Presumptive Taxation for Business and Profession

Small businesses can have a number of hassles in their professional journey. Right from building up their brand value to getting customers, hiring a workforce, and renting an office space, the everyday operations of small businesses and professionals can be quite challenging. Moreover, the Income Tax Act of 1961 also states that an individual in business or profession needs to maintain regular books of account and have the accounts audited. This can be a time consuming and costly affair. Hence, to offer a way out, the Government of India came up with the presumptive taxation scheme under Section 44AD, Section 44ADA, and, Section 44AE.

This article talks about the presumptive taxation scheme for businesses and professionals.

What is the presumptive taxation scheme?

The presumptive taxation was first introduced in the year 1995-96 under Section 44AD of the Income Tax Act of 1961. It was later amended, and a new presumptive taxation scheme was introduced FY 2016-17 under Section 44ADA.

As per the presumptive taxation scheme, small businesses or professionals are not mandated to maintain books of accounts. Their earnings and profits are presumed in relation to a certain percentage of their total sales for the year, and their taxes are calculated accordingly.

Presumptive taxation scheme under Section 44AD

1. What are the eligibility criteria to avail the presumptive taxation scheme under Section 44 AD?

The following categories are eligible under Section 44 AD:

• Resident individuals
• Hindu Undivided Families (HUFs)
• Partnership firms, except Limited Liability Partnerships (LLP)

Taxpayers also need to adhere to the following:

• The annual gross turn over for individuals and firms should not be more than ₹2 crores in the previous year.
• Individuals or firms cannot claim a tax deduction under Section 10A, 10B, 10AA, and 10BA during the assessment year.
• Individuals and firms cannot claim tax deduction under Section 80RRB and 80HH.

2. What are the restrictions in the presumptive taxation scheme under Section 44 AD?

The following taxpayers cannot avail the presumptive taxation scheme under Section 44 AD:

• Individuals earning from a profession under Section 44 AA (1)
• Businesses or individuals hiring and plying goods carriages
• Individuals running an agency
• Firms or individuals running a brokerage or commission-based business

3. What are the features of the presumptive taxation scheme under Section 44 AD?

Here are the features of this scheme:

• Taxpayers can consider 8% of the annual gross turnover of the previous as the presumptive income for the current assessment year.
• The annual turnover should be less than ₹2 crores.
• Taxpayers can use the presumptive income as their net income for the current year.
• Taxpayers who opt for Section 44 AD have to use the ITR Form 4 to file their income tax returns.
• Taxpayers cannot claim a deduction under Section 38 or 30 if they choose Section 44 AD.
• In the case of multiple businesses, the tax is calculated on the total turnover of all the businesses.
• In the case of income from business and profession, the income from business can be used to avail Section 44 AD. The income from profession is taxed as ordinary income under prevailing income tax slabs.
• Taxpayers can claim tax benefits under Chapter VI-1 along with the benefits of the presumptive tax scheme under Section 44 AD.

4. Can you opt in and out of Section 44 AD?

As per the rules of Section 44 AD, if a taxpayer chooses to opt for the presumptive taxation scheme for a financial year, the individual has to continue using the same for the next 5 financial years. However, if the taxpayer does not use the scheme for 5 consecutive years, the individual will not be able to opt for the presumptive taxation scheme for 5 years from the year of opting out.

Presumptive taxation scheme under Section 44ADA

1. What are the eligibility criteria to avail the presumptive taxation scheme under Section 44 ADA?

The following categories are eligible under Section 44 ADA:

• Resident individuals
• Hindu Undivided Families (HUFs)
• Partnership firms, except Limited Liability Partnerships (LLP)

In addition to this, the following professions can use the presumptive taxation scheme under Section 44 ADA:

• Legal
• Engineering
• Architecture
• Interior decoration
• Medical
• Accountancy
• Technical consultancy
• Film professionals like producers, directors, editors, actors, art directors, singers, music directors, dance directors, lyricists, cameramen, singers, scriptwriters, costume designers, etc.
• Any other profession as notified by the Central Board of Direct Taxes (CBDT).

2. What are the restrictions in the presumptive taxation scheme under Section 44 ADA?

Here are some restrictions of Section 44 ADA:

• The total gross earnings from a profession should not be more than ₹50 lakhs in a financial year.
• Taxpayers have to maintain a book of accounts if the income from a profession is less than 50% of the gross receipts.
• Taxpayers have to maintain a book of accounts if the total income is more than the basic exemption limit.
• Taxpayers have to pay advance tax on or before March 15 of the previous year. Failure to do so will result in a penalty to pay interest as per Section 234C.

3. Can you opt in and out of Section 44 ADA?

The process and rules of opting in and out of the presumptive taxation scheme under Section 44 ADA are quite relaxed as compared to those of Section 44 AD. Taxpayers can opt in or out of the presumptive taxation scheme under Section 44 ADA any time they want. The 5-year rule does not apply to taxpayers here.

Presumptive taxation scheme under Section 44 AE

1. What are the eligibility criteria to avail the presumptive taxation scheme under Section 44 AE?

The following categories are eligible under Section 44 AE:

• Resident individuals
• Hindu Undivided Families (HUFs)
• Partnership firms, except Limited Liability Partnerships (LLP)

In addition to this, the following professionals can avail the presumptive taxation scheme:

• Taxpayers in the business of plying, hiring, or leasing of goods carriages
• Taxpayers in ownership of 10 or fewer goods vehicles at any time during the year

2. What are the features of the presumptive taxation scheme under Section 44 AE?

Here are some things to note about Section 11 AE:

• A person cannot own more than 10 goods vehicles at any time during the year.
• In the case of heavy goods vehicles (more than a gross weight of 12 MT), the income is calculated at ₹1,000 per ton of gross vehicle weight for the time during which the vehicle is owned by the taxpayer.
• In the case of other vehicles, income is calculated at ₹7,500 for the time during which the vehicle is owned by the taxpayer.

3. What are the benefits of filing an income tax return under the presumptive taxation scheme?

Here are some benefits of the presumptive taxation scheme that can help taxpayers while filing their income tax return:

• The tax filing process is simplified: The process of filing an income tax return under the presumptive tax scheme is a lot shorter, simpler, and streamlined. This reduces the time spent on filing a return and offers the taxpayer an easier way to pay taxes.
• The cost of tax filing is reduced: The costs involved in filing an income tax return are also considerably lowered. With a simple process, taxpayers can file their own returns. There is no need to hire a professional to do the same thing. This saves the money that would otherwise be spent on chartered accountants and tax consultants.
• It allows taxpayers to lower their tax liability: The tax liability of a taxpayer opting for the presumptive tax scheme is lower than those who do not. With this scheme, small business owners and professionals can declare 50% of their income as their profit for the year. The remaining funds can be shown as expenses. This considerably lowers their tax liability.
• It removes the hassles of keeping books of accounts: The primary reason for the scheme was to eliminate the need for keeping books of accounts. Businesses and professionals opting for the scheme can save time and money by not having to maintain books of accounts.

To sum it up

The presumptive taxation scheme has brought many benefits for small businesses and professionals who otherwise had trouble maintaining books of accounts and consolidating their income tax returns. With a reduction in overall costs, small businesses can use the money for their professional growth.

There are also other tax-saving strategies that professionals can use to lower their taxes, such as investing in the market, buying insurance, etc. Some of these have been discussed in Kotak Life’s tax and savings guide.