Employee vs. Consultant - The Pros and Cons
Several multinational companies prefer to hire a resource as a consultant rather than an employee to avoid labour law compliance and other regulatory requirements. Indian Companies have also started adopting this trend and offering this option to professionals with a unique set of skills. In case you end up getting such an option from your company, you should consider several criteria before making this decision. With both the options, your role, duties, powers and compensation might be similar, but tax and regulatory implications would be completely different.
Nature of Income for tax purpose:
The professional fees received from the consultancy is treated as ‘Profits/gains from business/profession’; while income from the employment comes under ‘Salary Income’. This is critical for filing income tax returns in a correct form. E.g. a consultant will file return in Form ITR-3 or 4 while a salaried person will file it in ITR-1 or 2 depending on the other income sources.
Claim of various payments:
As an employee, you cannot claim deduction of various expenses incurred during your service. You are eligible only for the specified deductions such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), Child Education Allowance, etc.
On the other hand, a consultant can claim all the expenses such as travelling, mobile phone, internet and meeting expenses or any other spending for rendering the consultancy services. Moreover, a consultant can also claim depreciation on business assets i.e. a consultant can claim depreciation on their laptop, mobile phone, printer, etc.
Tax Deducted at Source (TDS):
Sadly, a Company will deduct the taxes from the payments made to you irrespective of the nature of your role. TDS will be as per the income tax slabs for employees and 10% for the consultants. You might feel that you will save taxes due to lower tax deduction rate under a consultancy, but that is not the case. Any deficit in tax liability on account of lesser TDS will have to be deposited to government treasury by way of an advance tax.
Income Tax Audit:
The role of a consultant will be viewed as a business by the Income Tax Authorities. Maintenance of books of accounts is mandatory for most of the businesses/professionals. In case turnover exceeds the prescribed limit under the Income Tax Act, 1961 then consultants have to get their books of accounts audited from a chartered accountant. There is no such mandate for a salaried employee; Form 16 (Salary Certificate) would suffice for return filing and assessment purpose.
Goods & Service Tax (GST):
So far, the consultant option seems beneficial to opt for. But with GST being introduced in July 2017, one should reconsider the benefits of a consultancy. If your services are covered under the notified taxable services such as management/business consultants, financial planners, engineers, software developers and your turnover for the year exceeds Rs.20Lacs then you are required to get registered under GST Law and comply with return filing. If you are appointed as a consultant for a shorter tenure, then you must surrender your GST registration on completion of a contract. There is no such compliance required under the indirect tax (GST) for salaried employees.
Hence, many different parameters need to be considered to decide and the answer would not be same for everyone. You should carefully choose between the two because reversing your decision can prove to be a costly affair, if not impossible.