Presumptive Taxation Scheme(U/s 44AD, 44ADA, 44AE)

PRESUMPTIVE TAXATION FOR BUSINESS AND PROFESSION SECTION 44AD, 44ADA, 44AE

Under the new provisions, implemented by the Income Tax Department, some sought of relief has been provided to small taxpayers, wherein, instead of undertaking the tedious job of maintenance of books of account and their auditing, they can apply for presumptive taxation scheme under sections 44AD, Section 44ADA and Section 44AE.

INTRODUCTION

Presumptive taxation scheme related to providing relief to small taxpayers. Any small taxpayer whose turnover is less than Rs 2 crores shall be eligible for such a scheme. To facilitate the running of businesses without any burden due to excessive compliance-related requirements, Section 44AD was introduced in the Income Tax Act.

Under this section, the assesses can declare their income at the prescribed rate and be relieved from the requirement of maintaining books of account.

This relaxation would also involve non-requirement of getting the accounts auditing, thus saving their cost and time. Businesses that enroll for taxation under the presumptive taxation scheme shall compute their income on an estimated basis, as provided under Section 44AD.

The small taxpayers can avail of the following presumptive taxation scheme under the Income-tax Act –

Presumptive Taxation Scheme

1. Presumptive taxation scheme under section 44AD.
2. Presumptive taxation scheme under section 44ADA.
3. The Presumptive taxation scheme under section 44AE.

PRESUMPTIVE TAXATION FOR BUSINESSES

LEGAL ENTITY

The entity that shall be enrolled under the scheme shall be a business that may differ based on the nature and size of its operations. Some of the common forms of business are –

• Sole Proprietorship
• Limited Liability Partnership
• Private Company
• Public Company
• Joint Venture

It is generally advised that the entity should be a company, since by forming a company, there is a separate legal entity, due to which the company can have its PAN and same be used to file a separate tax return.

Also read: Legal Compliance Audit service in India

ELIGIBILITY CRITERIA FOR SECTION 44AD

For an entity to pay tax under this scheme shall follow the following conditions –

1. The following persons can apply for this scheme –

• • Any resident individual in India
  • Resident Hindu Undivided Families (HUFs) in India
  • A partnership firm resident in India

2. The entities mentioned above must not have claimed deductions in income tax during the relevant assessment year under the following sections –

• • 10A
  • 10AA
  • 10B
  • 10BA
  • 80HH
  • 80RRB

3. The following persons shall not be eligible to apply for presumptive taxation scheme under section 44AD –

• • Any Limited Liability Partnership Firm (LLP) resident in India
  • Non-Resident of India
  • Any other person not included in the list of eligible persons.

BUSINESSES NOT INCLUDED UNDER SECTION 44AD

The following businesses are not eligible to apply for the presumptive scheme under section 44AD –

• • Business involved in renting, hiring, and plying of goods carriages as specified under section 44AE
  • Business working as an agency.
  • Any Individual receiving commission or any income as a brokerage.
  • An individual involved in any profession mentioned under section 44AA (1)
  • Insurance agents receive income in the form of commissions.
  • Businesses having gross total income exceeding Rs 2 crores in a financial year. 

MAINTENANCE OF BOOKS OF ACCOUNTS

Where the business satisfies the eligibility criteria, they would be required to mandatorily maintain proper books of accounts where –

• Their annual income exceeds Rs. 1,20,000.
• Their total sales, turnover, or gross receipts exceed Rs. 10,00,000.

In any of the 3 financial years immediately preceding the current financial year.

However, in the case of individuals and HUF, the above provisions have been further relaxed and they would be required to maintain proper books of accounts where –

• Their annual income exceeds Rs 2.5 lakhs.
• Their total sales, turnover or gross receipts exceeds Rs 25 lakhs

In any of the three financial years immediately preceding the current financial year.

Where proper books of accounts are not maintained by the persons, requiring to do so, shall be liable to a penalty of up to Rs 25,000.

TAX AUDIT

Businesses having gross receipts exceeding Rs 1 crore in a financial year, are required to compulsorily have tax audits. The due date for filing the tax audit report has been provided as 30^th September of the relevant assessment year. The report is filed electronically using Form 3CD.

It is also provided that under the normal circumstances, any revision to tax audit report is not possible, however, in some cases where the accounts are subject to any revision, the tax audit report can be revised.

PRESUMPTIVE TAXATION RATE 

The person opting for presumptive taxation under section 44AD, shall declare their income @ 8% for non-digital transactions or 6% for digital transactions on the gross receipts or turnover.

COMPUTATION

Suppose there is a company named Ram Traders have gross receipts of Rs 1 Crore for FY 2020-21 and they do not maintain books of accounts. Ram traders is looking to opt for presumptive taxation. In the above Rs 1 crore receipts, receipts worth Rs. 70 Lakhs were received through non-digital transactions while the remaining Rs. 30 Lakhs was received through digital transactions.

The computation of under the head of Income from Business and Profession would be –

For non-digital transactions: 8% of 70,00,000                              = Rs. 5,60,000
For digital transactions:  6% of 30,00,000                                     = Rs. 1,80,000
Income under the head “Business or Profession” will be            = Rs 7,40,000

BENEFITS

1. Eligible to claim deduction in relation to donation made in National Defence Fund.
2. Can claim deduction regarding donation made to Prime Minister’s National Relief Fund.
3. Taxable income is determined at a flat rate of 8% or 6%, depending on the nature of receipts, on the total turnover.
4. No need to determine and adjust the amount of expenses from income to determine the taxable income.
5. Non-obligation to maintain proper books of accounts under certain specified cases.
6. Non-obligation towards auditing of books of accounts.
7. Whenever the liability to pay advance tax arises, they can pay the same, without calculating the income, and the whole of the amount be paid before March 31, instead of making payments quarterly.

FILING OF ANNUAL RETURN

Where any individual of HUF carries on a business and opts for payment under a presumptive taxation scheme, shall file their annual return of income in form ITR 3.

OPT-IN AND OUT FROM SCHEME

It is provided that the person eligible to claim the benefit under Section 44AD, shall avail the same at any time during the relevant financial year. And also, such a person can opt out of the scheme at any point in time.

However, where a person opts out from the scheme of Presumptive Taxation under Section 44AD, the same shall not be eligible to avail the scheme for the next 5 financial years.

PARTICULARS	PRESUMPTIVE TAXATION UNDER SECTION 44AD
AY 2019-20	OPTS FOR PRESUMPTIVE TAXATION
AY 2020-21	DOES NOT OPT FOR PRESUMPTIVE TAXATION
AY 2021-22 – AY 2025-26	INELIGIBLE FOR PRESUMPTIVE TAXATION

OTHER PROVISIONS

1. Where an assessee is carrying more than 1 business, the total receipts or turnover for presumptive taxation eligibility, shall be taken as the total turnover from all the businesses.
2. Where an assessee is carrying on a business as well as profession, Section 44AD shall apply only on the income earned from business.
3. The assessee opting to declare their income as per presumptive taxation under section 44AD shall not be eligible to claim deductions under chapter VI-A
4. The assessee applying for presumptive taxation under section 44AD shall file his income tax returnin ITR Form 4 – Sugam

PRESUMPTIVE TAXATION FOR PROFESSION

PRESUMPTIVE TAXATION UNDER SECTION 44ADA

The benefit under this scheme shall be applicable to professions registered in India. Professionals having total gross receipts of up to Rs. 50 Lakhs in a financial year, shall be eligible to claim benefit under this Section with effect from Financial Year 2016-17.

Under this scheme, the taxable income of the person shall be determined at a flat rate of 50% of the total receipts.

The following professions be eligible to avail the benefit of presumptive taxation under section 44ADA –

• Legal services
• Medical services
• Engineering services
• Architectural services
• Profession related to Accountancy
• Technical Consultancy services
• Interior Decoration services

The scheme includes only resident Individual, HUF and Partnership firms only and exclude Limited Liability Partnership firm. The person opting under this scheme, shall be allowed claim deductions under Section 30 to 38. However, no other deduction related to expenses shall be allowed.

MAINTENANCE OF BOOKS OF ACCOUNTS

A. PROFESSIONALS CARRYING SPECIFIED PROFESSIONS

Professionals carrying the above-mentioned professions would be required to maintain books of accounts in accordance with Rule 6F, provided their annual gross receipts exceeds Rs. 1.5lakhs in any of the 3 immediately preceding financial years.

NECESSARY ACCOUNTS UNDER RULE 6F

• Cash Book – Book containing all the records of cash receipts and payments.
• Journal – It is an account maintained as a log of day-to-day transactions.
• Ledger – Book where all your entries from the journal, are transferred to separate accounts containing the details of all the accounts.
• Proper maintenance of photocopies of the bills or receipts of value exceeding Rs. 25
• Proper maintenance of original bills or receipts of value exceeding Rs. 50
• Daily case registers to provide details of patients, fees received, services provided and date of receipt in case of medical services.
• Book stating the stock details of the medicines and other consumable items.

B.  PROFESSIONALS CARRYING NON-SPECIFIED PROFESSIONS

Where the person carries the profession other than those discussed above, the same would be required to maintain proper books of accounts, provided the total annual income exceeds Rs. 2.5 lakhs or annual gross receipts exceeds Rs. 25 lakhs in any one of the immediately preceding 3 financial years.

COMPUTATION

The total gross receipts be determined by reducing the amount of expenses related to the profession like salary to any employee, rent for the premises of carrying profession, internet expenses, mobile expenses, official travel, lunch expenses etc.

Suppose, Arun is an interior designer and is having a gross revenue of Rs 40 lakhs for the FY 2020-21. The following expenses were incurred during the year –

• • Internet and mobile expenses – RS 50,000
  • Salary to employees – Rs 5 lakhs
  • Rent of premises – Rs 2 lakhs
  • Lunch expenses – Rs 50,000
  • Travel expenses – Rs 1 lakhs

	PARTICULARS	AMOUNT (IN RS)
	GROSS RECEIPTS	40,00,000
LESS –	EXPENSES RELATED TO PROFESSION
	INTERNET AND MOBILE	50,000
	SALARY	5,00,000
	RENT	2,00,000
	LUNCH EXPENSES	50,000
	TRAVEL EXPENSES	1,00,000
	NET RECEIPTS	31,00,000

However, in the case of presumptive taxation, the income would 50% of Rs 40 lakhs = Rs 20 lakhs which would be lower than that as determined above.

ITR FILING

The person carrying a professional, shall file ITR 3, as their annual return and the same be filed on and before 31^st July of the Assessment.

TAX AUDIT

Professionals shall be liable to tax audit, where their gross receipts exceed Rs 25 lakhs during any financial year. In case of any failure, a monetary penalty of up to 0.5% of the gross receipts or Rs 1.5 lakhs whichever is lower, shall be applied.

OPT-IN AND OUT FROM SECTION 44ADA

It is provided that any person eligible to the scheme under section 44ADA, can opt in and opt out from the scheme at any point of time, without any 5-year restriction, as applicable in case of section 44AD.

PARTICULARS	PRESUMPTIVE TAXATION UNDER SECTION 44ADA
AY 2019-20	OPTS FOR PRESUMPTIVE TAXATION
AY 2020-21	DOES NOT OPT FOR PRESUMPTIVE TAXATION
AY 2021-22	ELIGIBLE TO OPT FOR PRESUMPTIVE TAXATION.

FREELANCERS

Freelancers shall also be eligible for presumptive taxation, provided they are involved in any of the specified or non-specified professions.

PRESUMPTIVE TAXATION UNDER SECTION 44AE

 

ELIGIBLE ENTITY

Such a scheme can be availed by any person engaged in the business of plying, hiring or leasing of goods carriages and the said business does not involve vehicles exceeding 10 goods vehicles at any point of time in a financial year.

COMPUTATION OF TAX

In order to compute tax under this section, the following provisions be followed –

1. 1. Where the vehicle involves a heavy goods vehicle (having gross weight exceeding 12000kg), income in respect of such truck shall be of Rs. 1,000 per ton of gross weight of the vehicle, for every month or part of month of usage.
   2. Where the vehicle is a light weight goods vehicle, the income in respect of such truck shall be Rs 7,500 for every month or part of a month of usage.

ADVANCE TAX

It is to be noted that no relaxation in respect of advance tax payment be provided to persons opting for a presumptive taxation scheme under section 44AE.

MAINTENANCE OF BOOKS OF ACCOUNTS 

It is provided that the persons opting for the presumptive scheme under this section, shall maintain proper books of accounts in relation to income, expenses, assets, and liabilities of their business since these financial records would be essential to understand the performance of their business.

DEPRECIATION ALLOWED

It is provided that no credit for depreciation be allowed to persons opting for this scheme. Whenever a person purchases a capital asset, the benefit of the same is expected to last for more than a year.

Every year a small portion of its cost is expensed and is allowed to be reduced from your income. This amount of expense being charged every year is known as depreciation.

TAX AUDIT

Tax audit would be required to be undertaken by a Chartered Accountant where –

1. 1. The person is carrying profession and has annual gross receipts exceeding Rs.50 lakhs
   2. The person is carrying a business and has annual revenue exceeding Rs.1 crores
   3. A Person has opted for presumptive taxation, and the total income exceeds the basic exemption limit applicable on them.

DEDUCTIBLE EXPENSES

1. Rent paid for property where business is carried out.
2. Food and travel expenses related to official purpose.
3. Advertising, promotional and printing expenses in business.
4. Depreciation on assets used for carrying business activities.
5. Fees paid to a CA for Income tax return filing.
6. Travelling expenses for official work

Central Board of Direct Taxes enabled Tax Audit Utility (3CA-CD & 3CB-CD) for Assessment Year 2020-21 and Assessment Year 2021-22

• Central Board of Direct Taxes has enabled offline utilities for filing statutory Income-tax forms (Form 3CA-CD & 3CB-CD).

• The form is enabled for Assessment Year 2021-22 & Assessment Year 2020-21, Prior years would be available shortly.

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