How do I become Independent?

Company formation, Taxes etc

The easiest way to start on your own is to become an independent consultant. The re is almost nothing much required to get started. Following are some of the key steps that y ou need to take to become Independent Consultant:

1. Start with a Proprietary Firm under some name (your own name would suffice). Your home can be your firm s premises. You can have just a savings account to deposit your e arnings. 2. Identify a Chartered Accountant (CA) to work with, from a long-term perspecti ve basis. CA will be your most important partner through your Independent Consulting journey. 3. Assuming that you have a PAN number already available with you, the CA will a pply for your Professional Tax Enrolment Number and Professional Tax Registration Number. Bein g Self Employed, you have to get yourself enrolled, obtain a Professional Tax Enrolment Number, and pay a sum of Rs.2,500/- every year to the Govt.Of Maharshtra. The applicabil ity of these provisions vary from state to state. Likewise, a Professional Tax Registration n umber is necessary for the business establishment and profession tax, if you have staff, to be deducted from staff salaries, and paid to the Government, on a monthly basis. 4. With PAN number already available, the CA will apply for your Service Tax num ber. Service tax is applicable only if your gross receipts (income) is likely to be equal to or more than Rs.10 lacs per fiscal year (April to Mar). 5. All forms of consulting services come under the net of Service Tax. Service T ax has been quite stable for the last few years and currently at 10.3% of the gross billing. This is to be recovered from clients on a per invoice basis, and paid to the Central Govt., on a montly or quarterly basis, as may be applicable. This is over and above your Income Tax. B ut hang on, I have explained below, how in-spite of multiple taxes you will still end up bette r than the TDS that gets wiped out on salaries. 6. Open a bank account (savings is fine) specifically for transactions under the Independent Consulting. This helps in easy computation during all Tax filings & Returns. You need to ensure that all income coming in from consulting source should be deposited in t his account. All your other incomes (shares, property etc), should go into a different saving s account. 7. You should then create an invoice format that provides your Service Tax numbe r, Bank account details (A/c number, MICR code, NEFT Code, RTGS code, IFCI code etc) (wh

ich are available on every cheque that you have been signing), so that your customer can deposit monies electronically in your account without having to issue a cheque every tim e. 8. Ensure that you get Pay-slips for every payment from your employer (for corre ct computation of Service Tax) and FORM 16A, for Tax filings. 9. Finally, I recommend that when you are starting on your first consulting cont ract, it is best to negotiate a Retainer based model, where you will be paid a fixed amount every mo nth, rather than attempting to bill on Hourly, Daily or Weekly basis. 10. Service Tax is payable every quarter from the preceding quarter before 5th o f the month of that quarter. In some cases, like in partnership firms and companies. it is paya ble on a monthly basis too. 11. Advance Tax is payable as per Government rules & schedule. Ensure that your CA computes an optimum amount (usually on the larger side) as advance tax, so that when the yearly Tax returns is filed, you do not have a large amount payable.

I have lived a journey of Independent Consultant in India since 2003. In this jo urney, I have had experience (once) of my case coming up for inquiry from Income Tax. The experien ce is something I cannot reproduce in this document, but it was an insightful learning. To pen it in two lines, I learnt that no matter how careful you are in doing the Right things in the right way, t here are numerous ways to show it as an attempt to do wrong thing in a right way. Coming back to m y earlier advice of

choosing a good CA was from a perspective of how best you can optimize your taxe s. Beware, never dodge the taxes, but there are legal ways to optimize them. By being independent , you get all the opportunities to optimize the taxes. Some of my key experiences are below:

1. Service Tax is computed on your invoice value. If you manage to negotiate tha t as extra payable by your employer, then there is no issue (zero sum game). You get ST, th e same amount you pay to the Government. Clean and simple. 2. If ST is not paid to you and made inclusive as part of your compensation, the n the CA has to compute the same. Once computed, a straight cheque of that amount has to go out. 3. From Income tax perspective, there is a lot to optimize. First and foremost, whenever a payment is made to you by the employer, it will come with 10% TDS. 4. Second, Income Tax is payable on the profits you make from the amount that is received by you. 5. So the amount that you get from your employer is Income and you have to show expenses to compute the profits and 33% of this profit is payable as Income Tax. 6. Now your CA will have to work out your (operating) expenses, which should ide ally include expenses related to your own car (required transport to clients site), client en tertainment expenses (your visits to restaurants once in a while), premises expense(the tabl e, AC, fan, chairs that you got) so and so forth. Your Service Tax amount is also considered as an expense. 7. There will be CA s charges (which also go as an expense). These charges vary fr om CA to CA. Some take based on deliverables like computing & paying Service Tax, Filing Retu rns, Computing and Paying Advance Tax and final conducting Audit. Some CAs may take a fixed figure annually to cover all of the above. 8. Finally taking into account the TDS amounts and the advance tax paid by you, the final Tax amount (due or receivable) is computed. 9. Although one gets tempted to show no profits, it is not realistic. So one sho uld take a proper view on the tax. Let me assure you however that there will be significant saving of your tax outgo compared to while you were employed as a permanent employee.

To help you get quick advice and services, StaffOnContract has made available ac cess to our panel of CAs. At a nominal fee, you can establish your firm to become an Independent Cons ultant. You can either choose to engage with our panel of CAs or identify your own.

Happy Independence!

About the author

Chetan is the Founder and Managing Director of StaffOnContract, a project of Jou le Consulting Pvt.Ltd. StaffOnContract is a unique protal encouraging subject matter experts w anting to become entrepreneurs/ independent consultants. With a stint of over 20 years in the IT industry, Chetan turned independent consultant in 2003. Continuing to consult on various aspects of Management, Sales & Marketing, Chetan has established two other profit-making entrepreneuria l ventures. Chetan can be reached at chetan.indap@staffoncontract.com .