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Income Tax for Freelancers – 8. BOOK OF ACCOUNTS & AUDITING

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8. Book of Accounts & Auditing

when your freelancing business flourishes

Everyone wants to thrive in his/her business, and freelancers are no exception. We continue to be in operation with the vision of “making it big”.  So, it is only fair to equip ourselves with the knowledge of “What to do”…. “When we actually get there”.
I believe that unlike some, most of you (like me) have very limited knowledge of financial jargons. Yet, this is no excuse for not-educating oneself. Let us get started.. now that it involves “money-matters”…

A.      Book of Accounts

Definition: “Books or books of account includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in floppy, disc, tape or any other form of electro-magnetic data storage device”. This is an inclusive definition.” – Source : Taxguru

In other words, you need to maintain records of income, expenses, receipts, bills for all transactions exceeding ₹ 50/- Be informed (forewarned) that you are required to preserve these books for at least 6yrs.
Gross Receipts (Definition):

Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.

B.      Auditing (& of course, Auditor)

The book “An Introduction to Indian Government Accounts And Audit” [page 14, para 1.9] issued by the Comptroller and Auditor General of India, defines audit as

  “An Instrument Of Financial Control. It acts as a safeguard on behalf of the proprietor (whether an individual or group of persons) against extravagance, carelessness or fraud on the part of the proprietor’s agents or servants in the realization and utilization of the money or other assets and it ensures on the proprietor’s behalf that the accounts maintained truly represent facts and that the expenditure has been incurred with due regularity and propriety. The agency  employed for this purpose is called an auditor.”

 In simpler terms, auditing means, to check the accuracy of the financial statements (income , expenses, profit&loss) and detect any errors or fraudulent transactions, which should be duly recorded and reported.

Nirmal_CA

Nirmal Says,

Requirement of Maintenance of Accounts

 “ If your Gross Receipts from Freelancing / any Other Business / Professional exceed ₹10 lakhs or income exceeds ₹1,20,000/-  in the Financial Year then you are liable to maintain books of accounts”

Requirement of Audit

“If your Gross Receipts from profession exceed ₹25 lakhs or from Business exceeds ₹1 crore in a financial year, you are liable to get your accounts audited by a Chartered Accountant.”

Ref : Simpletaxindia

“Income from freelancing is then a part of Gross Total Income, just like your Income from Salary, or Income from House Property or Other Sources (Interest incomes, etc). All deduction which are available u/s 80C such as PPF, LIP , etc to name a few, are available from Gross Total Income.
When the income includes ‘Income From Business / Profession’, then applicable Income Tax Return Form is either ITR 4S [Income from Business is assessed a Presumptive Rates] (OR) ITR  4 [For all Business(es) including Audited]”,

See http://canirmalg.wordpress.com/disclaimer/  disclaiming liability on behalf of the author / persons giving inputs and making reviews, etc.

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Income Tax for Freelancers – Table of Contents

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Table of contents

  1. Income Tax for Freelancers, Make an Informed start
  2. Disclaimer and Acknowledgements
  3. Foreword and Introduction
  4. Tax Payee or not ? Where do you fit in ?
  5. Calculate Total Income
  6. Business Related Expenditure
  7. List of Deductions and Exceptions
  8. Calculate Taxable Income & Compute Income Tax
  9. How to pay Income Tax online (Advance Tax)
  10. Due Dates ( for Individuals) & An Example Calculation
  11. Book of Accounts and Auditing
  12. File Income Tax Return (Not included in this series), Recommended Reading & Discalimer (Again, but a different one !)
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Freelancing & Tax Laws in India

Freelancing in India is highly untapped market. With the advent of affordable broadband services, working from home is close to becoming a reality. Sites like oDesk, Get A Freelancer, Scriptlance & scores of other sites offer more than enough opportunities one can handle. Today, I have reason to believe, freelancing does pay. All it takes is a little bit of patience and lots of perseverance.

With all the dictionary definitions on one side, the term freelancing is normally associated with extra income. More fondly known as “parallel income”, something that you would do during your “non-office”hours and get paid for it too. If you are the type who would still do the same thing, even if no one pays you, then you just got yourself a hobby.

If you have had the experience of being associated with a startup, then I am sure you will be able to relate to the following scenario. First you burn your eyes out by making the right contacts & clinching the right kind of deals. Then you work your butt out at keeping the deadlines, and finally you wait with bated breath for the payment to get credited. Then its the same cycle all over again. Amidst all this frenzy you need to keep track of all administrative work, do the accounts, pay the salaries and last but not the least, file your taxes as well.

Things tend to approach this frenzy in freelancing once your clientele begin to grow. But, as freelancers we tend to forget that “we earn”, albeit marginally, it is still an income. Tell me, how many of us knew that “Any income derived by way of freelancing job is taxable under the provisions of Income Tax Act. 1961.” ( — there, now you know)

I tired searching for over 8 months all over the internet for some pointers in tax laws that might provide some insight from a freelancer’s point of view ( note :- freelancer from India). http://www.incometaxindia.gov.in/ did not give me any relevant results & http://indiankanoon.org threw some case references at me. Not to be surprised, everything bounced off my head even before I knew it. Then I did what I knew best I could do. I began looking for lawyers in the blogosphere. And that did it for me.

I came across Mr.Ranjith Xavier’s blog at http://indianlawyer.blogspot.com/, where he blogs about various legal topics. He is an Independent Legal Services Professional, and practicing in the High Court of Kerala at Ernakulam. All I had to do was ask and after few emails, Ranjith was hard at work compiling this extensive information about the various tax laws and the terminologies involved. He can be contacted at ranjithxavier(AT)gmail.com & has agreed to help to the best of his knowledge. Thanks! Ranjith.

He puts things under perspective as Tax Laws & FOREX laws ( i.e. Foreign exchange laws) Please click on the image to download the pdf document

If your annual income derived out of freelancing job alone; or if added to your other income(s), adds up to exceed the annual limit mentioned in the Income TaxAct, you are duty bound to apply for and obtain a Permanent Account Number (PAN).
Under the provisions of the THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT,1992, anyone doing import or export is expected to apply for and obtain an Importer-Exporter Code Number (IEC Number).

Strangely though, he also put forth this query to us, before answering it for us

“Import” and “export” means respectively bringing into, or taking out of, India any goods by land, sea or air;” In common parlance, “Goods” means merchandise or movable property in physical form.Now the question to be considered is whether a person who transmits digital files over internet is exporting “goods” from India to abroad.
Once “services” too are brought into the ambit (ie scope) of the said Section 7 of the Foreign Trade (Development and Regulation) Act, 1992,every freelancer who performs services to a foreign client would be exporting it and thus attracting the provisions of the said Act. In such a case, he/she should apply for and obtain the IEC Number.

These are snippets from the compilation that Mr.Ranjith Xavier has put forth for us. Honestly, I am getting intimidated by looking at the links listed in this document from where the relevant information has been handpicked by Ranjith. Few months back, I was all lost, be it the search phrase or which site to look. Now, Thanks to Ranjith, at least now I know where to start. From what I understand , the information within this document is only the tip of an iceberg.

Deepa’s
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