2 lakh crores industry and they don't have proper definitions or laws for it. Here is how Income tax and GST treat Freelancers of India.

As per NITI Aayog report, 2.35 crore Indians will be working as freelancers by 2029. The number does not seem significant because by 2030, Indian population will be 150 crores. But working population is estimated to be less than half of those 150 crores (double the significance).

From a tax collection perspective, 9 crore ITRs were filed this year. I agree that not all of the 2.35 crore individuals would be required to file taxes. In my opinion, the number of freelance tax filers is significant.

• Why special definitions matter?

The work environment is different as freelancers and remote workers work solo (hence the name freelancer).

The working style of someone in a freelance business is different from that of a salaried person or a traditional business. Most freelancers or remote workers work solo. In that sense, it is closer to a salaried job than to a business. But, income tax act classifies freelancing as Income from Business/Profession.

Most of the provisions of the law are complicated and unnecessary for the freelancers

The freelancing model is a lot simpler compared to the model of traditional businesses. Mostly, there are no vendors, limited number of clients and single line of product or services. The part of Income tax act covering freelancers/remote workers is full of nuances applicable to traditional manufacturing, shipping or trading businesses. This causes a lot of fluff unnecessary confusion.

• Why you need to know the definition under both Income tax and GST I am not going to say anything fancy or technical here.

  • You are required to follow both laws
  • Not knowing the rules can cause overpayment (yes that happens) or fines
  • When stakes are high, playing the game without knowing the rules is stressful

• The Income tax act coverage of freelancers

Income tax act has a heading called Income from business or profession. All the income generated from freelance, services businesses, manufacturing, trading, broking and similar activities goes under this head. Because it covers such a wide variety of activities, it is a huge module. It's a big list of rules and exceptions. That makes it tough to remember and complex.

• This is how Income tax act defines the word "Business": "business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture"
• This is how Income tax Act defines the word "Profession": "profession includes vocation"

The definition of the words business or profession is not clear. It means, the part of Income tax that deals with taxing income generated from freelance, services businesses, manufacturing, trading, broking and similar activities does not clearly define what is being taxed.

The words "trade", "commerce", "adventure" and "vocation" are general. They can mean multiple things. For someone trying to understand or explain the law, this is frustrating.

Important: The Income tax act says that some trades will always be treated as a profession. Common ones are: Information Technology, Accountants, Doctors, Lawyers, Engineers, Interior Designers and Architects.

The definition is vague. Comments by Supreme court on this matter do not help either.

Here is what the supreme court had to say in case of Supreme Court in CIT vs. Manmohan Das (1966):

"Profession means anything that requires specialized skill or knowledge"

This is also a general term (sad face).

Side note 1: There is new Income Tax Act coming next year, it copies these definitions.
Side note 2: I will be making a separate post on the legal meaning of profession.

• Here is what the GST act says

The GST act wants to have nothing to do with the words business or profession. It brings up two different concepts: Goods and services. Here is how both of those are defined under the GST Act:

Goods(Section 2(52)): "Goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;"

Services (Section 2(102)): "Services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged;"

In simple terms: As per GST, Goods = Anything whose ownership can be transferred, except for money and securities. Services: Anything other than goods, money and securities.

The definition of services is broad to avoid any kind of activity escaping the taxes. This is a common feature of laws made to collect money (fiscal laws).

There is also a special section of law called schedule II. It deals with special cases where it is hard to define what is goods and what is services. Schedule II is not going to be covered in this post. It is just a side thought.

As freelancers engage in intellectual (and sometimes physical) activities and ownership of these activities cannot be transferred (as in services of Akshit Garg cannot be provided by anyone other than Akshit Garg), they are covered under the definition of services. For GST, IT freelancers and remote workers provide service of technical/IT consultancy. Do not confuse it with providing software. Software is goods as its ownership can be transferred. Right to use the software is services.

The GST act does not have any other definition for freelancers. Freelancing is covered under Supply of services. No other clarification exists.

Bonus: Professional Tax

Professional tax is charged by 21 states in India. In my experience, out of these 21 states, Karnataka, Tamil Nadu, Telangana and Maharashtra are serious about collecting professional tax from the individuals. Most states focus on collecting professional tax from businesses employing multiple people on salary.

Professional tax regulation depends on the states. Some states give you tax break if you are just 5 years into the business, some give tax break for certain levels of business revenue. A common pattern is that you are required to get an enrollment certificate once you register for GST. Almost no state makes an exception for GST registered taxpayers.

Side note: All states offer two types of registrations: Enrollment certificate and Registration certificate. As a professional, you are required to get enrollment certificate. Professional certificate for employers to deduct professional tax on the salary.

If you are covered under the professional tax act, you are required to pay Rs. 2500/year as tax.

That is all for this post.