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Ref. No. KLI/22-23/E-BB/492
Ref. No. KLI/22-23/E-BB/490
Section 44AD is a presumptive taxation scheme introduced by Income Tax Law to ease the tax burden on small taxpayers or assesses. Read more about section 44AD of the Income Tax act for the AY 2021-22.
To provide a reprieve to smaller taxpayers, the Income Tax Act includes sections 44AD, 44ADA, and 44AE. These sections eliminate such assessments from the cumbersome task of maintaining an audit limit for AY 2021-22.
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 must retain regular accounts. In addition, they need to audit their books of accounts. However, when assessing adopt the PTS under section 44 of the income tax act, they may declare income at prescribed rates. It relieves them from the cumbersome task of maintaining and auditing accounts.
The presumptive taxation scheme is designed for small taxpayers involved in any venture except those 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 income tax deductions under sections 10A, 10AA, 10B, and 10BA or under sections 80HH and 80RRB are not eligible for this scheme.
The following categories are eligible:
In addition to the above:
Here are some conditions under section 44 of income tax act
Small business owners engaged in ventures excluding the following may claim relief under this section:
Here are some limitations of section 44 of income tax act
Here are the features of this strategy:
The usual way to compute business income is as follows:
Taxable business income = Gross turnover from business operations – business-related expenses
The business income is computed at 8% of the total gross turnover during the year. However, to encourage small business owners to digitalize their operations, section 44 - 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 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 standard 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 by the act.
However, when assesses adopts 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 before March 15 of the previous year. If such advance tax is not paid, interest per section 234C is levied.
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.
Assessees that opt for this scheme must follow it for at least five years. This scheme becomes unavailable to them for the next five years if this provision is not met. An ideal section 44A example could be to assume that an individual adopts the scheme for the assessment year 2017–18. They continue adopting the presumptive taxation scheme for the next two years, i.e., 2018 -19 and 2019–20. However, they did not adopt this scheme the following year, 2020–21. Therefore, they 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, they will have to maintain their accounts and get these audit limit for ay 2021-22 as per the provision of the Income Tax Act.
Here are some crucial points to keep in mind:
Declaring lower income:
Every firm is required to keep track of its profit and loss statements, official books of accounts, and other records used to determine its tax obligations. However, they are now provided with an exemption from reviewing the book of accounts and are required to pay a rate set by the slabs under the Presumptive Taxation Scheme, thanks to the establishment of Section 44 AD of the Income Tax Act.
Section 44AD is a presumptive taxation scheme under which income is estimated on the basis of 8% of sales (or 6% in the case of digital receipts and payments), and the taxpayer is given a break if the account books are not kept up to date.
Ref. No. KLI/22-23/E-BB/999
Ref. No. KLI/22-23/E-BB/490