Tax on Consultancy Services: Applicability, Tax Rate and Benefits

It is essential to understand the provisions of the Income-tax Act,1961, applicable to the services provided by consultants. For effective tax planning, consultants must be well-versed in the regulations outlined in the Income-tax Act, 1961.

Who is a Consultant?

The terms "consultant" or "profession" are not explicitly defined in the Income Tax Act, 1961. However, the explanation of Section 194J and the definition of "profession" under Section 2(36) give an insight.

Understanding "Professional Services" According to Section 194J

Professional services include legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, and advertising. They also cover professionals specified by the CBDT, such as authorised representatives, film artists, company secretaries, individuals in the IT sector, sports personalities, and more.

Understanding "Fees for Technical Services" According to Section 194J

"Fees for technical services" include managerial, technical, and consultancy services but exclude payments classified as Salary. 

• Technical Services: These require technical expertise or technology-related skills.
• Managerial Services: These services involve the expertise needed to oversee and run a client's business.
• Consultancy Services: These offer clients advice and guidance to support their business choices and plans.

Applicability of Tax on Consultancy Services

The income earned by a consultant is subject to taxation under the regular provisions of the Income-tax Act,1961, which is applicable to individuals. The taxation framework applicable to the consultants is as follows:

• Presumptive Taxation Scheme: This scheme offers consultants having annual gross receipts under Rs. 50 lakhs the benefit of simplified tax filing. Presumptive taxation estimates a profit of 50% of gross receipts. This approach reduces compliance burdens and streamlines the tax filing process.  Furthermore, the applicability limit increases to Rs. 75 lakh for consultants who maintain minimum cash transactions during the year (less than 5% of total gross receipts). 

Note: Presumptive taxation can be opted only if your gross receipts fall under the specified thresholds. If your income exceeds these limits (Rs. 50 lakh or Rs. 75 lakh, depending on cash transactions), the consultants must file their income tax under the normal provisions.

• Basic Exemption Limit: Individuals are entitled to a basic exempt limit of Rs. 2,50,000 or 3,00,000 as applicable(new regime). This means that the first Rs. 2,50,000 or 3,00,000 as applicable of their income is not liable to income tax.
• The rebate available under Section 87A differs between the old and new tax regimes:
  • Old Regime: Consultants with taxable income up to Rs. 5,00,000 can claim a rebate of Rs. 12,500.
  • New Regime (Applicable from Assessment Year 2024-25): In the new regime (Applicable for Assessment Year 2024-25), Consultants with taxable incomes up to 7,00,000 can claim a rebate of 25,000. 

Old Tax Regime:

• Consultants can reduce their taxable income by claiming deductions under sections like 80C, 80D, 80E, etc. This lowers their net taxable income.
• Consultants earning up to Rs. 5,00,000 can further benefit from a rebate under Section 87A, which reduces their tax liability by Rs. 12,500.

New Tax Regime (Applicable from Assessment Year 2024-25):

• Consultants opting for the new regime would not be able to claim most deductions except for a few specific exceptions. However, the new regime offers a higher tax rebate under Section 87A.
• This rebate amount is Rs. 25,000, which can effectively reduce the tax liability to zero for consultants with income up to Rs. 7,00,000. This provides significant tax relief for consultants with lower incomes.

Hence, if a consultant's income is up to Rs. 7,00,000 in a financial year, their total income would be exempt from income tax if they opt for the new regime under the Act. This ensures that consultants with relatively lower incomes are not burdened with income tax liabilities, giving them some relief and incentivising their participation in economic activities.

Taxation Rates for Consultancy Services

The income from consultancy services is taxable at the slab rate applicable to the consultant. There is no separate taxation rate for Income received by providing consultancy services.

TDS Applicability for Consultants

Section 194J mandates tax deducted at source for payments made to residents for professional or technical services. The applicable TDS rates are as follows:

• For Professional Consultancy: The tax is to be deducted at 10%.
• For Technical Consultancy: The tax is to be deducted at 2%.

TDS under this section is not applicable if the payer is an Individual or a Hindu Undivided Family (HUF), except when they are required to audit their books under Section 44AB.

The requirement to deduct TDS under Section 194J arises when the amount paid or payable to a resident exceeds Rs.30,000 in a financial year. This threshold encompasses the aggregate of all such sums credited or paid or expected to be credited or paid by the payer to the payee throughout the financial year.

However, it is advised to take the help of a professional tax consultant, as they possess the expertise and knowledge to navigate the complexities of tax laws and ensure that your tax filing is accurate and optimised for your specific financial situation. Consulting with a tax professional can provide personalised guidance tailored to your individual circumstances, helping you maximise tax savings, minimise liabilities, and avoid potential errors or audits.

Which ITR is Applicable for Consultants?

Consultants who opt for the presumptive scheme of taxation must file their Income Tax Return (ITR) using ITR-4. Consultants other than those who opt for presumptive scheme of taxation must file their ITR using ITR-3.