PRESUMPTIVE TAXATION - A BENEFIT SCHEME FOR SMALL TAX PAYERS

The Income Tax Act of India provides various provisions and benefits for small businesses and self-employed individuals. Two such provisions are Section 44AD and Section 44ADA, which provide a simplified tax calculation method for small businesses and professionals. Here is a brief note on the above provisions of the Income Tax Act.

BENEFITS OF PRESUMPTIVE TAXATION

1. Non-Maintenance of Books of Accounts as per Income Tax Act

2. Easier Return Filing Process

3. Reduced Administration Cost

4. Time Saving

SECTION 44AD:

Section 44AD of the Income Tax Act is applicable to small businesses that have a total turnover or gross receipts of up to Rs. 2 crores in a financial year. Under this section, a small business can declare a profit of 8% of its total turnover or gross receipts, and this profit is deemed to be the taxable income of the business for the financial year. Further, the small business can declare a profit of 6% for the amount of Turnover or gross receipts received through banking transactions such as account payee cheque/Demand Draft/NEFT/RTGS. This means that the small business opting for presumptive scheme is not required to maintain detailed books of accounts.

For example, let's say Mr. John is a small trader who has a total turnover of Rs. 1.5 crores in a financial year and out of the Total Turnover of Rs 1.50 crores, he receives Rs 1 Crore through Banking Transactions. Under Section 44AD, John can declare a profit of Rs. 10 lakhs (6% of Rs 1 Crores and 8% of Rs. 0.50 crores) for the financial year. John is not required to maintain detailed books of accounts and get them audited.

However, if John declares a profit of less than 8% of his total turnover, or if his total turnover exceeds Rs. 2 crores, then he is required to maintain detailed books of accounts and may be required to get them audited by a chartered accountant.

Additional Condition - Continuing in the Presumptive Scheme

In order to discourage persons from opting in and out of presumptive taxation scheme on a yearly basis, a section in the Income Tax Act had been introduced, wherein if the taxpayers is opting for presumptive scheme, then the taxpayer shall continue to declare profits as per the presumptive scheme for at least the next 5 years. If the taxpayer opts to declare profits under regular scheme within the 5 years, then the taxpayer shall not be eligible to claim presumptive scheme for the further period of 5 years after the taxpayer has opted out and shall be required to maintain detailed books of accounts and get them audited by a chartered accountant.

Persons not eligible to claim the benefit of presumptive taxation scheme:

1. A person in the Business of plying, hiring or leasing of goods carriages

2. A person who is carrying on any agency business

3. A person who is earning income in the nature of commission or brokerage

4. A person carrying on profession as defined in section 44AA of the Income Tax Act – Eligible Professionals are eligible for presumptive taxation scheme under Section 44ADA

SECTION 44ADA:

Section 44ADA of the Income Tax Act is applicable to professionals such as doctors, lawyers, architects, engineers, and accountants who have a total gross receipts of up to Rs. 50 lakhs in a financial year. Under this section, a professional can declare a profit of 50% of his total gross receipts, and this profit is deemed to be the taxable income of the professional for the financial year. This means that the professional is not required to maintain detailed books of accounts and get them audited by a Chartered Accountant.

For example, let's say Sam is a dentist who has a total gross receipts of Rs. 40 lakhs in a financial year. Under Section 44ADA, Sam can declare a profit of Rs. 20 lakhs (50% of Rs. 40 lakhs) for the financial year. Sam is not required to maintain detailed books of accounts and get them audited.

However, if Sam declares a profit of less than 50% of his total gross receipts, or if his total gross receipts exceed Rs. 50 lakhs, then he is required to maintain detailed books of accounts and get them audited by a Chartered Accountant.

AMENDMENTS IN BUDGET 2023:

Where the amount received in cash does not exceed 5% of the Turnover/Gross Receipts, The Threshold Limit as per Section 44AD shall be Rs 3 Crores (From existing limit Rs 2 Crores) and as per Section 44ADA shall be Rs 75 Lakhs (From existing limit Rs 50 Lakhs)

The Above provision is applicable only from 01st April 2024.

IMPORTANT POINT:

The above provisions are not available to Company/Limited Liability Partnership Firm/Non-Resident Assessee

CONCLUSION:

In conclusion, Section 44AD and Section 44ADA provide simplified tax calculation methods for small businesses and professionals, respectively.

Note: All the information stated above are for reference purpose only. The Author and the firm do not take any liability for any mistake or misinterpretation in the article. Kindly take the consultation of a professional before opting for the above schemes.