Freedom of Choice
In my 30 years of practice as a tax consultant dealing with corporate entities, professionals and the salaried, one point to which most conversations meander to is tax savings. Of the lot, the salaried individual is the most harried taxpayer, who is forever crying foul over high taxes that he has to pay and the little savings that
he is left with at the end of the year. While the usual taxsaving options under Section 80C exist, most often, one is looking at ways to reduce his or her tax outgo to as close as nil and have more money in his or her hands.
Yes, the salaried class ends up being burdened by income tax a lot more than others. The difference is stark when you compare the tax liability of a salaried individual to someone who acts as a consultant, but does the same job as that of the salaried individual. The reason for this anomaly exists because the way
the tax laws are applicable to them. In case of the salaried individual, tax is withheld by the employer every month at an average rate applicable to them. But for professionals, a company using their services deducts tax at a flat rate of 10 per cent from the consultancy fee at the time of payment.
The discrepancy sets at this level itself because the salaried spends from what they receive post the applicable tax. In contrast a professional first earns, then
spends and finally pays taxes on what is left after the expenses. Let me explain this with an example: Suppose A earns `10 lakh as salary excluding the deductions,
he will be liable to pay tax of around `1.3 lakh. Now, if A were to convert his employment to that of a consultant and continue to provide the same services to the organisation for the same remuneration, he will be entitled to charge all his profession-related expenses to the income and pay tax on the remaining income.
The advantages are immense. For instance, whether you are salaried, or, a consultant, you might be using a car to drive to work and pay a parking fee for the whole day while you work. The beauty of being a consultant is that you can claim for not only the expenses you incur when travelling to work, you can additionally claim for depreciation of the car, its maintenance, insurance, driver’s salary and also the parking fee that you pay. These expenses are deducted from the income you earn.