Can Consulting Companies Pay Salaries as Consultation Fees? Seeking Clarity on Legal and Payroll Practices

Dear Friends,

THIS MAIL IS ALREADY POSTED TO CHR BY ME AND THIS ISSUE IS BEEN PUT UNDER LEGAL ISSUE HEAD, AND I JUST DON'T WANT TO PUT THIS ISSUE UNDER LEGAL AND MAKE ITS SCOPE LIMITED. I WOULD LIKE TO MAKE IT WIDER AND WOULD LIKE TO KNOW ABOUT PAYROLL SYSTEMS IN CONSULTING COMPANIES. HENCE, I'M ONCE AGAIN MAILING TO ALL OF YOU PEOPLE TO GO THROUGH IT AND GIVE YOUR VALUABLE INFO ON THIS ISSUE

One of my known organizations is into training, development, and placements. It pays salary to all of their employees as "consultation fees" and shows it in their accounts as Consulting Charges, deducting "professional tax" at 5.2 percentage at the source itself.

This organization is registered as a consulting Pvt Ltd. and has 3 Divisions with 3 different names as separate legal entities, registered as a Training Company, Development Company, and the MAIN ONE as Consulting Company Pvt Ltd. However, all of these 3 division employees are getting salaries as "CONSULTATION FEES" from the main Consulting Company Pvt Ltd. The management states that they are not obligated to pay any kind of allowances/emoluments/facilities/perks (like HRA, DA, EA, CCA, PF, GPF, Insurance, etc.) since all employees have been appointed as consultants to this Org.

My question is, can any company pay all of its employees as consultation fees instead of salary by merely registering the company as a CONSULTING Pvt Ltd? Is this a valid practice? If not, what kind of allowances/emoluments/facilities/perks (like HRA, DA, EA, CCA, PF, GPF, Insurance, etc.) are entitled to these employees?

This organization's strength is around 40-50 members (employees, management, etc.), and what laws are applicable to these kinds of organizations?

Could you brief me on what laws make them do so, and which law can prevent them from doing so?

Expecting your early reply.

Thanking you,

Hi Rajnish,

Thank you very much for your email.

I'm not just talking about tax and some people hired as consultants and paid consultation fees. If some people are hired as consultants and they are working for a specific task or specific period, then it's a valid practice. But how far is it valid for all employees to be paid consultation fees for all types of designations, even though they have been appointed as full-time employees (without any constraints in the appointment letter except a minimum working period and notice period to exit the company)?

I also want to know about the pay system of consulting companies and its applicable laws and limitations.

Warm Regards,
Ramanuj

Hi Ramanuj,

You have posed a very relevant question, and despite my years of experience in the industry, I wasn't able to think of the right answers. I shall contact some experts in this matter and get back to you as soon as possible.

Thank you for stimulating my mind!!

Cheerio,
Rajat

Dear All,

Pursuant to questions put forward, I am also witnessing a similar irritant currently. I work in a small IT company. As part of my FY 2004-05 assessment, I was entitled to a lump sum amount as a bonus, and I agreed to the amount. Now, when I was about to get the bonus letter, I was told that the bonus amount is divided into 2 parts (one as a consultant fee - payable by another company, which is owned by the promoter of my company, and the second part as a normal amount - tax deducted).

Now my questions are:
1) How am I supposed to handle the consultancy fees in my tax return?
2) Is this some kind of tax evasion tactic, as I have not heard about this until today?

Currently, I am waiting for the FBT to become law and then would consult a CA accordingly. 😈 Any suggestions would be appreciated.

Hi Ramanuj,

I need some information from you on the following so I can find out the laws regarding the same:

1. Where exactly has the company been registered? I am looking for the physical location of the company. Based on the registration of the company, the rules and regulations will be different for the wages and benefits of the employees of the company.

2. Are the people working with the company appointed as employees or consultants?

The system of Consultants Agreement originates from the Independent Contractors Agreement. He or she functions like an outsourced person, with only the results specified and derived, and there is no supervision of their work. In India, they are designated as Consultants without being called Independent Contractors. Perhaps the term Contractor implies deploying a workforce in factories. In such genuine agreements, there is no need to deduct statutory dues.

With Regards,
Advocates & Notaries & Legal Consultants [HR]
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