Author: Diana Das, National Law University Odisha

Freelancing:

Working for one or more clients on a part-time or full-time basis without committing to a full-time job is known as freelancing. In contrast to full-time employment, when an employee receives an appointment letter upon joining the company, freelancing involves a mutually agreed-upon set of terms and conditions that are then documented in the form of a contract that is only valid for a specific amount of time.

The freelancer is paid on an hourly/weekly or monthly basis, depending on the terms and circumstances agreed upon and the nature of the work. In certain instances, the freelancer receives payment only after the job or assignment is finished.

Gig Economy:

The gig economy, sometimes referred to as the sharing or access economy, consists of part-time, freelance, and temporary jobs that are frequently held by independent contractors.  Workers gain flexibility and independence, while job security and perks like paid time off and health insurance are taken away.  Employing independent contractors without these perks allows businesses to cut expenses.

Instead of permanent jobs, gig economies are defined by contract, freelance, and temporary work.  Although they have flexibility, they frequently do not have job stability or access to basic benefits like health insurance.  Employers gain from cost savings and the ability to hire from a wider pool of talent that is available worldwide.

 The gig economy is a labour market where contract, freelance, and temporary work predominates over permanent positions.  People can make money by offering goods, services, or labour on demand.

Rental management, tutoring, coding, ride-sharing, food delivery, and article writing are examples of gig jobs.  In order to meet academic demands and save money, colleges also employ adjunct and part-time lecturers.

 Although freelancers and gig workers are categorized as independent contractors, the legal phrase "independent contractor" is used more broadly.  The primary distinction between freelancers and gig workers, two distinct categories of independent contractors, is the type of work they do, the clients they serve, and how they interact with digital platforms.

The taxation of freelancers and gig economy workers is guided by foundational taxation principles that determine the scope, manner, and extent of liability. These principles are enshrined under the Income Tax Act, 1961, the Goods and Services Tax Act, 2017, and further clarified through CBDT circulars and judicial interpretation.

1. Residence-Based Taxation

Section 5(1) of the Income Tax Act provides that a resident assessee is liable to tax on their global income, whereas a non-resident is taxed only on income accruing or arising in India. Thus, an Indian freelancer earning from a U.S. client must declare such income in India, subject to relief under Sections 90 and 91, which deal with Double Taxation Avoidance Agreements (DTAA) and unilateral relief. This aligns with the OECD Model Tax Convention, ensuring no income is taxed twice.

2. Source-Based Taxation

Complementing residence rules, Section 9 of the Act taxes income deemed to accrue or arise in India. For freelancers, this is relevant when services are rendered in India but consumed abroad. The Supreme Court in G.V.K. Industries Ltd. v. ITO recognized the wide powers of Parliament to tax income with a territorial nexus to India, reinforcing source-based principles.

3. Direct vs. Indirect Taxes

Income from freelancing is generally taxed under the head “Profits and Gains of Business or Profession” (Section 28). Freelancers can claim deductions under Sections 30–37, such as expenses on rent, internet, software, and travel. Further, Section 44ADA provides a presumptive taxation scheme for professionals, deeming 50% of gross receipts (up to ₹75 lakhs) as income, thereby reducing compliance.

On the indirect tax front, the GST Act, 2017 applies. Freelancers providing services are classified as “suppliers of services.” If turnover exceeds ₹20 lakhs (₹10 lakhs in special category states), GST registration is mandatory. Notably, Section 16 of the IGST Act, 2017 treats export of services as zero-rated supply, allowing freelancers to claim refunds of input tax credit. This is further clarified in CBIC Circular  which confirms that services provided to foreign clients qualify as exports if payment is received in convertible foreign exchange.

The taxation of freelancers and gig economy workers in India is primarily governed by the Income Tax Act, 1961 and the Goods and Services Tax Act, 2017. These laws, though designed much before the boom of digital freelancing, apply squarely to gig workers and independent professionals, with certain provisions providing flexibility.

1. Income Tax Act, 1961

Freelancers are not treated as salaried employees but as self-employed professionals. Their income is usually taxed under the head “Profits and Gains of Business or Profession” (Section 28). This gives them the benefit of deducting expenses directly related to their work, such as internet bills, software purchases, laptops, rent for co-working spaces, or travel costs.

For small freelancers, the Act provides a simplified route through Section 44ADA, known as the presumptive taxation scheme. If their gross receipts are up to ₹75 lakhs in a year, they can declare 50% of that income as taxable profit without maintaining detailed books of account. This eases compliance for independent workers who may not have the resources for complex accounting.

TDS provisions also apply. Clients paying freelancers are required to deduct tax at source under Section 194J (fees for professional or technical services, at 10%). Where the payer is an individual or HUF not subject to tax audit, Section 194M applies if annual payments exceed ₹50 lakhs. This ensures freelancers’ earnings are reported to the tax department, even when they are working independently.

2. GST Implications:

Under the GST regime, freelancers supplying services are treated as “suppliers.” If their annual turnover exceeds ₹20 lakhs (₹10 lakhs in special category states), they must obtain GST registration. Domestic services attract GST, usually at 18%. However, when services are provided to foreign clients, they may qualify as export of services under Section 2(6) of the IGST Act, which are treated as zero-rated supplies. This allows freelancers to claim input tax refunds, enhancing competitiveness in the global market.

3. Compliance Obligations

Unlike salaried individuals whose employers handle most compliance, freelancers must manage their own. They are required to:

• File income tax returns under Section 139(1).

• Pay advance tax in four installments under Section 208, failing which interest under Sections 234B and 234C applies.

Taxing gigs and freelance work creates unique challenges for taxpayers and revenue authorities. Unlike traditional work arrangements, gig work is usually deconstructed, online, and often cross-border. This undermines the ability of traditional tax administration to allocate taxes, and creates challenges related to classification, compliance, and enforcement.

1. Classification Problems: Employee or Independent Contractor:

Perhaps the most ongoing issue is the classification of workers. Taxation hinges significantly on how an individual is classified as an employee or independent contractor. The employees are taxed under the head “Salaries” with the TDS responsibility vested in the employer under Section 192 of the Income Tax Act, 1961. Freelancers, on the other hand, are taxed as self-employed and under “Profits and Gains of Business or Profession” (Section 28) with clients deducting TDS under Section 194J or 194M.

It becomes difficult in cases where the relationship is unclear. Most gig workers, for instance, food delivery partners or platform-based drivers, are under considerable control of digital platforms, but are legally classified as "partners" or "independent contractors." This confusion not only impacts how their earnings are taxed but also deprives them of employment-related benefits like provident fund or gratuity. Judicial precedents such as Dharangadhra Chemical Works Ltd. v. State of Saurashtra and Piyare Lal Adishwar Lal v. CIT emphasize the necessity of imposing control tests, yet de facto the characterization is in dispute.

2. Double Taxation in Cross-Border Freelancing

Cross-border freelancing makes it even more complicated. Indian residents need to report worldwide income under Section 5(1) of the Income Tax Act. Meanwhile, the source country can also tax payments made to a non-resident. For example, a U.S. client could withhold source tax when remitting payment to an Indian freelancer. Without relief, it produces double taxation.

Although Double Taxation Avoidance Agreements (DTAA) under Sections 90 and 91 grant relief, freelancers don't have knowledge or the means to claim foreign tax credit. Foreign tax payment proofs and filing Form 67 are cumbersome processes. Freelancers, therefore, end up paying higher taxes or pay them unconsciously, creating compliance gaps.

3. Limited Awareness of Freelancers in Tax Compliance:

The vast majority of freelancers and gig workers are first-generation taxpayers, particularly in industries such as content creation, digital marketing, and app-based services. They are not aware of the following obligations:

• Filing of income tax return under Section 139(1);

• Payment of advance tax under Section 208;

• Maintenance of books of accounts (Sec. 44AA);

• Applicability of GST registration above specified turnover limits.

This lack of knowledge contributes to under-reporting of earnings, delayed advance tax payments (incurring interest under Sections 234B and 234C), or non-registration under GST. As compared to salaried employees whose employers manage compliance, freelancers are solely responsible for tax compliances, usually in the absence of professional advice.

4. Administrative Burden for Tax Authorities

The gig economy presents major administrative issues for tax authorities. Contrary to traditional employment where employers aggregate tax deductions, gig workers are independent and work across borders. Detecting non-compliance, particularly cross-border compliance, demands greater coordination with banks, online payment platforms, and foreign taxation authorities.

The taxation of gig workers and freelancers has emerged as one of the most urgent concerns in today’s tax landscapes. 

One such important problem is the identification of gig workers. Courts have long made distinctions between independent contractors and employees, such as in Dhrangadhra Chemical Works Ltd. v. State of Saurashtra, where the Supreme Court highlighted the "control and supervision" test to ascertain employer employee status. Whereas such tests are effective in traditional sectors, their application to digital freelancers, who are given independence but dependent on algorithms, is still unclear. Incorrect classification could lead to the wrong tax treatment, either by denying freelancers legitimate business expense deductions or mistakenly applying employee TDS principles.

The treatment of foreign income adds to the complexity. Freelancers typically earn income from foreign clients, which requires the residence-based and source-based tax principles. In G.V.K. Industries Ltd. v. ITO, the Supreme Court recognized India's right to tax the worldwide income of its residents.

While this aligns with residence-based taxation, it exposes freelancers to double taxation risks unless relief is available under Double Taxation Avoidance Agreements (DTAAs). In practice, many freelancers lack awareness of these provisions, leading to either over-taxation or inadvertent non-compliance.

The compliance load on the taxpayers as well as authorities is also considerable. Freelancers have to keep tabular records of receipts, invoices, and expenses to avail deductions under Section 28 or avail presumptive taxation under Section 44ADA. Platforms, however, tend to deduct TDS under Section 194J or Section 194M, leaving freelancers to match different forms of income. For small-scale freelancers, this regulatory framework is overly cumbersome, defeating the spirit of tax simplicity.

GST superimposes another layer of complexity. In Amazon Seller Services Pvt. Ltd. v. Commissioner of ‘Service Tax’ the tribunal recognized the unique model of services offered by digital intermediaries

Thus, while the current legal framework attempts to incorporate freelancers into the tax net, it does so through piecemeal regulations and not as part of an overarching policy. Judicial decisions like Dhrangadhra Chemicals and G.V.K. Industries provide interpretative guidelines, but the distinctive features of the gig economy make legislative reform imperative. Streamlined models of compliance, open classification criteria, and connecting taxation with social security would not only ensure that the gig economy is taxed fairly but also protected in the broader socio-economic framework.

Taxing freelancers needs to occur for reasons beyond revenue collection. It will play a critical role in formalizing the gig economy, if done fairly, simply, and with adequate protections. Greater clarity through legislation, technological acceptability, and policy frameworks that support these activities would allow India to address its revenue requirements whilst adapting to the new realities of modern work.

1. Clear Legislative Classification of Gig Workers:

Currently, there is confusion in whether to classify gig workers as employees or independent contractors. It brings confusion not just for taxation but also for social security and benefits. The legislature must bring specific statutory identification of gig workers under the Income Tax Act, 1961, and related labour laws, as is the identification brought by the Code on Social Security, 2020. A clear differentiation would avoid misapplication of provisions such as Section 192 (salary TDS) vs Section 194J/194M (professional/contractual TDS).

2. Improved Tax Compliance for Small Freelancers

Most freelancers are small-time earners with poor means to manage taxes. The presumptive taxation regime under Section 44ADA is a good initiative, but its applicability could be extended to other categories of gig workers beyond "specified professionals." A simplified compliance method in the form of an optional flat-rate tax with no heavy filing would eliminate administrative hassles for taxpayers as well as the government.

3. Relief in Cross-Border Taxation

With the growth of digital freelancing, double taxation and cross-border taxation are significant challenges. India needs to enhance its DTAA enforcement frameworks and issue more precise guidelines on foreign remittances. Simplifying the mechanism for claiming foreign tax credits through an online system would help avoid the unfair levy of double taxation on the same income on freelancers.

Taxation of gig economy workers and freelancers poses both a challenge and an opportunity for contemporary legal and tax systems. With the character of work in a state of accelerated change, shifting away from fixed employer–employee arrangements towards flexible, platform-based engagements, conventional tax structures prove inadequate. While the Income Tax Act, 1961 and GST regime give some facilities to tax such income, they are more suited to traditional employment and established businesses. Freelancers thus find themselves in between categories, uncertain about classification, compliance, and reliefs.

The examination reveals that classification of employees and independent contractors is decisive in ascertaining the liability of tax. Employees are in the regime of predictable salary taxation, while freelancers are considered self-employed, liable for taxation in “Profits and Gains of Business or Profession.” Despite this categorization providing freelancers with the advantage of deduction and presumptive taxation under Section 44ADA, it also puts the entire compliance burden on advance tax, GST return filing, and bookkeeping on the individual. For small-scale workers, this compliance burden is usually disproportionate to their income.

Cross-border freelancing additionally involves complexities of double taxation, foreign exchange implications, and treaty interpretation. Though judicial dicta like G.V.K. Industries Ltd. v. ITO have supported India's jurisdiction over taxing worldwide income of residents, in reality, most freelancers are not aware or do not possess the technical ability to overcome Double Taxation Avoidance Agreements and claim relief.

In conclusion, the gig economy is not going away and those that are employed in this subscription segment deserve a tax system that is practical and enforceable but also fair, equitable and aligned with today's employment realities.

• Income Tax Act, 1961, §§ 2(13), 2(15), 44ADA, 192, 194J, 194M.

• Income Tax Rules, Form 67

• Double Taxation Avoidance Agreements, Income Tax Department India,

• S. K. Singh, Cross-Border Freelancing: Tax Challenges and Solutions, KPMG India Insights, 2023,

• S. Raghavan, How Does Law Define Gig Workers?, ECON. & POL. WKLY., Jan. 25, 2021,

• EPW Engage, Gig Economy and Legal Frameworks, https://www.epw.in/engage/article/how-does-law-define-gig-worker