In this article, we will tell you everything about Presumptive Taxation, its eligibility criteria, benefits and what happens when you do not follow or opt for this section!
What is Presumptive Taxation?
Presumptive is derived from the word presume which means to assume in advance. Thus, Presumptive Taxation is nothing but an option available to certain businesses to show a fixed percentage as income/net profit of their total gross receipts/total turnover irrespective of their actual income and expenditure. This is an option available to small businesses to reduce the burden of compliance with respect to the Income Tax Act.
The Eligibility criteria for Section 44AD is Three fold viz Business Structures, Turnover and type of Business.
These rules are applicable to the following business structures:
- Resident Individual (including Proprietorships)
- Resident HUF
- Resident Partnership Firm (excluding LLPs)
Thus, this section is not applicable to Non-Residents, Companies, Cooperative Societies, Trusts, etc.
The turnover should not exceed Rs 2 Crores.
Type of Business
All types of businesses are covered under Section 44AD. However, there are certain businesses which are not eligible.
Businesses not covered under Section 44AD
This section is not applicable to the following class of Businesses:
- Professionals such as CA’s, Doctors, Lawyers, Architects, Engineers, Technical Consultants, Film Artists, Interior Decorators, etc.
- Business Income earned in the nature of commission or brokerage business (For e.g. Share Brokers, Insurance Agents, Property Agents).
- Any Agency Business (for Courier Agency).
- Business of plying, hiring and leasing goods carriage.
How does this Section work?
- The business whose turnover is upto 2 crores has to declare its profit at 8% of its Gross Receipts/Turnover if received in Cash.
- However, to encourage Cashless Modes of Payment, if the Payments received in Digital Mode (Account Payee Cheque, Account Payee Draft, ECS) then a concessional rate of 6% of Total Turnover is to be considered as his profit if the same is received upto due date of filing of return. For eg if a Businessman issues an invoice of Rs 10 lacs on 10th March and receives the payment digitally before 31st July then he is eligible to calculate his profit at 6% on 10 lacs.
- It is significant to note that 8% or 6% respectively is income and not the tax liability.
For eg if an assessee has his turnover of say 1 Crore and if he receives 50% payment in Cash and 50% payment in Digital Mode, the 8% and 6% of 50 lakhs that is 4 lakhs and 3 lakhs which comes to total of 7 lakhs will be his income not the tax liability. This income and his other incomes will then be added to arrive on the Total Income which will then be used to calculate Income Tax.
- Moreover, all the business expenditures incurred by the business will be assumed to be allowed including Salary and Interest to Partners, Depreciation and so on.
- Similarly, no deduction under Section 10A,10AA, 10B, Chapter VI C ie 80HH to 80RRB shall be available to the Business. (namely SEZ Business Unit, Profit Linked Deductions, Royalty, Patents Income, etc)
- However applicable deduction under section 80C to 80 GGC shall be available to the Business. (PPF, LIC, 5 Year Term Deposit, NPS, Medical Premium, Donations, Contribution to Political Party, Scientific Research, etc)
- The Business opting for this scheme and declares his profit does not have to maintain Books of Accounts and does not have to get his Books audited.
- The Assessee has to pay only a single instalment of Advance Tax by 15th March of that previous year (annually) if the expected Tax Liability is more than Rs10,000.
- The Assessee can comply with the Income Tax Act requirement by simply filing ITR 4 online with relative ease by due date of 31st July every year. However, the same is 30th November for financial year 2019-20.
What if my profit is not 8% or 6%?
While reading this article you would surely have got a question what if my Profit is actually lower than 8% or 6%? What do I do then?
- If the businessman has earned less than 8% or 6% and wants to declare less profit, then he must maintain books of accounts. In addition to that, he needs to get his Books of Accounts audited.
- Once the assessee opts out of the scheme he shall not be eligible to avail the benefit of Presumptive Rate for next 5 consecutive years following the year of opt out.
For Eg: Assessee Turnover for 2017-18 is 1.5 Cr shows 6%/8% Profit. Turnover for 2018-19 is 1 Cr shows say 5% Profit which is Lower than 6%/8% as the case may be. Here then he shall not be eligible for Presumptive Taxation for 5 consecutive years starting from 2019-20 to 2023-24.
- Additionally, he will have to maintain Books of Accounts and get the same Audited for all those next 5 years.
Other Related Rules
- If an assessee is running multiple businesses under same PAN then the turnover limit of 2 Crores shall be seen as the Total turnover all Businesses under the same PAN and not for each business.
- The assessee has an option to opt for calculating profit as per Presumptive Taxation System for one business and as per normal provisions for profits of the other Business.
- If the assessee is carrying on Business as well as Profession than income from only Business is to be considered for Presumptive Taxation under 44AD as a separate section is available for Professional Income.
- Presumptive Taxation is not applicable for other heads of income such as Capital Gains, House Property Income, etc. of the assessee.
To conclude, if you are running a small business, Section 44AD is very beneficial as it considerably reduces your compliance burden. The only issue arises when your margins are thin and because of this section you need to get an Audit done which increases Costs.
-Article Written by CA Susham Rambhia for Business Guru