Income Tax Scrutiny on Content Creators and Consultants: The 44AD vs 44ADA Dilemma, OR Business or Profession? The Grey Area in Section 44AD vs 44ADA
A closer look at the TDS mismatch, presumptive taxation provisions, and compliance challenges faced by freelancers, consultants, and digital creators under Indian tax laws.
The Income Tax Department has begun questioning many social media content creators, scriptwriters, consultants, and ad professionals about the section of law under which they file their returns.
- Issue: Many have been filing returns under Section 44AD (presumptive taxation for small businesses), but tax officers argue they should be filing under Section 44ADA, which applies only to specific professions listed in law (like legal, medical, engineering, architecture, etc.).
- Problem: Most content creators and consultants do not fall within the specified list of professions under Section 44ADA. Hence, they find themselves stuck between two provisions.
- TDS Mismatch: Clients deduct tax under Section 194J (professional fees @10%), instead of 194C (contract work @2%). This mismatch is triggering scrutiny.
- Legal View: The Supreme Court has held that “business” is a broad term, and unless a profession is specifically listed in Section 44AA, presumptive taxation under Section 44AD should remain available.
- Advice: Taxpayers must carefully document the nature of their activities (business vs profession). Merely because TDS was deducted under 194J does not automatically mean the work is a “profession.”
Conclusion
The tax scrutiny on content creators and consultants arises mainly due to a mismatch between the section used for filing (44AD/44ADA) and TDS deduction under 194J. While the department often insists on 44ADA, the law restricts it only to listed professions. Therefore, unless their work specifically falls under the notified professional categories, taxpayers can still use Section 44AD. Proper classification, accurate documentation of activities, and correct application of TDS provisions are essential to avoid disputes and reclassification by the tax authorities.
Brief on Sections 44AD, 44ADA, and 194J under Income Tax Act
Section 44AD – Presumptive Taxation for Small Businesses
Section 44AD of the Income Tax Act provides a simplified presumptive taxation scheme for small businesses. Eligible resident individuals, Hindu Undivided Families (HUFs), and partnership firms (other than LLPs) engaged in business can declare income at 6% of turnover/receipts (for digital transactions) or 8% (for cash transactions), provided the total turnover does not exceed ₹2 crore in a financial year. They are not required to maintain detailed books of accounts or get them audited, reducing compliance burden.
Section 44ADA – Presumptive Taxation for Professionals
Section 44ADA extends the benefit of presumptive taxation to certain professionals such as doctors, lawyers, architects, engineers, accountants, interior decorators, and others notified under Section 44AA. Professionals with gross receipts up to ₹50 lakh in a financial year can declare 50% of their receipts as income, and are not required to maintain detailed accounts or undergo audit. This helps professionals simplify tax compliance while paying a fair share of tax.
Section 194J – TDS on Fees for Professional or Technical Services
Section 194J mandates deduction of tax at source (TDS) on payments made towards fees for professional services, technical services, royalty, or non-compete fees. Any person (other than individuals/HUFs not covered under tax audit) making such payments is required to deduct TDS at 10% (2% in case of technical services) if the amount paid exceeds ₹30,000 in a financial year per payee. This ensures advance collection of tax from income sources that are not subject to salary withholding.
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