Presumptive Taxation U/s 44AD

As per the provisions contained under the Income Tax Act, a person engaged in business or profession is required to keep proper books of account and to get his accounts audited. In order to provide relief to small taxpayers from such tedious compliance, section 44AD (presumptive taxation scheme)  was introduced under the Income Tax Act. A person opting for the presumptive taxation scheme can declare his income at a prescribed rate on the basis of his annual turnover and, in turn, is relieved from complex work of maintaining various of books of account and also from getting the accounts audited.

Under the Presumptive Taxation Scheme under the Income Tax Act is defined under section 44AD. Under this scheme, the income of the assessee is 'presumed' based on the annual turnover. under Presumptive Taxation Scheme, an eligible assessee can calculate his income under Section on an estimated basis at a rate prescribed under section 44AD.

Eligible Assessees under section 44AD

Following are the category of taxpayers who can opt for Presumptive Taxation Scheme:

·         The preventive taxation scheme can be opted by an individual (resident individual), HUF (Hindu Undivided Family) or Partnership Firm. However, an LLP (Limited Liability Partnership) is not eligible to avail the benefit of Presumptive Taxation Scheme.

·         Assessees engaged in the business of plying, leasing or hiring of goods carriages, carrying on any agency business and earning income in the nature of brokerage or commission cannot avail this scheme as they are covered under section 44AE.

·         The Preventive Taxation Scheme covers most of the small businesses with a total turnover of less than 2 crores. That means an assessee can pay tax under preventive scheme only if the aggregate turnover per annum doesn't exceed Rs. 2 crores.

·         An assessee paying tax under the presumptive scheme cannot claim any profit-linked deductions available under Sections 10A, 10B, 80-IA-80RRB.

Who cannot opt Preventive Taxation Scheme U/s 44AD?

If the eligible assessee has claimed deduction available under section 10, 10A, 10B, 10BA, or 80IA to 80RRB then the assessee cannot opt Preventive Taxation Scheme under 44AD.

Computation of Income under section 44AD

As per the IT Act, the income of any taxable person is computed as follows:

Particulars	Amount
Turnover or gross receipts from the business	XXXXX
Less : Expenses incurred in relation to earning of the income	(XXXXX)
Taxable Business Income	XXXXX

In a taxpayer opted to pay tax under the provisions of Section 44AD i.e. under presumptive taxation scheme, his income will be computed on the presumptive basis at a predetermined rate of 8% of the gross turnover of the eligible business for the year. However, in order to boost the digital transactions among the unorganized section of the business, an amendment was passed under section 44AD to reduce the rate by 2%. Therefore, the effective rate is 6% of the turnover where the gross receipt by the eligible assessee is in form of digital payments or through banking channel / digital means.

Some other Important points to be considered under section 44AD:

While calculating the aggregate turnover of the business, the following items will be included:

·         Sales of unusable empties and supplies

·         Service Charges on delivery

·         Value Added Tax

·         Excise Duty

·         Cess and other levies

·         GST

On the contrary, the following items are not to be included while calculating the turnover of the business:

·         Consideration received on sale of fixed assets

·         Cash or other discounts

·         Advance or deposits received by the business

Additionally, assessee paying tax under presumptive taxation scheme is required to pay whole advance tax on or before 15th March of the financial year. If the assessee fails to pay the advance tax by the time prescribed i.e. by 15th March, the assessee shall be liable to pay interest under section 234C.