance – not easy to achieve.
There’s another option available – switching to a consulting role. In a consulting role, earnings are treated as business income and one can deduct expenses related to work to reduce the net taxable income, which may not be possible as an employee.
The maths is simple: you save tax if your business expenses exceed those you can claim as an employee. But for a high-earning individual consultant in the ₹1 crore income bracket, how much expenses will be enough to move the tax needle in his favour?
To be sure, a consultant should truly be an independent professional and not attached to only one company that prohibits him from taking up other gigs. The tax department can treat such consultants as employees.
Eligible expenses
All work-related expenses can be deducted from the gross income. These include rent, electricity, Wi-Fi and water bills of your office (including home office), phone bills, official travel expenses including petrol bills, cab fares, flight tickets and hotel bookings, subscriptions of software, journals, and periodicals used for work, official meal expenses and staff salaries
One-time purchases such as furniture, electronics, gadgets and supplies used in the office, and the corresponding maintenance and repairs of these items also qualify as business expenses. These apply even to consultants who work from home and not from an office space.
“If a consultant is using their house to run their profession, the expenses being claimed should be limited to the part of the property being used. For instance, you can claim the cost of the air-conditioner installed in your office room as a business expense, but not all other ACs installed in other rooms,” said Prakash Hegde, a chartered accountant and principal consultant of direct taxation at Acer Tax & Corporate Services LLP.
Apart from expenses, depreciation on assets used for work such as laptops, speakers, furniture and even the office premises, if owned by the professional, can be claimed. Hegde pointed out that several wealthy professionals claim depreciation on their high-end cars even when they are used solely for personal use, which is wrong.
“The consultant has to determine how much the car is used for professional work and accordingly claim fuel expenses and depreciation. Tax officers usually consider 50% of the car’s value for calculating depreciation when the car is used for both personal and professional purposes,” Hegde said.
The same reasoning works for determining fuel bills and driver’s salary to be claimed as expenses.
Consultants working from home that is owned by them can claim depreciation on the portion of the property used as an office.
“Similarly, if the said house is on loan, they can claim interest proportionate to the part of the property used as office as business expense,” Hegde added.
However, claiming bogus expenses and depreciation has severe consequences. Such expenses are reversed, treated as income, and a tax demand is raised on them along with 18% annual interest on the outstanding tax. The professional may also have to cough up 200% of the outstanding tax as penalty.
In most cases, at high income levels, adding up such expenses and depreciation will typically exceed the tax-saving components in your CTC (cost to company). Expenses such as mobile phone and broadband bills, fuel, and driver’s salary can be claimed as expenses even as an employee. However, one can deduct the full rent in a business, which is not the case with house rent allowance. The condition is that the full premises on which rent is paid is used for work.
Most other expenses, including purchasing furniture, electronics and their repair, cannot be claimed as an employee, as opposed to business.
Due to this one does stand to save more tax as a consultant, but the difference could be small. Hence, one should look at other factors too.
Audit, GST compliance
Business income entails added tax compliance. The professional has to maintain books of accounts. This means noting each and every expense incurred in a day, separately recording cash receipts and maintaining all receipts and invoices.
When gross revenue is over ₹75 lakh, the professional has to mandatorily get the books of account audited by a chartered accountant. The audit is an added expense but can be deducted as a business expense.
Secondly, the individual has to get a GST registration number, pay GST every month and file a GST return every quarter. Each month, the professional has to raise the invoice with an additional 18% (most common rate) GST component. The company pays this to the consultant, which is then to be deposited by the latter to the government.
Professionals who consult with foreign clients get some relief as GST is not charged to foreign companies. The invoice will just have the fee charged for the service provided. Tax will not be deducted at source. This means there is no GST to be paid each month, and you get higher in-hand income without TDS.
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However, this doesn’t mean you don’t have to register for GST – it is mandatory in all cases, even when the consultant only works with foreign clients, after revenue exceeds ₹20 lakh. The consultant has to file quarterly statements as well showing the total integrated tax as zero.
Hanish S., a chartered accountant and partner at HSKA and Associates, advises that such consultants must get an inward remittance certificate from their bank.
“Tax authorities always insist on this certificate even though some tribunals have ruled that a payment confirmation receipt from PayPal is sufficient,” he said.
The consultant must also annually file a letter of undertaking with the government.
“It’s a simple online process and granted instantly. It should not be missed as the tax department will issue notices demanding tax on export. It can be challenged but it’s an added hassle of going into litigation,” said Hanish.
Presumptive income
The presumptive tax scheme under Section 44 ADA is not available to professionals with income over ₹75 lakh. The other option for high income taxpayers with business income is the presumptive scheme under Section 44 AD, but that’s only available to businesses and non-specified professionals.
Karan Batra, founder of chartereclub.com, said the majority of employees switching to consulting qualify as technical consultants and hence qualify only for Section 44 ADA.
“In the list of specified professions under Section 44 ADA, one category is technical consultants that is not defined by the tax laws but encompasses all roles where the consultant has specialised expertise that is not easily replaceable in the market. In the case of consultants who have converted from jobs, I typically see companies deduct 10% TDS, which is applicable to professionals,” said Batra.
Some experts argue that a degree or technical qualification is also required to qualify as a technical consultant.
“Many courts have ruled that to be a professional, the person should have certain skill or expertise in that field and should also be qualified for the profession they want to engage in,” Hegde said.
Experts advise that high income consultants should not be tempted by the huge tax savings available in the Section 44 AD presumptive scheme if they don’t qualify as a small business. Batra said he has been approached by many high-income consultants who opt for Section 44 AD so that they can offer only 6% of the revenue to tax.
“The government is not investigating such cases yet, but it’s not right.”
Hegde added that in the absence of specific guidelines, there’s a thin line between those who can call themselves professionals and those that are businesses.
Without the presumptive tax scheme, switching to consulting at high income levels may not be fruitful for most. Individual consultants will most likely not have enough expenses to reduce the tax considerably. If that’s the case, weigh in on whether forgoing job security and taking up additional tax compliances are worth it.