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With the objective of providing a reprieve to smaller taxpayers, the Income Tax Act includes section 44AD, 44ADA, and 44AE. These sections eliminate such assesses from the cumbersome task of maintaining and auditing accounts.
Known as the Presumptive Taxation Scheme (PTS), these sections provide special provisions to compute business profits on a presumptive basis.
According to the Income Tax Act, business owners are mandated to retain regular accounts. In addition, they need to audit their books of accounts. However, when assesses adopt the PTS under section 44 of the Income Tax Act, they may declare income at prescribed rates. This relieves them from the cumbersome task of maintaining and auditing accounts.
Presumptive taxation scheme is designed for small taxpayers involved in any venture excepting those as defined in this section. The following taxpayers may opt for this scheme:
The scheme is not available for non-resident taxpayers. Additionally, any assesses who claim claim income tax deductions under sections 10A, 10AA, 10B, and 10BA or under sections, 80HH and 80RRB are not eligible for this scheme.
Eligibility to get the advantages of presumptive taxation strategy under Section 44 AD
The following categories are eligible:
In addition to the above,
- The annual gross turn over should not be more than INR 2 crores in the previous year for individuals and firms.
- Individuals or firms are eligible if they have not claimed a tax deduction under Section 10A, 10B, 10AA, and 10BA during the assessment year.
- Individuals and firms are eligible if they have not claimed tax deduction under Section 80RRB and 80HH.
Section 44 AD – Conditions
Here are some conditions under Section 44 AD
- Firms or individuals hiring and plying goods carriages are not eligible.
- Firms or individuals running a brokerage or commission-based business are not eligible.
- Individuals running an agency are not eligible.
- Taxpayers earning from a profession under Section 44AA (1) are not eligible.
Small business owners engaged in ventures excluding the following may claim relief under this section:
Section 44 ADA limits
Here are some limitations of Section 44 ADA
- Total gross earnings from a profession should not be more than INR 50 lakhs for a given financial year.
- If the income from a profession is less than 50% of the gross receipts, the taxpayer is required to maintain a book of accounts.
- If the total income of the taxpayer is more than the basic exemption limit, the taxpayer is required to maintain a book of accounts.
Tax feature of Section 44 AD strategy
Here are the features of this strategy:
- 8% of the annual gross turnover of a business in the previous is considered to be the presumptive income for the current assessment year.
- The annual turnover should be less than INR 2 crores.
- Individuals and firms can use the presumptive income as their net income for the current year.
- Taxpayers cannot claim a deduction under Section 38 or 30 if they choose Section 44 AD.
The normal way to compute business income is as follows:
Taxable business income = Gross turnover from business operations – business related expenses
When assesses adopt this scheme, the business income is computed at a rate of 8% of the total gross turnover during the year. To encourage small business owners to digitalize their operations, section 44 for 2018 – 19 is modified; the income is calculated at a rate of 6% of the total gross turnover of the business during the year. The gross turnover includes revenues through account payee checks, bank drafts, or through the electronic clearing system.
Therefore, when a business adopts the presumptive taxation scheme, total taxable income is calculated at 6% or 8% based on the gross turnover. However, a business owner may voluntarily disclose a higher income, if required.
Under the regular guidelines of the Income Tax Act, the total taxable income from business operations is calculated after deducting the allowable expenses and disallowing expenses that are not in accordance with the Act.
However, when assesses adopt this scheme, there is no provision for allowing or disallowing any business-related expenses. The taxable income is capped at the prescribed rate of the total gross turnover. Moreover, when this scheme is adopted, there is no additional provision for depreciation. The Written Down Value (WDV) of an asset is calculated according to depreciation provisions under section 32.
All assesses who adopt the PTS must pay the entire advance tax liability on or prior to March 15 of the previous year. If such advance tax is not paid, interest in accordance to section 234C is levied.
Opting in and out of Section 44 ADA
Taxpayers can opt for the presumptive tax scheme in any assessment year. Taxpayers can also opt out as per their choice. However, once opted out, taxpayers cannot choose the scheme for the next 5 years.
Assesses that opt for this scheme must follow it for at least five years. If this provision is not met, this scheme becomes unavailable to them for a period of the next five years. An ideal section 44A example could be to assume that an individual adopts the scheme for the assessment year 2017–18. He continues adopting the presumptive taxation scheme for the next two years i.e. 2018 -19 and 2019–20. However, he does not adopt this scheme during the next year, which is 2020–21. Therefore, the individual will be unable to claim the benefits under this section for the next five years i.e. for assessment years 2021–22 until 2025 –26. During this period, he will have to maintain his accounts and get these audited as per the provision of the Income Tax Act.
Other relevant points regarding Section 44 AD
Here are some crucial points to keep in mind:
- In case of more than one business, the tax is calculated on the total turnover of all the businesses combined.
- In the case of income from business and profession, the income from business can be considered to avail the benefits of Section 44 AD. However, the income from the profession is taxed as ordinary income under prevailing income tax slabs.
- Taxpayers who opt for the benefits under Section 44 AD need to use ITR Form 4 to file their income tax returns.
- Taxpayers can claim tax benefits under Chapter VI-1 along with the benefits of the presumptive tax scheme under Section 44 AD.
Declaring lower income or higher income under the Presumptive Taxation Scheme
Declaring lower income:
- In case a taxpayer’s total turnover is less than the declared presumptive income or 8% of the previous year’s turnover, the taxpayer is required to maintain a book of accounts under Section 44 AA.
- The book of accounts should be audited as per Section 44 AB. Declaring higher income:
- A taxpayer can declare a higher income than the declared presumptive income or 8% of the previous year’s turnover.
- No book of accounts has to be maintained in this case.
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