Are you showing employees as consultants to save tax?

Recently I met a startupper who very happily told me that his employees are very happy because of this recently applied tax scheme, which is “Hire your resources as consultants”

Now here are some advantages of the scheme

1. Employees show their income as ‘Consultancy income’ under the head “Profits and gain of business or profession” and accordingly claim expenses like their telephone expenses, electricity, petrol, driver’s salary and so on, which are not possible to claim if you show your income as salary income.

2. Claim refund of TDS which the company/firm has paid to the government.

3. Regular deductions which salaried employees get like 80C and 80D are also available to consultants.

In a nutshell if I can say – they are able to minimize their tax to a great extent.

But this is just one side of the story and obviously this is the good side. The bad side is

1. While joining as a consultant you have to register yourself with various government authorities like Income Tax deppt, Service Tax deppt (CBEC), PF deppt etc.

2. So, if you are earning more than 10 lakhs you are liable to pay service tax to the government and also comply with various rules and procedures of service tax.

3. And if you are earning even more than 15 lakhs then not only service tax formalities but also you’ll have to comply with Income Tax procedures which are – Tax audit required to be conducted for professionals earning more than 15 lakhs. Moreover you would also be required to deduct TDS on the payments you make and subsequently file TDS returns in every quarter.

Assuming you are able to comply with the above mentioned procedures, still you run a risk of getting caught by Income Tax people since you will have to prove that your relation with the company is of service provider-recipient and not of employer-employee which according to me is quite difficult (almost impossible).

My advice : Don’t mess things up!

» More legal resources for startups.

[Guest article by CA Mayank Kharbanda. He can be reached at mayank.kharbanda@visionkpo.com.]

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