Author: Nishant Shastri
College: ILS law college, Pune
Abstracts
The rapid growth of India’s digital economy has left our tax laws struggling to keep pace. Gig workers—like app-based delivery partners, drivers, and independent freelancers—are stuck in a difficult legal spot. Because they lack a formal employer-employee relationship, the law treats them as independent businesses, making their income liable to tax under the “Profits and Gains from Business or Profession” (PGBP) head via Section 28. Their work also triggers mandatory GST registration under Sections 22 and 24 of the CGST Act, 2017 once they cross turnover limits or link with digital platforms. This article examines how rigid presumptive tax rules (Sections 44AD/44ADA) penalize these low-margin earners, leaving them trapped in a broken regulatory system.
To the point
India’s gig economy has exploded, yet the tax framework governing it remains stuck in a pre-gig era, quietly punishing the very workers it should support. The result is a system that looks neutral on paper but functions as a trap in practice.
The first problem is definitional. Gig workers are not salaried employees. They receive no fixed monthly pay, no employer-deducted TDS under salary provisions, and none of the structured benefits that come with an employer-employee relationship. Instead, they are treated as independent earners running their own “business,” regardless of how little control they actually have over their work.
This forces them into the Profits and Gains from Business or Profession (PGBP) head, where the law attempts to fit them into rigid presumptive taxation schemes. For app-based delivery partners and drivers under Section 44AD, the law presumes a fixed 6% to 8% net profit margin on gross turnover. For freelance consultants, developers, and researchers classified as professionals under Section 44ADA, the government presumes a massive 50% profit margin. On the surface, this sounds like an administrative concession. In reality, it is deeply unfair. A delivery rider or a freelance consultant earning a modest, fluctuating income is legally presumed to be pocketing these fixed profit margins, completely ignoring actual outlays like fuel, heavy platform commission cuts, software costs, and inflation. The presumption doesn’t shrink with falling income — it simply taxes people who can least afford it on “phantom profits” they never actually took home.
Worse, gig workers fall into a benefits vacuum. Salaried employees get standard deductions, provident fund contributions, gratuity, and employer-paid insurance. Registered corporations can claim detailed business expense deductions and structural reliefs. Gig workers get neither. They are taxed like businesses but denied the flexibility businesses enjoy, and treated as workers without receiving any of the protections workers are entitled to. They exist in a no-man’s-land, absorbing the disadvantages of both categories while enjoying the advantages of neither.
Compounding this is the absence of any proper classification of gig workers under law. Are they employees, independent contractors, or professionals? No consistent answer exists across tax provisions, labour codes, or platform agreements — leaving workers unsure of their rights and vulnerable to whichever interpretation suits the tax authority or platform at a given moment.
Finally, Goods and Services Tax (GST) adds another layer of hardship. Many gig workers cross registration thresholds unknowingly depending on the specific nature of the services they provide. They face heavy compliance burdens that are entirely disproportionate to their actual income, while simultaneously struggling with severe input tax credit mismatches created by the automated billing structures of digital aggregators. This turns what should be simple independent earning into a bureaucratic minefield.
Together, these gaps don’t just complicate taxation — they trap gig workers in a system designed for someone else’s economy.
Use of Legal Jargon
The direct taxation framework governing independent workers relies on distinct concepts under the Income Tax Act, 1961. At the threshold, a gig worker is classified as an ‘Assessee’ under Section 2(7). Because no formal employer-employee relationship exists, their earnings are funneled under the head of ‘Profits and Gains from Business or Profession’ (PGBP) pursuant to Section 28, shifting corporate-level accounting burdens onto individual earners.
To bypass mandatory bookkeeping under Section 44AA, the law relies on a statutory fiction: the ‘Presumptive Taxation Scheme’ under Sections 44AD and 44ADA. This mechanism presumes a fixed net profit margin (6% to 8% for businesses; 50% for professionals), completely ignoring volatile operational realities and heavy platform commissions.
Furthermore, digital aggregators aggressively apply ‘Tax Deducted at Source’ (TDS) under Sections 194C or 194O, severely locking up daily cash flows. Compounding this, if a worker’s projected annual tax liability crosses ₹10,000, Section 208 mandates the payment of ‘Advance Tax’ in strict quarterly intervals. Any failure to accurately project these volatile earnings triggers mandatory interest penalties under Sections 234B and 234C, systematically trapping independent workers in an unharmonized fiscal regime.
The proof
Section 28 of the Income Tax Act, 1961 brings gig income under “Profits and Gains from Business or Profession” (PGBP), which is exactly where the trouble starts—it mechanically strips away any claim gig workers might have to salary-like treatment. Section 44AA then demands they maintain detailed books of accounts once income crosses basic thresholds, an unreasonable ask for an individual juggling deliveries or rides between digital applications. Section 44ABpushes this further, mandating a formal tax audit if they opt out of presumptive margins or cross standard corporate turnover limits—a compliance burden explicitly built for organized businesses, not a rider earning ₹20,000 a month.
Sections 44AD and 44ADA offer the so-called relief: presumptive taxation at 8\% or 6\% under Section 44AD for general gig work, or a massive 50\% profit assumption for notified professionals under Section 44ADA. But this “relief” is where the trap tightens—it operates on a statutory fiction, assuming a fixed profit margin no matter how squeezed real earnings are by platform commissions and inflation, effectively taxing hardship as if it were success.
On the indirect tax side, Section 22 of the Central Goods and Services Tax (CGST) Act, 2017 forces registration once aggregate turnover crosses the standard service threshold, while Section 24 mandates compulsory registration for certain inter-state or platform-linked categories regardless of turnover. This often catches independent earners completely off guard, providing absolutely no fiscal cushion for their unstable, low-margin income. Together, these provisions don’t just tax gig workers; they misread who they are entirely
Case laws
IFAT v. Union of India — The issue was whether app-based gig workers, treated by platforms as “partners” rather than employees, could claim social security under existing labour welfare laws. Facts showed IFAT’s 35,000-strong membership faced denial of benefits despite platform control over their work. Though the Supreme Court hasn’t delivered a final judgment, it has directed the Union to commit to timelines for framing rules under the Social Security Code, 2020. This shows how gig workers remain trapped without formal classification, echoing our earlier argument on legal ambiguity.
Sushilaben Indravadan Gandhi v. New India Assurance — The issue was whether a doctor engaged on honorarium, not salary, under a “contract for service” qualified as an employee for insurance liability purposes. Facts revealed he received a fixed honorarium plus earnings share, worked full-time, yet lacked employee benefits. The Supreme Court held it was a contract for service, since he functioned as an independent professional. This mirrors gig workers’ plight — economically dependent yet legally denied employee status, benefits, or protection.
Conclusion
The gig economy tax trap is not accidental — it is the product of laws built for a world that no longer exists. Presumptive taxation under Sections 44AD/44ADA punishes low earners as if they were profitable, GST rules under Sections 22 and 24 burden them with compliance they can’t absorb, and no benefit cushions them like it does salaried employees or professionals. Cases like IFAT and SushilabenGandhi reveal the same pattern in labour law — workers economically dependent yet legally unclassified, caught between “employee” and “independent contractor.” Until lawmakers recognize gig workers as a distinct category deserving fair, proportionate treatment, they will remain taxed like businesses and protected like no one at all.
FAQ
1) Where gig workers fall to pay taxes?
Gig workers’ earnings are taxed under “Profits and Gains of Business or Profession” (PGBP) under Section 28, using presumptive taxation (Sections 44AD/44ADA) unless regular books are maintained.
2) What happens if a gig worker Fails to pay advance tax?
Under Section 234B/234C of income tax act ,1961. Interest at 1% per month is charged on the unpaid/shortfall amount until the tax is actually paid, increasing their financial burden.
References / sources
1) Income Tax Act ,1961
2) CGST Act,2017
3) IFAT v. Union of India (Writ Petition Civil No. 1068/2021) & Sushilaben Indravadan Gandhi v. New India Assurance – SSC & Indian Kanoon
