How do I account for money paid to colleagues out of my professional income?

Question

I am resident of India and I work as a freelancer, developing software for Indian companies. Sometimes, I do the work along with a few other professionals like me. I receive the payments into my bank account and then disburse it to others based on pre-agreed hourly rates or fixed sums.

Please note :

1. I receive money as Professional Fees and NOT contract amount.
2. I do not have a company registered for the purpose.
3. I have no TAN myself and have not withheld any tax for payments.
4. The total amount involved is < 10,00,000 for the entire year.

Now my questions :

1. In my income tax returns, how do I account for these pay-outs ? As payment to sub-contractors OR payment of salaries OR is there another way ?

2. Do I need to maintain invoices I send to the clients and do I need to receive invoices from my colleagues ?

Thanks for your help.

Answer 1

As an individual freelancer, you would need to maintain a book of accounts. This should show all the income you are getting, and should also list all the payments incurred. This can not only include the payments to other professionals, but also any hardware purchased, phone bills, any travel and entertainment bills directly related to the service you are offering.

Once you arrive at a net profit figure, you would need to file this as your income.

Consult a tax professional and he can help with how to keep the records of income and expenses. i.e. You would need to create invoices for payments, use checks or online transfers for most payments, segregate the accounts, one account used for this professional stuff, and another for your personal stuff, etc.

In a normal course the Income Tax Department does not ask for these records, however whenever your tax returns get scrutinized on a random basis, they would ask for all the relevant documentations.