Almost every business or professional has to maintain a regular and detailed book of accounts which is evaluated at the end of the year with a profit & loss statement on the basis of which the taxable income and corresponding tax is calculated accordingly. The Presumptive Taxation Scheme was introduced with the aim of helping small businesses and professionals avail a simpler taxation system with a lesser burden of compliance. In other words, these businesses are not required to maintain regular books of accounts and can declare their income at a prescribed or “presumptive” rate, calculated at a certain percentage of gross turnover of the business.
The Income Tax Act has framed the Presumptive Taxation Scheme under three main sections i.e., Section 44AD, 44ADA and 44AE and a person adopting the scheme is exempted from maintaining regular books of accounts and also relieved from getting his accounts audited.
In this article, we will cover the provisions of Section 44AD and Section 44ADA applicable to small businesses and professions designed to facilitate simpler and easier tax filing with reduced compliance burden.
As per the guidelines of 2016 Budget, to avail the benefits of Presumptive Taxation Scheme, it should be opted for at least 5 years. After opting for the scheme, the assessee is required to file ITR under it for a period of at least 5 years. This provision has been introduced to discourage the misuse of the scheme. In case the assessee has opted out of the scheme or has filed returns like a normal taxpayer, he cannot opt for the scheme for the next 5 years.
The following category of taxpayers can opt for this scheme:
If the taxpayer has claimed deduction under section 10, 10A, 10B, Section 10BA, or Section 80HH to 80RRB in the relevant year then this scheme cannot be opted by him.
In case of a person adopting the provisions of Section 44AD, income is computed on the presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year. With the objective of boosting digital transactions among small, unorganized businesses, Section 44AD has brought in an amendment by reducing the rate of deemed total income from 8% to 6%. In other words, to qualify for the lower presumptive rate of 6% of the total turnover, a small unorganised business must accept digital payments or gross receipts received through banking channel / digital means.
Section 44ADA was introduced for small professionals with the objective to simplify taxation, reduce compliance burden and facilitate the ease of doing business for certain small professionals. It also aims at bringing parity between small businesses who enjoy Presumptive Taxation Scheme under Section 44AD and small professionals.
The below-mentioned professions can avail benefits of Presumptive Taxation Scheme under Section 44ADA:
In case of a person adopting the provisions of section 44ADA, income will be computed on a presumptive basis, i.e. @ 50% of the total gross receipts of the profession. In other words, total gross receipts from profession should not exceed Rs 50 lakh for a financial year.
Under Section 44AD Presumptive Taxation scheme, taxpayers have to pay 100% advance tax by 15th of March of the financial year. Usually, advance tax needs to be paid in four instalments starting June of the financial year with 15% of estimated income and 45%, 75% of aggregate and the balance as the final in next three quarters.
[ Read: Advance Tax Payment Guide ]
The assessee is not allowed to deduct any business expenses against the income under Presumptive Taxation Scheme.
If more than one business is carried out, the relief of presumptive taxation scheme is applicable to businesses where accounting records and audit is not maintained ie, business assessed under Section 44AD. The turnover of all such businesses must be aggregated to check the eligibility to adopt presumptive taxation scheme under Section 44AD.
If the taxpayer is in anticipation of profit from business lower than 8% or 6%, he may declare a profit at a lower rate but will have to maintain books of accounts and get them audited.
The assessee is exempt from maintaining books of accounts if, his income is lower than 50% of the gross receipts or in other words, his profits and gains are lower than 50% of the gross receipts.
Under the Section 44ADA, the assessee is allowed the following deductions:
Starting AY 2017-18 Salary, remuneration or interest paid to partners would not be allowed to be claimed as a deduction by the professional firm.
The main objective of the Presumptive Taxation Scheme is to reduce the compliance burden of the small taxpayers having income from the profession and to facilitate the ease of doing business. With lesser compliance requirements, the Presumptive Taxation Scheme will give a massive relief and boost to a large number of MSMEs (Medium & Small Medium Enterprises). This scheme is a move forward towards an efficient economy and an attractive mechanism for the scrutiny of income tax assessment.