₹20 Lakhs and Beyond: Understanding GST for Freelancers in India

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In India, as the abundance of the internet brought about a digital revolution, many fields of work gained immense push. The online earning sector has become a hot trend since then due to various advantages. The concept of “Freelancing” came to India mostly during the COVID-19 period as people in their homes, devoid of their offline jobs, wanted a new source of income. It was reported by a survey from a famous freelancing platform that the number of freelancer signups saw a 50% rise during the COVID-19 period. Based on revenue growth, India is home to the 2nd largest freelancing community in the world with 160%. However, its peculiar nature of earning relative to other normal ways does not exempt it from being obligated to the country through taxes. There are various taxation policies and compliances for freelancers in india. 

In this blog, we will learn about GST for freelancers and its complexities. Since this topic is not much mainstream when it comes to sector-wise contribution to the economy. Thus, we will also highlight the contribution of the freelance community towards economic growth and employment in the country.  

What is Freelancing?

Tired of working in jobs that require going to the office, working regular hours without much growth and flexibility. This is where freelancers win. Freelancers refer to individuals who charge clients for doing work in their specialized field. Freelancers work from the comfort of their homes and are able to make money by working on multiple projects for different organizations at the same time.

The first advantage of freelancing is the ability to work independently from anywhere in the world and even while traveling. Individuals can register themselves at popular freelancing platforms or even start a website and pitch through cold emailing to attract clients. Many freelancers who have excelled in their careers even go for opening their own freelancing agencies to take up more work and boost their income. Out of the global workforce of 3.38 billion people, freelancers make up about 46.6% with a staggering 1.57 billion worldwide.
 

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5 Primary Types of Freelancers

Organizations hire freelancers based on their specialized niche, work schedule, and pay structure. These attributes divide the broad term of freelancing into different parts. Some of them are given below:

1. Moonlighter

Individuals that take up freelancing as a side-gig, to be done on weekends or holidays are called moonlighters. These individuals already work for a full-time income coming from a source and add freelancing as an additional income source. Moonlighters are more common in the freelance community because it requires lesser commitment and exists only as an additional earning source.

2. Independent Contractor

Such individuals accept works as projects. Instead of having regular jobs, such freelancers takeup projects that go on for months or a year. They refrain from working on multiple gigs and instead work on limited gigs at one time with full commitment. However, such freelancers must have adequate experience and skills to obtain contracts.

3. Freelance Business Owner

Many times freelancing is turned into a business by directing the workflow from numerous clients to hired freelancers. In such a model, the owner of the business model can also work as a freelancer and at the same time get work done by other freelancers by providing them some commission or compensation. This is the next level of freelancing and requires an adequate network of clients or connections to start.

4. Diversified Worker

These freelancers excel in multitasking thereby, taking multiple works from different clients. They even manage between part-time work and freelancing. They usually can carry out multiple gigs from different niches. They are flexible with their choices of work and can shift from being moonlighters to independent contractors according to their convenience. 

5. Experiential Freelancer

Such an individual believes in experimenting with different gigs and evolve their freelance profile. Sometimes freelancers can get bored of doing the same kind of work day after day and can require a change within or outside of their niche. For instance, content writing freelance often go for editing, copywriting, and proofreading services apart from ghostwriting for websites. This can work out for freelancers and their earning might increase if proceed correctly.

The Key Advantages of Freelancing

There are many reasons why Freelancing has become a go-to option for income today. The idea of freelancing attracts many individuals on a daily basis and people even leave their job for freelancing. In India too, the freelance market has seen a boom over a couple of years. This is justified since freelancing has immense growth potential in store for individuals. So, let us look into the advantages of freelancing:
 

1. Flexibility 

Freelancing gives the freedom to work from anywhere and even while traveling. It is the perfect blend of working under pressure and one’s own comfort. Freelancers take up work that suits their schedule and can work based on their preferred working hours (day or night).

2. Can choose work

The type of work a freelancer wants to do is up to him/her. Moreover, you can always choose work after reaching a certain level. Works that involve an imbalanced work-pay ratio can be disposed of. Thus, freelancing has the feature of filtering work or projects based on their nature and convenience.

3. Profit

In freelancing, the service provider deals directly with the client. Due to this, the earnings or profit made is shared very less. Apart from things like platform fee and taxes, all the profit earned moves directly to the freelancers without leaking out anywhere else.

The 3 Disadvantages of Freelancing

Though freelancing is glorified with its independent nature and flexibility, there are certain aspects that must also be highlighted as disadvantages of freelancing. Some of them are-

1. All on your own

Being a freelancer also means that you are all on your own. Any profit or loss made is solely borne. Moreover, there won’t be much help when there is scarcity of clients. All the situations and demands from a client have to be handled by you and the pressure cannot be shared with anyone.

2. Irregular income

Freelancing is a sector where earning is never definite. It depends on different factors. Freelancers can never be 100% sure of their estimated future earnings. There is no salary here, and thus no security. Suppose you have obligations like rent and family expenses, then, during a low-income month, there must be certain savings you must from earlier to cope up with the shortage in earnings. Thus, one of the major disadvantages of freelancing is its irregular income which can disrupt your expenses at times.

3. Lonely experience

Freelancing often becomes a lonely affair. There are no co-workers with you which makes the experience less likable. Though some people aren’t much affected by having to work alone, many people often find it difficult to cope with. Freelancers cannot share their mistakes, stress, or problems related to their work with anyone and have to continue their work regardless of how they feel. The work environment has a piece missing in freelancing. Working from home can often become exhausting as you need to bear all the stress and responsibilities on your shoulders with little help from any other. As a result, it is not uncommon for negative feelings to start kicking in.

Understanding the Landscape of Freelance Market in India

• The large middle-income population makes India a hotspot for hiring workers. And what can be better than working straight from the comfort of home? These two reasons make India a freelancing hub of the world. 
• India has the second fastest-growing freelancing community in the world in terms of revenue growth. There are 15 million freelancers currently in India which accounts for 25% of the whole freelance population around the world. 
• In 2020, as COVID-19 prevailed, freelancing in India grew by about 46%. The market demand for freelancers is only increasing day by day. Companies irrespective of size and revenue are looking for freelancers to efficiently execute projects. 
• In India, as the startup revolution continues to thrive, the freelancing community will also grow along with it.
• Freelancers in India are underpaid compared to their counterparts from other countries. Before the pandemic hit, the monthly earnings of freelancers were about Rs 25000 in India. But after the COVID-19 period, 90% of freelancers earned not more than Rs 150 a day.

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Moreover, as this sector flourishes, there are certain aspects it must be wary of. One of such is tax for freelancers in india. In the next section, we will highlight the information revolving around GST for freelancers in the country.

The GST Implications for Freelancers

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The Goods and Services Tax is imposed on any addition of value during business workflow. Businesses are obliged to the government to pay commissions on their profits by filing GST returns timely. 

There are various compliances for businesses that must be followed to avoid non-compliance penalties and fines.

However, is GST necessary for freelancers? 

The answer to this question lies in the revenue generated by the concerned GST service. Certain freelancers need to register for GST and obtain a GST Identification Number (GSTIN). These freelancers are those with revenue exceeding Rs 20 Lakhs in a financial year. 

Moreover, it is important to keep in mind that the revenue of a freelancer includes all sources including commission, charged fees, incentives, and so on. Although freelancers below the threshold revenue value are not obliged to be registered, still it is advisable to do so voluntarily. This is because GST-registered freelancers make it easier for client organizations to meet compliances.

The rate of GST for freelancers is 18%. For freelance services that concern foreign clients, one can be exempt from paying GST. However, he/she must fill in a form called Letter of Undertaking (LUT). Filling in the LUT form even after paying the exempted GST charge can invoke refund of such GST. However, there are some prerequisites before filling the LUT-

• Client of a foreign nationality.
• The service provider must be an Indian citizen.
• The payment made in the transaction must enter the bank in a foreign currency. Banks then convert the currency to Indian rupees. The transaction amount is considered as a foreign currency payment and thus the service provider would require a Foreign Inward Remittance Certificate (FIRC) at the time of the transaction.

Composition Schemes under GST enable 6% GST tax for freelancers in India. However, to avail of this scheme, freelancers must have a turnover of less than Rs 50 Lakhs in a year. Also, if the service is provided to clients outside the state or country, this scheme cannot be availed.

The Invoicing requirements for freelancers are the same as for other businesses. There are no special rules or requirements for freelancers. A valid invoice must include the Name, Address of the business as registered, GSTIN, SAC of the provided service, date, and transaction amounts. In case of services provided to foreign clients. The term “under LUT” must be mentioned in the invoice to be recognized and exempted from GST.

The Tax Collection at Source is valid for freelancers. This is mostly collected by e-commerce operators or freelance platforms at a specified rate of 1%. However, freelancers not registered for GST are not liable to pay TCS. 

Input Tax Credit is a deduction from GST that acts as an allowance in cases of purchases. For freelancers, there are no special exemptions from input tax credit rules. They can also avail of Input Tax Credit on business-related purchases such as a laptop, internet bill, electricity, house rent, etc.

Is Freelancing a OIDAR Service?

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Any service that involves earning money through the internet without any physical interaction with the payer is categorized under OIDAR services. OIDAR stands for Online Information Database Access and Retrieval Services. Any digital product or service is accounted for by an OIDAR receipt on any payment. 

As per the IGST Act 2017, OIDAR encompasses electronic or digital services such as Online advertising, online cloud service, selling digital products such as e-books, movies, software, courses, etc, providing monetizable data, earning through digital content, and earnings from gaming.

Freelancing falls under the OIDAR services category as it involves earning by providing a service in a digital way. There is inclusion of OIDAR services under GST regardless of their operation address being inside or outside India for business or non-business related purposes.

The IGST rate of OIDAR services is 18%. However, in case of selling e-books, such OIDAR services under GST are subjected to only 5% commission.
For OIDAR services under GST, registration is necessary for all entities whatever be their turnover. Moreover, oidar services that operate outside India providing services to Indian citizens must also register for GST. The authorized signatory required for OIDAR services under GST should be an Indian resident and must have a PAN card number. These signatories are authorized to deal with all the GST-related matters. When it comes to claiming Input Tax Credit (ITC), only those OIDAR services in taxable territory are eligible to claim ITC. This means that taxpayers who are not residents of India are not eligible to claim input tax credits against their GST.

Section 44ADA of Income Tax Act

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This was invoked for simplifying taxation processes for small-scale professionals. Section 44ADA of Income Tax Act is a directory for taxation policies involving professions that are mentioned under this act. Under this act, professionals like doctors, lawyers, engineers, and so on need to pay tax if their earnings exceed Rs. 75 lakh. This limit was previously Rs 50 lakh only. However, one condition must be met to avail of the increase in limit. 95% of total receipts must be online.

Both individuals and partnership firms are eligible for Section 44ADA of Income Tax Act. In regard to professionals, the ones who are eligible are-

• Engineering
• Medical Services
• Consulting
• Finance 
• Architecture
• Artists
• Other professionals

To avail of the presumptive taxation scheme under Section 44ADA of Income Tax Act, the following criteria must be met-

• The net receipt value of the profession must be less than or equal to Rs 50 Lakh.
• This limit can be plummeted to Rs 75 lakh only if the total cash revenue is less than 5% of the net receipt value from last year.
• While filing ITR, at least 50% of the net receipts need to be recorded as income.

Conclusion

Broadly, the impact of freelancing has revolutionized the working population of the world. In India too, freelancing has spread its wings. With both advantages and disadvantages, people in India do not hesitate to give freelancing a try. Thus, for such a big sector of working personnel, knowledge about taxation rules is a must. Many terms related to GST for freelancers are described through the blog.

Not always freelancers or normal businesses have the time to keep in check with such legal requirements. This is where Filing Buddy comes in. FIling Buddy keeps track of all your taxation, registration, and compliance-related matters in an effective manner. Get in touch with our experts today!