Starting a Consultancy Business in India

World of Finance by M.Vijaya Sai

An individual planning to start his own consultancy in India, would like to have the answers for the following questions:
Q1: Can I simultaneously start my own business / consultancy while working as an employee?
Q2: Which is better from tax point of view: salaried employee vs. working as a consultant?
Q3: If I start a consultancy, then what are the legal formalities?
Q4: If working as a consultant, whether to open a sole proprietorship firm or work under individual’s name?
Q5: If I open a sole proprietorship, whether any registration is required for it?
Q6: How can I be sure that the name I’m going to use, say, “ABC Consultants” is unique and there is no other business or profession is being operated under the same name? What if in future I become famous and someone else copies my firm name?
Q7: What is the status of sole proprietorship under Income Tax Act, 1961? Do I need to apply for a separate PAN card for sole proprietorship? Do I need to file two returns, one in the individual capacity and other for proprietorship firm? What are the tax deductions allowed in running my own business or consultancy? How does it make a difference in the taxation if I run the run the business / profession from home?
Q8: What are the TDS implications?
Q9: Whether any other tax is applicable such as service tax? If yes, then is there any exemption limit below which I’m not liable for service tax? What about service tax registration? Is it required irrespective of the exemption limit or only if my billing exceeds certain minimum threshold? Do I require registration before starting the service or can I apply afterwards? What is the rate service of service tax applicable for FY 2009-10?
Q10: Whether a separate bank account is required for banking purposes?
Q11: What if I render services to a foreign client?
Q12: What if I start a sole proprietorship and later on in future (to expand the business) decide to convert it into partnership / company?

In a nutshell, the reader wants to know how to start a consultancy business in India?

Working as an Employee vs. Consultant: Income tax Implications
Location of Clients: In deciding whether to work as an employee or as a consultant, it is immaterial whether you work for a US client or Indian client.

However, if you work for US clients you also need to take into account US tax laws and DTAA between India and US.

Tax on Salary vs. Professional Income: As a consultant your income is taxed under the head “Income from business or profession” and accordingly you’re entitled for all the genuine expenses incurred for purpose of running your professional practice such as travelling, rent (even if working from home), depreciation (on car, computer etc) printing and stationary, telephone etc.

On the other hand, if you work as an employee, your entire salary doesn’t get taxed. You’re entitled for various exemptions and deductions such as HRA (for rent paid), transport allowance, medical reimbursement, LTA etc.

TDS: If you are a salaried employee, the entire tax on your salary gets deducted at source as per section 192 of the IT Act. But, if you’re working as a consultant, TDS @ 10% is deducted under section 194J (TDS on professional or technical services).

Non-Tax Consideration: As a consultant you can work for many clients but as an employee you can only work for one employer. Why? There are no statutory restrictions on engaging yourself in any other activity / trade while simultaneously working as an employee. However, usually as per the terms and conditions of employment contract (appointment letter), employees are barred from undertaking any business, profession or vocation directly or indirectly without prior permission of the employer.

Starting or opening a Sole Proprietorship Firm

 
Meaning: A sole proprietorship firm (also called proprietorship) is a form of business entity (other forms are partnership firms and Companies registered under Companies Act, 1956) owned and operated by an individual. It is the oldest, cheapest, simplest and most common form of business organization.

Registration: In India, a sole proprietorship firm has no legal existence separate from its owner. Therefore, there is no requirement of registration.

However, you might require registration under other regulatory authorities. For example, if you’re a professional, say, practicing as a CA, you require registration with ICAI; if selling mutual funds, registration is required with AMFI; if selling insurance need to have license from IRDA; if into import / export of goods or services, IEC (Import Export Code) is required.

Tax Status: From tax point of view, it is immaterial whether you run consultancy in your name or open a proprietorship firm. Unlike a partnership firm, which has a separate status than the partners running it and is accordingly a separate tax entity for tax purposes, the sole proprietorship firm and the sole proprietor are the same and there is only one tax assessment in the name of individual. Therefore, only one tax return is to be filed in the name of individual.

PAN: There is no need to apply for a separate PAN card for proprietorship firm and you can quote your individual PAN wherever required in your business dealings. In other words, PAN of the proprietor will be PAN of the proprietorship firm.

Conversion: In future, if required you can convert your sole proprietorship into partnership firm or a private limited company under Companies Act, 1956.


Service Tax Implications

 
Registration: If you’re providing a specified taxable service and the aggregate value of the service provided by you exceeds Rs 10 lakh during the financial year, then you’re liable for service tax and also need a registration [Form no ST-1] under Service tax.

Rate: The current rate of service tax is 10.3 percent.

Location of Clients: If the taxable service is exported then no need to pay service tax by virtue of Rule 4 of Export of Service Rules 2005. But what is export of services? As per Rule 3 of Export of Service Rules, 2005, if the taxable services is provided from India and used outside India and payment is received in convertible foreign exchange, then the taxable service is considered as exported.

Banking Issues
If you’re running consultancy services or professional practice in your individual name, then there is no mandatory requirement to have a separate bank account. But it is always better to keep your personal transactions separate from business transactions as it also helps in accounting and compliance with tax matters.

On the other hand, if you’re rendering consultancy or other services under a sole proprietorship name, then it becomes necessary to have a separate bank account in the name of proprietorship firm. Why? Because your clients are going to issue cheques in the name of your proprietorship concern which can’t be deposited into your personal bank account.

Besides, as business / professional concerns are not allowed to open a savings bank account, you’ll have to open a current account. To open a business account in the name of proprietorship concern, banks usually demand a registration with any government or statutory body or a trade license (as a part of KYC norms) and if you don’t have any registrations / license, you might face problem in account opening. However, some banks allow you to submit a CA certificate. This is in fact the most troublesome part of opening a sole proprietorship firm.

But in my opinion banks are not at fault because in order to satisfy themselves about the genuineness of the sole proprietorship firm and as a safeguard against fraud, it becomes necessary for banks to require proper documentation.

Other Requirements

 
Website: Now a day, if you expect your clients / customers to take you seriously, it is a must to have your own website. So it is always better to buy a domain name at the beginning itself even if you would like to wait for sometime before launching your website.

Accounting & Auditing: As per section 44AB of Income Tax Act, 1961 read with Rule 6F of IT Rules, 1962 every person carrying on business or profession is required to maintain books of accounts depending upon the income and turnover / gross receipts as specified therein. In case of ‘specified professions’ the requirement is mandatory irrespective of the ‘gross receipts’.

Furthermore, according to section 44AB of IT Act, a person carrying on a profession is required to get his accounts audited if the gross receipts exceed Rs 10 lakh in a financial year.

Printing & Stationary: A letter head, visiting cards and a stamp is also required.

Trade Marks: If you want to make sure that in future nobody else makes use of your business name, brand or logo, you have to get it registered as a Trademark with Trademark Registrar under Trade Marks Act, 1999. Before registration a market survey is required to ascertain if same / similar mark is already in use in the market.

I’ve tried to ensure that the above write-up gives a comprehensive view of all the issues faced by a budding entrepreneur in starting his own consultancy business in India either in his individual name or as a sole proprietorship firm.

If anything is still missing, please write in the Message box . You can also send your queries directly to feedback at vijayaram9@gmail.com.