Why Is Recruitment As Consultant Not Preferable ?
January 23, 2009 by taxworry · 3 Comments
Recently while during switching of jobs , today to the next potential employer at Mumbai , I asked for , higher take home,the HR Mgr told that , within the offer which they provided , they have another option , to show me as a Consultant , that will attract Income tax of only 12.5% , where as if you want to show status as regular employee , the normal tax treatment of 33% will be applicable.. so being a consultant , you can save 20% , from tax payment.I asked him for 1 day time to think, i.e. time till Jan 23rd 12:00 PM .Can you please let me know if this info which he told is correct ? and what is downside of offer as Consultant? Snehal , Banglore
The statement of HRD manager is not only incorrect but it is misleading also. There is no tax saving if somebody is consultant. The tax rate 12.5 % is only for TDS purpose and not final computation of tax under Income Tax Act.
When you are recruited as consultant , it only means that company treats you as contractual person and not an employee .On being consultant ,following additional burden comes to you
1. tax is deducted at source irrespective of the fact that total income earned by you in a year is below exemption limit. This is because in case of consultancy , the TDS shall be deducted if the aggregate payment in a year exceeds Rs 20,000. Where as , if you are women employee , the salary up to Rs 1,80,000 in FY2008-09 shall not bring any tax or TDS because basic exemption is up to Rs 1,80,000 for women.
2. If you are consultant, you will have to pay even service tax if the job you are performing falls under chargeable service. Off course , there is a basic exemption up to Rs 10 lakhs.
3. If you are consultant and comes with in definition of “professional “ for the purpose of section 44A of the I T act , you will have to maintain books of accounts.Read Who Are Required to Maintain Books of Accounts ?. You may even have to get your accounst audited u/s 44AB in certain sitaution.
4. If you are consultant , you will have to file a very lengthy return form ITR-4 and not ITR –1 or ITR –2 . That it self is being problem.
5. If you are consultant, you lose many privileges of being employee under different laws of India which governs employer employee relationship.
Companies gets most of the benefit when one work for it on contractual basis .
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Goodevening sir,
it seems i am not comfortable with your suggestion that being a consultant one is not going to be benifited rather then being a regular employee.
because i myself is also working as a freelancer consultant and i think even if my receipts cross 5 lkah per annum i am entitled to get deduction of may car expenses , mobile bills , lunch dinner charges etc , books and so many other expenses which are somehow related with my profession.
kindly correct me if i am wrong at all.
Dear Anonymous
You have , unfortunately, not understood the “context” in which the answer was given.
Why should a company recruit a person false pretext of “consultant” when what he is actaully is an employee? The company only gets benefits on any counts of law .
A professional who is a professional are allowed all expense which is validly spent for his/her profession , to that extent you are correct.
But a recruitment by a company under “contract saying that the conultancy is better as it saves tax is incorrect and misleading.
A person , say earning Rs 3 lakhs as consulatancy fee will have to get his fee deducted atleat more than Rs 36,000 which he/she will have to claim from tax department.
Moreover, he will have other botheration.