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Tax issues for freelancers and startups in India

For any startup or a freelancer, first few years are always challenging. Right from choosing the appropriate constitution for setting up the business to taking into account the tax implications, everything has to be done appropriately.

Taxes can be complicated but their ignorance or lack of knowledge can land a young startup in unwanted troubles. So the best way to deal with them is to understand the basics about the tax implications in a startup scenario. TDS (Taxes Deducted at Source): TDS is simply the withheld tax. As per the Income Tax Act, when a person makes payment to another person subject to the conditions specified as per the Income Tax Act, Tax is to be deducted from that payment and that tax has to be deposited to the government. For different kinds of payments, there are different threshold limits and different rates at which tax is to be deducted. TDS is to be deposited before the stipulated due date (7th of every month). Quarterly TDS return is also to be filed before the due date (15th of the month immediately after completion of the quarter). Failure in deposit or filing of TDS may incur penalty and interest.

Service Tax will be applicable if you are into a business of providing customer services. As per the rules, there is a basic exemption limit of Rs. 10 Lakhs on service tax, i.e., you will not attract service tax until your turnover crosses Rs. 10 Lakhs. This is a big advantage on the part of an entrepreneur. However you will have to intimate the service tax authorities upon reaching the turnover of Rs. 9 Lakhs and obtain a voluntary service tax registration. Unlike sales tax, Service tax is centralised and the rate of service tax is uniform across India for similar services.

Excise duty is basically an indirect tax that is collected on manufacture of the goods in India. For different types of goods and products, there are different prescribed rate at which the excise duty is to be charged. Exemption is available for the Small Scale Industries (SSI). Following conditions are to be followed in order to claim the exemption:

  • The aggregate turnover of the Unit for any financial year should not exceed Rupees One Hundred and Fifty Lakhs.
  • Turnover must not exceed Rupees 400 lakhs in the preceding financial year.

Sales Tax will be applicable if you are into business of selling goods. When you are selling the goods within your state, you will have to get registered with the state’s commercial tax authorities. If you are selling the goods across states, you will have to obtain the Central sales tax registration from your state’s commercial tax authorities only. Sales tax rates can be different for same type of goods in different states. However for Interstate sales, there is a uniform rate for each type of goods.

Advance Tax is basically your income tax as you go. The Income Tax department wants you to pay taxes as you earn and not until the end of the year when you prepare your financials. In case of non corporates, the Tax liability is to be paid in 3 installments as follows:

Whereas in case of corporate assesses the installments will be as follows

Keep in mind that deferment or failure in payment of advance taxes will incur interest liabilities which is not the situation you’d want when you are trying to save every single penny and invest the same towards the growth of your business.

All these taxes are to be considered as per their applicability to your new venture. Always remember not to be “penny wise pound foolish”. When you are setting up, try and get some help from a chartered accountant who could take care of the basics for you and throw some light on the tax applicability.

(Anand Satyapanthi- Certified Chartered Accountant, Co-founder at Quicko.com)

Categories: Income Tax
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