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Freelancing in India is still a nascent industry with little or no set rules and regulations. However, with the advent of GST, freelancers providing taxable services will be required to get registered under GST (if exceeding the exemption limit) and pay tax on the services provided.  Let’s take a look at the taxation scenario that freelancers under GST can expect.

Positive impact of GST on freelancers

Tax Credit on inputs: The Input Credit of CGST /SGST/ IGST paid at the time of purchase of Input goods as well as on Capital goods will be available for Goods and Service Tax regime unlike in the current scenario where the Value Added Tax/Central Sales Tax/Excise paid on Inputs are costs to the freelancers and results in increased service cost.

Inputs held in stock: Freelancers will be eligible to avail the credit of inputs held in stock in situations where the freelancer is shifting from the exemption to the taxable category. Furthermore, this tax credit can be utilized for the payment of output GST liability in future.

Freelancers providing online or offline software services:  As of now, the freelancers providing software services are paying both Service Tax as well as VAT on sale of such software. This causes a cascading effect as the freelancer pays both the taxes on the same service thereby increasing the cost of  the software. However, this cascading effect will get resolved under GST thereby reducing the cost of software to customers.

Exemption for small service providers: Freelancers under GST regime would be able to avail the basic exemption up to a turnover of Rs.20 lakhs unlike Rs.10 lakhs in present Service Tax laws.

Negative impact of GST on freelancers

The tax rate: Currently, there is no explicit rate announced for the services sector. However, since the current service tax rate is 15%, .the rate likely to be applicable for the freelancers would be 18%. Therefore, the increase in indirect taxation will inflate the cost of the service; consecutively the end consumer has to suffer.

No centralized registration: Under GST, there is no concept of centralized registration for those who have different premises in different locations. Therefore, the freelancer service providers have to register themselves in each state from where they are providing services and pay CGST/SGST in that state respectively.

Tax on free services: Freelancers under GST will have to pay tax even on free services provided as under GST even the service/supply made without consideration is liable to tax.

Increase in the burden of compliance: Under the GST regime the legal compliance burden is expected to rise for freelancers as they have to file various returns per year from each location where the registration has been granted, and undergo a compulsory audit by a licensed CA if the turnover exceeds the threshold limit.

The Bottom Line

The idea behind the Goods and Service Tax is to bring all businesses including the freelancers under a single tax regime, whether they deal in goods or services. The revenue department is pursuing to increase the country’s tax base by including the freelancers under the purview of GST as well. This should help to improve the tax-GDP ratio which is very low at the moment in the country. Once GST is live, it is assumed that the Government will come up with even more enactments for organizing this sector.

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