To reduce the tax burden and to provide relief from tedious work to small tax assessees, the government of India has incorporated a scheme of presumptive taxation. Businesses adopting the presumptive taxation scheme are not required to maintain regular books of account. They can declare the income at a prescribed rate. The presumptive taxation scheme is framed under two sections- Section 44AD and 44AE of the Income Tax Act, 1961. Person adopting presumptive taxation schemes are exempt from getting their books of account audited. In this article, let’s go through the provisions of presumptive taxation scheme under Section 44AD in detail.
Eligibility Criteria to avail the Benefits of Presumptive Taxation Scheme under Section 44AD
Below are the types of tax assessees who can adopt the provisions of presumptive taxation scheme Under Section 44AD:
- Resident Individual tax payers
- Hindu Undivided Families
Partnership Firm (except LLP or Limited Liability Partnership Firm)
Below conditions are to be satisfied for adopting presumptive taxation scheme under Section 44AD of the Income Tax Act:
- The firm or individual’s gross receipt or annual turnover in the previous year should not have exceeded Rs. 2 crores.
For Example, Mr. Mohan has a provisions store. The annual turnover of his shop for the last year was Rs. 90 lakh. He can adopt the scheme of presumptive taxation under Section 44 AD to avoid tedious paperwork involved in filing taxes at the end of the financial year. Provisions of Section 44AD primarily concentrates on small and medium size businesses.
- Any firm or a person who has not claimed tax deduction under the Sections 10A, 10AA, 10B, 10BA during the assessment year can adopt the provisions of Section 44AD. Same applies for the individuals or firms who have not claimed deductions under Section 80HH to 80 RRB.
- Individuals or firms engaged in the business of plying and hiring goods carriages cannot adopt these provisions.
Firm or an individual assessee involved in professional services in which the income is earned in the nature of brokerage or commission cannot adopt presumptive taxation schemes. The same is now amended and professionals can adopt the provisions of presumptive taxation scheme under the new Section 44ADA with effect from 1st April 2017.
For understanding the applicability of the presumptive taxation scheme under Section 44AD, let’s take an illustration. XYZ Pvt Ltd. is involved in the business of manufacturing. Now, even if the company satisfies all the above mentioned conditions, it cannot opt for presumptive taxation scheme under Section 44A as private limited companies are not eligible under the provisions of the scheme.
- Applicable Rate and Income Computation under Section 44AD
Eligible assessees who are willing to adopt the presumptive taxation scheme under the provisions of Section 44AD has to compute their income on the estimation basis. It is calculated at the rate of 8% of Gross receipts or total annual turnover of the business for the previous year. Assessee can even declare an income in his income tax return higher than the presumptive income shown as per the scheme.
For example, Mr. Lokesh is running a stationary shop whose turnover is Rs. 80 lakh for the previous year. He is willing to adopt the provisions of presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961 with regards to taxation of his business. As per the provisions of Section 44AD, income will be computed on the basis of estimation at the rate of 8% of gross receipts or total turnover of the eligible business for the previous year. In this case, Mr. Lokesh having a stationary business with Rs. 80 lakh turnover (less than Rs. 2 cr as per the provisions of Section 44AD) can adopt the provisions of the scheme. And his annual presumptive tax will be Rs. 6.4 lakhs (i.e. 8% of 80 lakh).
- Amendments to Section 44AD in Union Budget 2016
After the amendments by Union Budget 2016, a new section called Section 44ADA has been inserted with effect from 1st of April 2017.
Earlier to amendments, assessees who were engaged in professional activities were not allowed to adopt the provisions of presumptive taxation scheme under Section 44AD. However, after the insertion of Section 44ADA, self-employed professionals are now allowed to adopt presumptive taxation scheme provided the following conditions are satisfied
- Gross receipt for the previous year should not exceed Rs. 50 lakhs.
- Assessee should declare at least 50% of gross receipt as deemed profit.
- Businesses are required to comply with Advance Tax provisions if they are willing to adopt the provisions of Section 44AD. Eligible businesses should deposit advance tax on or before the 15th of March.
Amendments to Section 44AD in Union Budget 2017
With an objective of boosting digitalisation in the country, government has decided to provide incentives to businesses that use digital route for payments. One such incentive is the reduction in presumptive tax rate for businesses that are making digital payments. Such businesses can claim 6% of the total digital payments received. Any payment method other than cash is included in this i.e. demand draft/ cheque/credit cards/debit cards/net banking/ RTGS or NEFT. 6% is applicable only to the cases of payment that are received through cashless mode. For other cases, usual 8% rate will be applicable.
Important Points to Note
- In case the assessee is running more than one business, turnover of all the businesses in question need to be considered to check the eligibility to adopt presumptive taxation scheme under Section 44AD.
- In case the assessee is involved in both business and professional practice, then provisions of presumptive taxation under Section 44AD can be adopted only for the business, income pertaining to profession has to be computed as per the normal provisions of the Income Tax Act, 1961.
- An assessee can claim tax deductions and avail benefits under Chapter VI-A (Section 80C to 80U) even if he is declaring income as per presumptive taxation scheme under Section 44AD of the Income Tax Act.
Section 44ADA extends the benefit of presumptive taxation to professionals, which was only available to specific businesses before. Section 44ADA allows professionals to adopt the provisions of presumptive taxation scheme provided their gross receipts for the financial year do not exceed Rs.50 lakh. Below are the professionals who can avail the benefits of presumptive taxation under this section:
- Architectural profession
- Technical consultant
- Interior business
Let’s take an example to understand this. Mr. Mohan is running a partnership firm in the name of Shree Corporation. Gross receipts of his business for the previous year were Rs. 86 lakhs. He declared his income under the presumptive taxation scheme of Section 44AD. Net income was Rs. 688000 after computing at the rate of 8% of the gross receipts. He wanted to claim further deductions under Section 30 for the depreciation of his firm’s building. But, as per the provisions under Section 44AD, computed presumptive income (6% or 8% of gross receipts or turnover of the eligible business for the previous year) is considered as the net income for the business covered under the presumptive taxation scheme. Hence, assessee is not allowed to claim any deductions under Section 30 to 38 (including depreciation and unabsorbed depreciation) of the Income Tax Act. Hence, Mr. Mohan cannot claim any further deductions after the computation of net income.
Provisions for Eligible Partnership Firm
For example, let’s say Priyam Corporation is a partnership firm engaged in the business of manufacturing wooden photo frames. The firm has declared its income for the previous year as per the provisions of the presumptive taxation scheme under Section 44AD. After computation of income on basis of estimation i.e. at the rate of 8% on gross receipts, the firm wanted to claim further deductions on account of interest paid to its partners. In this case, Priyam Corporation can claim deductions for the interest paid to partners as deductions of interest paid to its partners and also the remuneration paid within the limit prescribed under Section 40 b) of IT Act are allowed as deduction under the presumptive taxation scheme.
Computing Written down Value (WDV) of depreciable assets:
Let’s understand this with an illustration. GT Corporation, a steel manufacturing firm has declared its income as per the provisions of the presumptive taxation scheme as under Section 44AD of the Income Tax Act. Presumptive income of GT Corporation was calculated at the prescribed rate i.e. 8% without deducting any depreciation as it is presumed that there is no deduction on account of depreciation is allowed under the provisions of presumptive taxation scheme. In this case, it is important to note that, even though the depreciation on the business asset is not available for deduction, it is necessary for the computation of the written value of the particular asset. Depreciation needs to be calculated and deducted.
Provisions relating to maintenance of books of account:
To understand this, let’s take an example. Mr. Mani is running a provision store. Turnover of his business for the previous year is Rs. 40 lakh. He declared his business income as per the provisions of presumptive taxation scheme of Section 44AD. In this case, Mr. Mani is not obliged to maintain the books of account relating to his business as per the provisions of Section 44AD. And also, he is not required to get his books audited as his business is not covered under Section 44AA and Section 44AB of the IT Act.
- Declaring Lower Income or Higher Income under the Presumptive Taxation Scheme:
In case, the actual income is more than the presumptive income scheme, this provision allows the assessee to declare the higher income at his option (higher than the prescribed rate of 8%). Lastly, presumptive taxation scheme under Section 44AD is a great relief to small and medium tax payers with regards to maintenance of books of account and getting it audited which is often quite very tedious job with high probability of errors.