Understanding Presumptive Taxation

For paying taxes on income, an assessee has two options available to him.  The first option is to compute the taxable income as per the books of account. The second option is the Presumptive Taxation Scheme where the assessee’s income would be assessed on the basis of his/her total gross receipts or turnover.

An individual, a partnership firm or a Hindu Undivided Family (HUF), being a resident in India, could opt for the Presumptive Taxation Scheme. However, in case the gross receipt or total turnover of the taxpayer exceeds INR 2 crore, then such assessee cannot take the benefit of Presumptive Taxation Scheme. In such as case, the assessee is required to get his books of account audited by a practicing Chartered Accountant.

According to the presumptive tax scheme u/s 44AD of the Income Tax Act, 1961, 8% of the gross receipts or total turnover would be deemed to be the income of the assessee. However, in last Union Budget, the limit has been reduced to 6% for digital receipts of the assessee. The Presumptive Tax Scheme is mostly meant for the SMEs for relieving them from the worry of maintaining their books of account and also getting the same audited.

A taxpayer opting for this scheme needs to segregate his/her digital transactions and other transactions since the income tax rate of deemed income is 6% for digital receipts and 8% for the other receipts.

Who are not eligible under Section 44AD?

·         Limited liability partnerships (LLPs) and companies

·         Assessee’s claiming profit-linked deductions u/s 10A, 10B, 80-IA etc. of the Income Tax Act, 1961.

·         An assessee engaged in the business of plying, hiring or leasing of goods carriages

·         An assessee who earns income which is in the nature of brokerage or commission

·         An assessee carrying on an agency

·         Professionals like lawyers, chartered accountants, engineers, company secretaries, film artists etc.

Implications of PresumptiveTaxation Scheme u/s 44AD

·         An assessee would not require maintaining books of account and getting them audited. Nevertheless, the assessee would be required to maintain the basic records for establishing the nature of the business and his/her gross receipts or total turnover.

·         The assessee cannot claim deductions for his business expenditure.

·         An assessee who hasn’t opted for the Presumptive Tax Scheme needs to file a cumbersome return in ITR-4. Whereas, assessees opting for the Presumptive Tax Scheme, are required to file the simplified return using Form ITR-4S.

Things to note with respect to Presumptive Taxation Scheme u/s 44AD

·         After opting the Presumptive Taxation Scheme u/s 44AD, the assessee needs to continue with this Scheme for the consecutive 5 years, otherwise, the assessee would be required to get his/her books of account audited by a practicing Chartered Accountant for the subsequent five years.

·         An assessee could declare a lower income than 6% or 8%, however, in that he needs to maintain his books of account according to Section 44AA of the Income Tax Act, 1961 and also needs to get them audited according to Section 44AB of the Income Tax Ac, 1961.