Service Tax for Indian freelancers and software firms

2 Flares Filament.io 2 Flares ×

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The information provided here may be outdated or incorrect.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.

Last Updated On : 19th December 2012

Subscribe to get updates delivered to your inbox

About Silver Moon

Php developer, blogger and Linux enthusiast. He can be reached at m00n.silv3r@gmail.com. Or find him on Google+

  • Jayesh

    According to us the criteria for any income is not dependent on the currency its deposited in. Service tax is applicable for any income earned for the services consumed within India and if service is consumed outside India then service tax is not applicable on such income. We a company (revenue over 35 Lacs) and another company we know who have revenue over 1.25 crores ( half of which is through paypal) does not have to pay any service tax because the service they render to their clients ( ie: software and applications) are consumed outside India.

  • pravinuttarwar

    I guess, this post is outdated now. Our CA told us that from 2012 rules have been changed and even for INR coming from Foreign accounts we dont need to pay ST, as long as it is coming from US. Is that true? Anybody confirm that?

  • Vijeet Deliwala

    Are you sure Elance sends the money in USD? When I do a wire transfer from Elance,I get a mail as follows
    Amount Withdrawn: $XXX USD
    Exchange rate on Aug 28, 2013: 66.27 INR/USD
    Amount Withdrawn Locally: XXX INR
    So,does it send money in INR or USD ?

    • Sadaf Zehra

      can you tell me if elance deducts 25$ from your earnings if you choose USD as destination currency?
      I can’t decide whether i shud choose a paypal or wire transfer method.

  • QUbe

    A few questions which probably bother all of us freelancers. If Silver Moon could answer them it would be great.

    1. For a person who is already employed and is just doing freelancing on the side and receiving the money through Paypal does she/he need an Export/Import License ? (person is just providing software services)

    2. Does she/he need to register a sole proprietorship ?

    3. When the total income is calculated at the end of the year ( salary + freelance income), do they consider the total amount as the total revenue? or an independent bank A/C which if maintained for freelancing purpose is taken to be the indicator of total revenue ?

    • http://www.binarytides.com/ Silver Moon

      1. export license is not needed for freelancing

      2. as long as service tax is not application proprietorship firm need not be registered. After service tax becomes application, its better to register a firm and pay service tax from that firm.

      contact a professional chartered accountant for more information.

  • Prashanth

    Hi,
    I Do freelancing work in Elance and Freelancer.com , I need your help to know whether i have to pay tax or not ?
    I started Doing freelancing Job in year 2012 . So in the Entire year of 2012 i.e from jan 2012 to Dec 2012 My earning Is nearer to 4000$ USD . In that 4000USD nearly 1500USD has been transfered using Directly Wire transfer (in USD) . and the rest using paypal(in INR)

    So my question is Whether i should be paying tax for the year 2012 ? and if yes How much tax it would be for me ?and when is the last date to pay ?

    I will be greatfull to you, if anyone help me out here .Many thanks

    Regards,
    Prashanth

  • http://luckybhumkar.blogspot.com Laxmikant Bhumkar

    Thanks for this nice sharing, educating us about Service tax rules and regulation about the Web-designing services.

  • S. K. Agrawal

    This article by Mr/Mrs. Silver Moon is dated 14th September 2012. This is an updated current article. Hence this query:

    Remittance in convertible foreign exchange was mentioned in earlier “export of service rules” which has since been replaced by ‘Place of provision rules” which does not talk about convertible foreign exchange. Do this precondition of convertible FE for exemption on export of service appear in any other section of the act OR circular ? If so I will be extremely thankful to get a reference so that I can read it. I am consciously mentioning my email address to get a reply from anybody and am not averse to receiving emails so long it is on the subject.

    S K Agrawal
    saroi123@gmail.com

    • Jagpreet

      I 2nd the request made by sk. The person who is filing my service tax say no such clause exists in service tax which exempts if the revenue was recorded as USD in the bank account. If I can get the rule/clause number that would be great!

  • sanoop

    Hi everyone, i am gonna go off-track and ask you something else altogether, i am beginner to this freelance world, and i found it hard to believe that one could actually make money working online, your above queries have changed by beliefs drastically, you all seem to be doing pretty good, with the whole freelance scenario, As a reflex, i would like to start out to , i had registered on elance.com a few weeks ago, but could not get anything going and had to put it aside, would be very delighted if any of you could guide me how to go about the whole freelance deal. oh yeah!! my skills, i can do transcribing and writing, blogging, a little bit of SEO, any suggestions would be welcome. thank you

  • http://everywalkinghour.com Ashwin

    Hi,

    I have few questions and I would feel great if you could answer them.

    My annual income is 5.5 lakhs and I work for a private company. I plan to do freelance and I am not sure how to show this amount in my income tax. My income tax and file returns is maintained by a CA for the company I work for. I wish not to get my company a clue on this extra income.

    1. Would it be fine just to let know by themselves I make extra money?
    2. If I file my income returns by myself(with the help of my personal CA) will they ever get to know I earned more with my PAN?
    3. Do you have some best sources when I can learn more on tax?
    4. What do you suggest?

    • Silver Moon

      you cannot have 2 CAs to file your return, and even if you tell your company CA about the extra money you have to tell the source as well.
      So either let your company know about it, or take your IT file to a separate private CA.

  • Siri

    Hi

    We have incorporated a PVT ltd company in India.
    We work from India for a foreign client.
    The client transfers amount in Pounds and we receive it in a Hyderabad bank at the current exchange rate
    and it gets deposited in INR.
    Could you please tell me if we are eligible for Service tax exemption as transfer is initiated in Pounds by the client?
    Your information is highly appreciated.

    Thanks
    Siri

  • http://www.mytrailertube.com reddy

    hello friend,i am doing affiliate marketing from 6 months making money from that emthods,i am geting paid nearly 600-800 usd monthly from cpa companies,all are paying wiretrafers and moneybookers,money bookers also when i withadrw they are doing wire,all coming to my savings a/c,all are genuine affiliate commisions,is this legal to receive wiretransfers to my savings a/c, can you please suggest me is there any problem with it deprtment

  • Masood

    @Binary Tides-Service tax is not at all applicable to Export money(if we are receiving the money in foreign currency).

    Just,I would like to know about moneybookers,whether they transfer the money in foreign currency(ex:US Dollar) to our bank account.I know paypal is not doing this.Pl help me if someone do have knowledge on this,if moneybooker is not doing it than what would be other best alternative.

    Thanks
    Masood

    • Silver Moon

      Yes – moneybookers transfers USD dollar to your bank account , provided you selected dollar as your primary currency while creating moneybookers account.
      And since you receive USD in your bank account, service tax is not applicable.

  • Avik Mallick

    Hi,

    I am currently working as a SENIOR WEB DEVELOPER in a web development company based in INDIA. My company pays my INCOME TAX for my salary. Besides my salary I have an extra income from different source [ FREELANCING in ELANCE (http://www.elance.com) ].

    From ELANCE I withdraw money (USD) to my PAYPAL account and it automatically converts into INR i.e. currency conversion. Also when I withdraw money from ELANCE to my PAYPAL account it deducts 9% of total withdrawn. And when I withdraw funds from my PayPal account to my bank account in India it goes as INR.

    So, I want to know that the money which goes to my paypal account to my bank account, is it applicable for income tax? So I am requesting you if you kindly clarify my queries, then I will be thankful to you.

    Thanks & Best regards

  • Rohit

    Hi Binary,

    Need your help on immediate basis. I have a prop.firm on my name which provides staffing solution to domestic IT clients. Few days back I got a designing project from a US client and now they have to make a payment which would be approx. 4000USD/Month. The project is for 3 months approx and I am supposed to get 15,000 USD in total. I have asked them to wire transfer me the amount to my staffing solution’s prop.firm bank account. The payment would be coming in USD only.

    My 3 questions:
    1. Is there going to be any problem if I get the payment in my staffing solution firm Bank Account?
    2. Do i need to pay S.T.?
    3. When I will be filing my Income Tax, how this money in USD would be counted in?

    please revert ASAP.

    thanks

  • Sarang

    Hey Binary,

    When I finish a project of say 1000/- USD on Elance, it charges me 87.5 USD commission. My friend who just passed out CA said that I will have to bill the client 1000$, put 87.5$ as commission expense and pay 20% TDS on this since Elance would not have a pan card. Is this correct way of doing it?

    Sarang
    Datasoft, India

  • Veevas

    One of the most lucid articles I have read. No jargon, and completely informative. Thanks Moon, shine every night.

  • Savita

    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?

  • Berry

    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.

    • Anirban

      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.

  • Asish

    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

    • Binary Tides

      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.

  • http://www.purecoders.com Debasish Dash

    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

  • Kartik

    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.

    • Binary Tides

      Contact a professional chartered accountant for more information.
      They charge you a nominal fee and prepare your accounts and take care of tax matters.

  • Rahul

    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

    • Binary Tides

      Ask your CA (Accountant)

      • Rahul

        my ca is not good with this online transactions can you please help me a little on it ?

        • Gaurav Arya

          Kindly mail me all your service tax queries to aaryagee@gmail.com.

          I will try to solve your all problems and issues related to Service Tax.

          I am Delhi based CA

  • Shailender Singh

    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?

    • Binary Tides

      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.

      • Shailender Singh

        Thanks. You have cleared all my doubts.

      • Shailender Singh

        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.

  • Pawan

    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

    • Binary Tides

      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.

      • Pawan

        Oh ok, I thought I need to pay service tax on amount received before deducting paypal fees.

        Thanks for your help. I appreciate it.

      • Pawan

        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?

        • Binary Tides

          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”

          • Pawan

            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?

  • http://www.techtalkies.com Pawan

    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!

  • Sandeep

    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

  • Anirban

    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.

    • Binary Tides

      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.

2 Flares Twitter 0 Facebook 2 Google+ 0 LinkedIn 0 StumbleUpon 0 Filament.io 2 Flares ×