Under Indian tax laws, income earned by Indian freelancers from foreign clients is taxable in India as "profits and gains of business or profession" under Section 28 of the Income Tax Act, 1961. It is regarded as export income (or foreign income) and could also be regarded as the export of services. We take a look at how this income is taxed in India, whether goods and services tax (GST) is charged, and how those earning a freelance income from foreign clients should file their taxes. Also, as we will see, if the income is taxed in another country, foreign tax credit can be claimed in India as per the Double Taxation Avoidance Agreement (DTAA) or Indian tax laws.
No GST On Export Services
“For GST purposes, if the services provided meet certain conditions, including the condition that the place of supply is outside India, these services are classified as “export of services” and are zero-rated, i.e., no GST is payable,” says SR Patnaik, partner (head - taxation), Cyril Amarchand Mangaldas.
Thus, as a freelancer, if you are servicing foreign clients on a principal-to-principal basis and not as an "intermediary", then there is no GST. On the contrary, there is a refund of any GST that you might be paying for the purchase of goods or services for providing such services.
“For example, incase you have provided a IT/ ITES, legal, accounting service of Rs 40 lakh to a foreign based client and have received the services of a professional who has charged you Rs 10 lakh plus Rs 1.8 lakh GST, then on the one hand you need not pay GST to the government as your service will qualify as export and on the other hand you will get a refund of Rs 1.8 lakh GST which you have paid to your vendor. Only that you would need to do the compliances under GST to get this refund, like filing the GST returns monthly/ quarterly/ annually,” says Vivek Jalan, partner, Tax Connect Advisory Services.
Indian freelancers earning income from foreign clients must file their Income Tax Return (ITR) using ITR-3 or ITR-4, depending on whether they opt for the regular taxation or presumptive taxation scheme, which enables them to presume a percentage of their income as profits for tax purposes, significantly reducing their compliance burdens.
Presumptive Taxation
“The freelancers are eligible to opt for presumptive taxation if their turnover does not exceed specified thresholds. In other cases, they would be required to pay regular taxes and may be subject to compliance requirements like maintenance of books of account and audit mandates,” says Patnaik.
In case tax is paid for such income outside India, foreign tax credit (FTC) can be claimed in India, irrespective of whether India has entered into a DTAA with the foreign country or not. For claiming the FTC, freelancers need to file their statement of income arising outside India in Form 67, along with their ITR, along with other documents like a statement specifying the nature of income, along with proof of deduction, and acknowledgment of the payment of taxes outside India.
The freelancers would also be required to file GST returns in cases where GST is payable for export of services or in case the exporter wishes to claim input tax credit.
“Freelancers can claim deduction of certain expenses, including business expenses, from their profits and gains from business and profession, thereby reducing taxable income. The deduction under section 80QQB of the Income Tax Act, 1961 is available to authors of certain books on royalties received, subject to certain prescribed conditions and thresholds,” says Patnaik.
If the income is taxed in a foreign country, foreign tax credit can be claimed in India as per the DTAA or Indian tax laws, up to the extent of their Indian tax liability on such income, upon furnishing of the requisite documents.
