All about Presumptive taxation scheme - Part 1 - Finance Ppl

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All about Presumptive taxation scheme - Part 1

  1. What is presumptive taxation?

    2. Unlike Normal taxation, where tax is calculated based on actual profits after deducting business expenses, presumptive taxation scheme allows eligible small businesses or professionals to declare income as a fixed percentage of turnover. The percentage is notified by the CBDT and may be updated from time to time. Assessee that opts for presumptive taxation is exempt from maintaining books under Section 44AA and tax audit under Section 44AB.

  2. Why was it introduced?

    3. Objective behind introduction of presumptive taxation was to ease tax compliance for small businesses and professionals. Under presumptive taxation, eligible businesses can declare a fixed percentage of their total turnover or gross receipts as profit, thereby eliminating the need without extensive book keeping in order to arrive profit amount for the purpose of tax calculation.

  3. pre-requisites common to all sections under presumptive taxation scheme ?

    4. Following are the pre-requisites to opt for the Presumptive Taxation schemes

    1. Filing ITR-4 is a must for assessee who opted for presumptive taxation scheme.
    2. Whole of the Advance tax liability must be paid on or before 15th March of the financial year. Failure to do so attracts interest under Section 234C. Note: No disqualification from presumptive scheme: You can still file under PTS, but have to pay interest penalties.
    3. Higher income can be declared, but lower income requires book keeping and tax audit if total income exceeds basic exemption limit (discussed in detail below)
    4. Presumptive income is considered net taxable income. No separate deduction for expense from the presumptive income (except under 44AE, in case of partnership firm, interest and remuneration are allowed as claimable expense).
  4. Governing Provisions:

    5. Presumptive taxation is available under three different sections depending on nature of income and turnover. They are:

    1. Sec 44 AD: Special provision for computing profits and gains of business on presumptive basis
    2. Section 44ADA: Special provision for computing profits and gains of profession on presumptive basis
    3. Section 44AE: Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages
  5. Section 44AD: Presumptive Scheme for Businesses

    6. 44AD deals with computation of income on estimated basis in the case of assessee engaged in certain business, subject to certain conditions. Major qualifying criteria is turnover.

    Eligibility Criteria:
    1. Must be a resident in India.
    2. Assessee must be an individual, HUF or Partnership firm other than LLP.
    3. Business whose turnover/gross receipts during the previous financial year meets falls within the turnover limit prescribed, may opt for PTS under 44AD.
    Turnover limit
    1. Threshold limit of turnover is ₹3 crores, if aggregate of cash receipts during the FY is less than or equal to 5% of total turnover or gross receipts.
    2. Threshold limit of turnover is ₹2 crores, if aggregate of cash receipts during the FY exceeds 5% of total turnover or gross receipts.
      3. *Threshold limit in this context refers to maximum turnover beyond which the assessee will cease to qualify as eligible for 44AD
    Which businesses are not eligible for PTS under 44AD?

    1. Goods carriage business that is referred to in Sec 44AE
    2. Assessee involved in Agency business
    3. Businesses that are earning income from commission or brokerage.
    Taxable income:

    If the assessee satisfies the eligibility criteria and OPTS for PTS under the section, then the Income is presumed at:
    ---> 8% of turnover for cash transactions and
    ---> 6% of the turnover for the receipts through digital mode
    The Assessee can declare a sum more than the presumptive income as taxable income, in which case he will be taxed accordingly.

    Other applicable provisions :

    Other provisions that are applicable for an assessee who opts for PTS under 44 AD are:

    1. Any deduction allowable under the provisions of sections 30 to 38 of Income tax Act (including depreciation) shall be deemed to have been already given full effect to and no further deduction under those sections shall be allowed for the purpose of arriving at the taxable income.
    2. In case of assessee being a Partnership firm, Remuneration and interest to partners ARE NOT ALLOWED as separate deductions under Section 40(b). This is because partner remuneration and interest are deemed to have been already allowed / factored under the presumptive taxable income.
    3. The eligible Assessee under this section , cannot claim deduction under any of the sections 10A, 10AA, 10B, 10BA (OR) deduction under any provisions of ‘Part C’ of Chapter VIA in the relevant assessment year.
      Note: Part A and Part B deductions are still allowed under Sec 44AD. The restriction applies only to Part C -which encompasses deductions in respect of certain incomes.
    4. The written down value of assets shall be deemed to have been calculated as if assessee had claimed and had been actually allowed depreciation for each of the relevant assessment years.
    5. Once opted, the assessee must continue under the scheme for 5 consecutive years. Opting out in between, shall disqualify the assessee from availing PTS for the next 5 years.
      Though it can be logically implied or understood without even a mention, the income tax explicitly states to avoid ambiguity, that right from the AY in which the assessee opts out, if his total income exceeds maximum amount not chargeable to tax, they shall be liable to maintain books under 44AA and get books audited under 44AB (tax audit). Meaning, the presumptive taxation scheme benefit got is gone!!
    6. Also, If assessee declares lower income than the presumptive rate and total income exceeds the exemption limit, then, they must maintain books of account under Section 44AA and get audited under Section 44AB.
FAQ:

Doubt Questions: Why does Sec 44AD uses word turnover or gross receipts? Asking this because, Sec 44AD It neither covers profession nor commission business, so what’s the need to use the term gross receipts interchangeably with term turnover?

Answer:

  1. Turnover typically refers to sales of goods, common in trading or manufacturing businesses. Gross receipts is a broader term that includes income from services that the business offer apart from sale of goods, miscellaneous business receipts, or non-sales income (like installation charges, service fees, etc.
  2. Also, even though Sec 44AD does not cover professionals or commission business, it still covers service-oriented businesses (like service contractors, repair stores). For these, income is from providing services, hence the term “gross receipts.”

In this article i have discussed about the Concept of Presumptive taxation, its applicability and pre-requisites. Have also detailed the provisions of Section 44AD, In the subsequent article, i will detail the provisions of Section 44ADA and Section 44AE.