Being self-employed is no more a social taboo these days as jobs for mid-level professionals (10-20 years) shrink. They can be called consultants or freelancers. Companies involved in financial services, technology, media, defense, engineering, advertising, marketing, etc, take the help of such people, as it helps them control costs, manage without hiring full-time equivalents, and get efficiency without much hassle.
The advent of Goods and Service Tax (GST) has put such self-employed/freelancers in a bind. While GST registration is ordinarily for people with Rs 20 lakh turnover, the supply of services inter-state has made it nearly compulsory for such individuals to be GST-registered. This brings on the burden of compliance such as regular return filings, and payment of taxes, even if payments are not realised on time. DNA Money spoke to experts to understand how should self-employed/freelancers navigate GST.
Travails of freelancing
For long, freelancing was perceived as a career without making a long-term commitment to one employer, self-employed deciding who they'll work for and for how long, and 'corporate mercenaries' working for the highest bidder. Those explanations may be sound good on paper, but the reality is far more sordid.
A large section of freelancers have been forced to use this as a default option, not necessarily by design. A shrinking market in certain sectors and cost-control mechanisms have ensured that mid-level professionals may not really get 'full-time' positions. Hence, freelancing became an economic necessity. Also, there are some who have chosen to walk this path. One major reason was the benefit of pay lesser tax on their earnings, as they can claim expenses as incurred to earn the income.
GST compliance
The biggest challenge these days is GST compliance. They may be one-person teams but have gotten themselves registered with GST to be a registered vendor for a client of organised GST compliant clients.
While the flow of work may be comfortable, getting payment on time is different ballgame altogether. As per the GST law, invoice needs to be issued within 30 days from completion of service. Freelancers can issue an invoice on the first of the following month, that is, within the time limit to issue invoices.
"This would give them 50 days to realise the invoice and make payment of GST. It will not lead to any substantial blockage of own funds. However, if the invoice is realised after 50 days, the said GST will be paid from their own funds," says Parag Mehta, Partner, N A Shah Associates LLP.
If they get a cash flow respite for 50 days to pay GST, this normally should be enough time to collect the money against such invoice and pay respective GST from the said collection, instead of paying from their own cash inflow. However, often the 50-day window to get payment is over, and there is still no sight of the money. To avoid this situation, Devender Kumar, indirect tax expert, Anil K Goyal and Associates feels that freelancers should try to incorporate payment terms and conditions to avoid delayed payments. They should have payment terms of 20-30 days, which will help to deposit tax after receiving the payment, he says. "The agreement should also have the condition of advance payments and interest on delayed payment to at least reduce the burden of depositing the tax," he says.
Under service tax regime, there were two provisions which were helpful to smaller freelancers, that is, payment of tax on a quarterly basis and on the realisation of invoices. However under GST, there is no such provision, points out Mehta.
Self-employed consultants, who get paid at a cycle of later than 50 days, need a good plan. "They need to create a buffer of cash flow to rotate for payment of GST. There is no other mechanism to avoid delay in compliances," says Aarti Garg, partner indirect tax, Anil K Goyal and Associates.
Return filing
Return filing is not as much as a problem as payments. There are two returns to be filed. A monthly summary return in GSTR 3B after payment of tax for all taxpayers. Quarterly sales register in GSTR 1 for taxpayers with turnover less than Rs 1.50 crore. You can do monthly filings or do three months at one go, in the form of quarterly filings. But in the absence of timely payments paying taxes for one month is probably easier than three months lumpsum.
"There is no leverage of making tax payment quarterly. The only advantage of filing GSTR 1 on a quarterly basis is saving the monthly hassle of filing the Sales Registers. A disadvantage is many companies release the GST payment only after the vendor invoices appear on GSTR 2A on the GST site. Hence, the GST amount may remain blocked in such instances for a quarter," points out Mehta.
There is one way to handle the delayed payment and GST problem. According to Devender Kumar, debit/credit note can be helpful tools for freelancers, as in case of assuming that payment will not come he/she can cancel the invoice. "If the issuance and cancellation of the same invoice is done in the same month, then there is no need to show this invoice in GST return and one is also not required to deposit tax against the same," he says. But in the case of different month's transaction, taxpayer can use the debit/credit note and take back the ITC (Input Tax Credit) benefits. Also, as per GST law, the payment should be done to the supplier within 180 days, otherwise GST amounts need to be reversed.
Unfortunately, there is no provision for claiming a refund in case of bad debts. "GST can be adjusted only if there is a deficiency in services or wrongly charging GST. Hence, proper care should be taken while raising invoices. In case the freelancer has to claim a refund for deficiency or excess charge, he/she will have to apply online and along with documentary evidence claim a refund from the department. A normal case takes between four to six months to get refund," says Mehta of N.A Shah Associates.
GST had compliance issues in the initial phases. However, over the last year, it has streamlined and the process is a lot faster now. The advantage to freelancers would be that they will be able to take ITC of GST for most capital expenses like computer, laptops, etc, and expenses like travelling, bank charges, printing, stationery, etc. This would reduce expenses to an extent and enable them to offer competitive pricing for their services, say experts.
TAXING TIMES
- GST registration is for people with Rs 20 lakh turnover, but also those who provide inter-state services
- As per GST law, invoice needs to be issued within 30 days from completion of service
- Freelancers who get paid within 50 days have time to collect money against the invoice and pay the GST
- Those whose payments take longer would incorporate payment terms and conditions in their agreement or pay GST from their own pocket
- You can file returns on a monthly basis or three months at one go
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