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How CFOs can tackle tax issues related to moonlighting

Moonlighting is trending in today’s environment, especially with the concept of work from home. In common parlance, it refers to taking up another job while still in employment with an organization. It can be called dual employment, i.e. working for one organization and taking up responsibilities and duties from another organization with the urge to earn extra money. It is quite often that such employment is taken without the employer’s knowledge.
 

In the wake of the prevailing furore on moonlighting, apart from the legal and ethical side, it would be interesting to gauge the tax complexities involved in this concept from the company’s perspective. The questions which hover around this newly emerged concept are who shall be responsible for the tax deduction obligations and how shall tax be determined. Implications would depend upon the terms and conditions of the second engagement i.e., whether it is an employment agreement or a freelance agreement. If the person is taking up employment, then the income from moonlighting (in any form) would be classified as salary. On the other hand, if such employees are providing services as a freelancer such individuals would ordinarily be classified as income from business and profession.

 

Interestingly, the question arises whether CFOs have any tax obligation while making payments to such an employee or freelancer. The answer is yes. For example, Person X is earning salary income from two different employers. In such a scenario, both employers are required to deduct TDS on salary payments to Person X. It could lead to a scenario where both employers would consider the basic exemption limit and respective slab rate for deducting TDS. This shall result in less deduction of TDS by each employer than the taxpayer’s aggregate tax liability. Similarly, a standard deduction of INR 50,000 can be considered by both employers and have the same implications. Consequently, it would create a potential tax outflow in the future along with interest under Section 234B and Section 234C in the employee’s hand.

 

The important factor which needs to be highlighted is the integrity on the part of the moonlighter to disclose his/her salary to any one of the employers by furnishing Form 12B (Form for furnishing details of income under section 192(2) for the year ending 31st March)for the purpose of deduction of tax and avoid the situation of tax evasion, but that would ordinarily be possible only when the person has disclosed his/her dual employment to both the employers. Thus,the employer is not responsible for any tax deduction or non-compliance if the employee fails to disclose such information to their employer.

 

It would be a more complex scenario wherein Person X is employed by company A as a salaried individual and by company B as a Freelancer. It is amply clear that income earned from freelancing could be taxed as Business/Profession Income or other income in the hands of the employee and income from company A as salary. In such a scenario, company A shall only be responsible for computing and deducting TDS on salary income. Thus, company A would not be under obligation to deduct TDS on professional income earned by such employee from company B. However, company B would have to withhold the tax on payment to such freelancer under Section 194J (Fees for professional or technical services) if the aggregate amount exceeds INR 30,000 in a financial year. Additionally, if the disclosures in Form 12B are made, company A would need to consider this income as well for TDS calculation.

 

Apart from the withholding tax obligation, CFOs are under a duty to disclose details of salary income (and other incomes disclosed by the employee) in Form 16 and duly issue this document to the employee. The company would also be liable to make provident fund contributions if such provisions are applicable to its establishment. If the employee is working with 2 companies to which PF Act applies, the contribution would need to be done by both separately. No specific exemption is available in this regard to the companies.

 

The declarations received from such employees should be duly taken into consideration for the purpose of the TDS tax calculation and to also ensure that an employee already contributing to PF in another company is mandatorily covered within its ambit.

 

Besides, companies have an obligation to furnish details to the government on the respective due dates in Form 24Q (Salary) and Form 26Q (any other case) (i.e., TDS Returns).

 

Summing up, apart from dealing with the legality, moonlighting requires some extra diligence on the part of CFOs to ensure that compliances are not missed out.

 

About the Author The article is written by Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm, with inputs from Chetna Chaudhary, Manager - Tax, AKM Global.

 

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