9
2011
Service Tax for Indian freelancers and software firms
An article by 
Disclaimer :
The information provided here may be outdated or incorrect. The tax rules are revised every year in annual budgets. Please consult your CA for latest regulations and norms.
What is Service Tax
In India service tax is applicable on certain businesses/firm if its annual revenue exceeds 10 Lakh Rupees. Current rate is 10.30% (at the time of writing this article). Its not applicable where VAT is applied.
Service Tax is applicable in IT sector and on software firms and freelancers whose annual revenue exceeds the limit. The annual revenue includes both foreign and local income. So if the total of foreign revenue and local revenue exceeds the 10 Lakh limit then the firm is supposed to apply for a Service Tax number.
Service Tax only on INR revenue
However Service Tax or S.T. is to be paid only on local revenue. If a company’s revenue is 5 Lakh in USD and 5 Lakh in INR then S.T. is to be paid on only the local 5 Lakh revenue. The 5 Lakh ruppe income in USD is free from S.T.
But this benefit is applicable only if the revenue was recorded as USD in the bank account. Its not applicable if some foreign individual/company send the money as INR. The best example of this would be Paypal. Paypal is used by most Indian freelancers to accept payment from foreign clients. But Paypal sends money via NEFT to bank account and the currency of deposit is INR. Hence this deposit becomes applicable for service tax. Another popular money transfer medium is Moneybookers. Moneybookers has the option to keep an account in currency USD , and if such an account requests withdrawal , the money is send via Wire Transfer in currency USD. This is shown as a USD deposit in the receiver’s bank account and hence this is free from service tax.
Freelancing websites
1. Elance – Elance provides the option of wire transfer for money withdrawal. In Wire Transfer deposits are in USD and hence free from service tax. For paid membership 1 free wire transfer per month is available. Rest have charges applicable.
2. Odesk – Odesk provides Paypal , Moneybookers and NEFT transfer. NEFT transfers will be in INR hence are applicable for S.T. Depending on the annual revenue volume , its useful to choose moneybookers. So the transfer can be like this :
Odesk -> Moneybookers -> Bank Account
3. Freelancer – Freelancer.com provides Paypal , Moneybookers and Wire option. Whichever suitable should be used. Freelancer provides wire only for USD currency. It has other currency options like AUD , for which wire is not available. Wire transfer have charges.
4. Scriptlance – Provides moneybookers , neft , paypal.
Moneybookers useful.
Conclusion
So if your annual revenue is over 10 Lakh , then get your payments deposited to your bank account in USD or any foreign currency to make them service tax free. Once the deposit is made in rupee , service tax is applicable.
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Dear Binary Tides,
I am working in India in MNC. My annual salary is 5.0 lakh, company had deducted my TDS on this income. Burt at the same time I am doing individual freelancing too. Last year I received $2000 as a cost of work I did for one of US client. They sent me this amount by “wire transfer” in my Indian bank saving account. After that they also sent me $300 as a gift because they become happy on my work which is also by “wire transfer”. So as you told above my income is not exceeding 10 lakh and also received amount is in $ so it is not coming under Tax. But do i needs to show this income while filling ITR ? If I show this ($2300) as a income, under which section I can claim it as a Taxless income? Or I should not mention it anywhere it as a income while filling for income tax return?
Hello Binary Tides,
I am a freelancer IT service provider and last financial year I used to get $4000/month in my saving account via wire transfer in US $ only.
Last financial year I received approx Rs. 23 lakh via wire transfer in my savings account. My all income comes via wire transfer in US$ only.
This financial year I will be receiving almost $2500/month as wire transfer form USA.
Now:
- My CA is telling me that I need to open an Individual current account and then apply for IEC (Import Export Code) to make this money legal.
- But my bank tells me that I don’t need IEC to receive money from USA, as my monthly inward remittance is less than $5000/month.
Please let me know:
1. Do I need to pay service tax? (income exceeding 10 Lakh but all income came and will come as US $ only)
2. Do I need to open current account and apply for IEC (Import Export Code)..?
3. If there are other legal methods to make a freelancer income legal, what are those?
Thank you.
Hi Berry,
This is exactly my situation. I’m from Kolkata. I too am totally confused about my tax liabilities and nobody seems to be providing clear idea. My CA says since I’m exporting software, the income is exempt from service tax but I have to register as a sole proprietorship firm to for proper accounting and also have to pay advance taxes to avoid paying a lot of money in the form of interests. May be we can get in touch and try to find a solution together.
Hi there,
I have recently started with freelancing [not registered as a company as I am the only] and have made around 2.7 lacs this year off graphics and website desiging. Since I got paid from various freelance portals online How will I prove the CA/Govt. that the money that I have received on my paypal account is legal? Also, paypal never shows the conversion from foregin currency. What reflects against the reason of credit amount is:
NEFT -CITIN[somenumber]-PAYPAL OPGSP SETT
Is this sufficient? My CA knows nothing about freelancing and the most with whom I have discussed it with. Your help will be appriciated on this matter.
Regards
You should consult a modern CA who has experience with latest export/import tax rules.
Freelancing is considered exporting of IT services.
The money you receive in paypal is shown as your income and you pay tax on that , provided your total income exceeds taxable limit.
Below 10Lac annual revenue you dont need to worry about service tax.
You should issue invoices to customers whom you provide services , and get them signed by them if possible and keep it in your records.
Hello Guys,
I’m a freelancer and I work for a US based company and get regular income in USD directly to my bank account. But I’m having hard time maintaining my finances for income tax calculation and return filling etc. Can somebody suggest an easy accounting software which will work with freelance income. Tally is not my cup of tea anyway.
Thanks a lot
Debasish
Hello Binary Tides,
Thank you for a very informative article. I earn 475$ per month paid via PAYPAL due to free lancing as a 3D artist for a client in US. This is a job for 2 years and i have completed 1 year just now. Could you please tell me what how should i pay my taxes. Will 475$ be considered as for service tax or as personal income tax. I am damn confused as to how I should proceed. Please help me out.
Contact a professional chartered accountant for more information.
They charge you a nominal fee and prepare your accounts and take care of tax matters.
Hi!,
I am used to receive USD payments from May 2010 through paypal & each month I usually receive USD10000 & haven’t paid service tax yet for paypal bank transfers.Someday may I get in trouble? If I pay service tax will I get TDS credit?I am not very good with this tax thing & all,if you can provide some help I,ll be thankful to you
Ask your CA (Accountant)
my ca is not good with this online transactions can you please help me a little on it ?
Hello,
I am from freelancer working on freelancer.com.
I use freelancer -> moneybookers(usd) -> bank account.
My income exceeds 10 lakhs.
So in order to avoid service tax, I should keep balance in USD in my bank?
And does bank support USD balance?
You dont need to keep your balance in USD in your bank.
No bank can do that.
You just have to receive money in USD.
If you use moneybookers then your moneybookers account should be in USD.
And when you receive money in your indian bank account , the bank statement would show something like this :
USD 1000 to 40000 INR.
The main point is to “receive” USD (or any foreign currency) in your bank account.
Later the bank account converts it to the relevant INR amount with the prevailing forex rates.
Thanks. You have cleared all my doubts.
Hi Binary Tides,
I think there is no problem to keeping balance in INR on moneybookers for service tax.
When someone withdraw money from moneybookers to bank, moneybookers use following steps.
INR -> EUR -> receiver’s bank account
Moneybookers change the currency to EUR when withdrawing to indian bank and EUR is actually coming to bank.
http://www.bhagwad.com/blog/2010/personal/using-moneybookers-to-send-money-to-india-paypal-alternative.html/
Above link is interesting post about moneybookers.
Please share your thought.
Thanks.
Hi,
I have one question though:
For paypal income -Do we need to pay service tax on amount credited to our bank account ie payment sent by paypal to our bank account in INR after deducting their charges
OR do we need to pay service tax on amount that we received in our paypal account ie before deducting paypal charges?
Thanks
Pawan
service tax is applied on the “revenue”. So whatever comes to the bank account would be considered as revenue and
service tax would be applicable on that only.
Oh ok, I thought I need to pay service tax on amount received before deducting paypal fees.
Thanks for your help. I appreciate it.
Still I have a doubt.
Suppose we raise invoice of $10 to customer and he pays through paypal.
Then won’t we pay service tax on invoice amount ie $10 as we are charging the same to customer as per invoice raised to him?
And show paypal charges as expenses while file filing ITR?
paypal charges are shown as “expenses”
and service tax is applicable on the “net INR inflow” in your bank account.
So if you bill $10 , then s.t. is applicable on whatever inr amount reaches your bank (irrespective of whatever charges paypal applies).
this is further confirmed by the fact that rbi refuses to recognise paypal as a bank and paypal has agreed to this provided :
1. no outward payment can be made from indian paypal accounts. i.e. you cannot make a payment from your paypal account
2. paypal will autowithdraw your balance to your bank account the same day , and is not eligible to pay any interest (like in savings account)
the above 2 criterias make paypal a “non-bank” and just a money transfer “agency”
Thanks for your detailed explanation.
So what I understand is that when we file ITR then we show the invoice amount while when we pay S.T then we show what we receive in bank.
Do we follow the same in case of 2checkout(credit card gateway) and ccavenue?
I was looking whether service tax is applicable on paypal income from past many days but got answers no where.
Your articles cleared all my doubts.
Awesome article!
Hi
Thanks for the article, Its very useful for many fellow freelancers. Though I have some doubt and after a lot of search I couldn’t clear it. If you could help in this regard, I will be highly thankful to you. Also It may clear doubts of many other fellow freelancers.
Does Indian Freelancers need IEC or FEMA registration at all? (Most of the docs i found were old and were confusing in the sense that in future there may b provision to include services in export)
And do they need to file in IT returns even when they don’t fall under tax brackets?
Any info regarding this is highly appreciated
thanks
Sandeep
Very informative article. I’m a software engineer freelancing fulltime on Elance. I quit my job 6 months back to freelance fulltime and enjoying my independence. Now I’m worried about tax filing. How should I file tax? What I learned is that I have to get a trade license as a sole proprietorship firm and file tax by filling ITR 4 and if my income exceeds Rs 10 lacs, I must get my account audited by an independent chartered accountant. Can you kindly share your knowledge regarding this? It’ll be very helpful for me.
If you want to register a propreitorship firm like ABC Technologies then you need a trade license. This trade license will be used to open a bank account in the name of ABC Technologies.
To file tax you need a CA to prepare your profit loss statement etc. Get in touch with a good chartered accountant for more information.