Taxation of Freelancers and Small Business Owners- Part 2

After coming to know how business-related expenses minimize tax liabilities, there are some other additional strategies and tax schemes to make the process easier. In this chapter, we look into the Presumptive Taxation Scheme, plus ways in which GST compliance, advance tax payment, and Professional Tax apply to a freelancer or small businessperson. These strategies, in addition to the deductions previously discussed, will assist freelancers and small business owners in maintaining compliance while keeping their tax burden as low as possible.

For freelancers and small business owners in India, taxes are treated considerably differently from those of salaried individuals. While the latter has their taxes deducted at source, in the case of the former, it is left to them to take care of the tax issues. Well, the good news is that there is an easier way for those with annual turnovers less than ₹50 lakh: Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act.

This scheme presumes that 50% of the gross income of a freelancer is his profit, thus making it far easier to calculate their taxes. It relieves the freelancer from maintaining a detailed record of all his expenses. For instance, if in a year, a freelancer earns ₹40 lakh, the scheme will consider only ₹20 lakh as his taxable income, no matter what the actual expenses are. The second option will be more convenient for those freelancers whose business expenses are less, as it would ultimately require only 50% of the income to be taxed. Whereas the option to move to the regular tax regime is still present in their choices, which provides for deducting the actual business expenses from income.

Besides paying income tax, freelancers and small business owners have to follow the rules regarding Goods and Services Tax. In case their annual turnover goes beyond ₹20 lakh for states like North East, ₹10 lakh, they need to get registered under GST. Upon registration, they are bound to charge GST on services or products sold and file returns periodically. Most freelance services-consulting, digital work-comprise 18% tax to be added to the invoices. Again, the good news is that there is also an Input Tax Credit, under which a freelancer is entitled to get the GST already paid on business purchases, such as a laptop or office stationery, adjusted against the GST one collects from clients. However, not being in compliance with the GST might lead to penalties; therefore, it is very important to keep up with your GST filings.

The second important factor is the payment of taxes in advance. Unlike salaried people, who have their employer deduct their tax, in the case of freelancers, their income is required to be estimated and advanced if one's total liability exceeds ₹10,000 in a year. These are paid in installments and help the freelancer avoid one big fat tax bill at the end of the financial year.

Additionally, in a few states, freelancers and small business owners have to pay Professional Tax, which is generally a small annual fee ranging from ₹200 to ₹2,500, depending on the state. It is worth verifying the local tax policies and ensuring such payments are made on time to avoid fines.

Conclusion

Freelancers and small business owners in India need to be proactive about their taxes. A proper understanding of the Presumptive Taxation Scheme, GST registration, advance tax payments, and Professional Tax obligations will go a long way in reducing the after-effects of taxes and maintaining compliance. With careful planning and timely payments, freelancers can avoid penalties and focus on growing their businesses.