Income Tax is calculated on 'Total Income' of the assessee. The Income Tax law is always perceived to be quite a complex law with so many claims, disallowances, deductions, exemptions etc. There is no doubt that to arrive at a correct 'total income' on which the tax liability is calculated, one has to make so many calculations to the Net Profit as reflected in the Profit and Loss account of an enterprise. One has to be informed about which kind of expenses cannot be 'claimed', what expenses will be disallowed, which are the nature of income that is exempt from payment of any tax and how one can optimise their tax liability by investing certain sum of money in specified assets. It is very obvious that a business person is not expected to know all these complexities and to prepare the computation of their taxable income and return of income without the help of an expert consultant or a chartered accountant in most cases.
In a move to avoid these complex calculations and to simplify the life of relatively smaller business people, The Government of India has rolled out a scheme for a certain category of entrepreneurs with low turnover and volume of business. The scheme specifies determination of total income as a fixed rate of the turnover of these business enterprises. This is referred to as computation of profits and gains of business on 'Presumptive basis' under the Income Tax. The 'total income' for that year is presumed to be a certain percentage of turnover of the business in that year. Let us understand what this presumptive basis of taxation scheme is and under what circumstances and manner it is applicable to the small businesses.
Section 44AD - Presumptive taxation for Small business owners:
The purpose of this section in the Income Tax Act is to free up the business person from making the complex calculations and also to substantially reduce their compliance burden. Such business owner is also not required to maintain the books of accounts and get them audited by a Chartered Accountant. The salient features of this scheme are as follows:
Eligible assessee - This section is applicable only to Individual, Hindu Undivided Families (HUF) or a Partnership firm who is a resident in India. It is specifically provided that a Limited Liability Partnership (an LLP) is not eligible to take benefit of this section.
All the assessees who opt to be assessed under this section, are not eligible to claim any deductions under sections 10A, 10AA, 10B, 10BA or under any provisions of chapter VI-A under the heading "Deduction in respect of certain incomes" ie. Section 80HH to Section 80RRB.
Eligible business - The benefit of this presumptive tax under this section will not be available to eligible assessee engaged in any of the following businesses:
- A person carrying on profession as defined under section 44AA - For these professionals, a different scheme under section 44ADA is available.
- A person earning income in the nature of commission or brokerage
- Any agency business
- Any business of plying, hiring or leasing of goods carriages referred in section 44AE
Presumptive Profit - All the eligible assessees engaged in the eligible business and whose turnover or gross receipts in the previous year does not exceed INR 2 crores, can declare 8% of the turnover or gross receipt or a higher amount, as their net profit from the business. The assessee may declare only 6% of the turnover/gross receipt as its net profit in respect of the turnover/gross receipts which are received by account payee cheques/ bank drafts or any of the electronic mode of payment.
Accordingly, the assessee may simply derive at its Total income by calculating 8% or 6% as the case may be on the business turnover during the year. He may simply calculate and pay tax on the total income without having to maintain books of accounts for the business.
Depreciation - Since depreciation on fixed assets is deemed to have been considered while calculating the net profit, the written down value of the fixed assets will be regarded as the value arrived at after reducing the depreciation. This is particularly important at the time of sale of that asset. The Capital Gain will be calculated as the difference between the sale value and the 'written down value' so calculated after reducing the depreciation as mentioned above.
Opting out - When an assessee declares profit on the basis of this section and opts not to follow this presumptive basis of declaring income in any of the next 5 years, he shall not be allowed to opt for this section again for a further period of 5 years from the year in which he has opted not to follow declaring income on the presumptive basis as per this section. In such circumstances, the assessee will be required to maintain the books of accounts as required by law and get them audited under section 44AB of The Act.
Salary and interest to partners - In case of a partnership firm, salary and interest paid to partners shall not be eligible to be deducted from the net profit @ 8% of 6% as the case may be, so calculated in accordance with this section. In calculating the net profit on the presumptive basis, it is assumed that the salary and interest to partners have been deemed to have been deducted/allowed.
Section 44ADA - Presumptive taxation for Small Professionals:
The presumptive basis of income for small professionals is very similar to that of small business owners as explained in section 44AD. The professionals are defined under section 44AA to include Legal, Medical, Engineering, Architectural, interior decoration, Accountancy, technical consultancy or such other professions as may be defined by the Board in the official gazette.
The professionals are eligible to opt for calculating their income on presumptive basis only if their gross receipt does not exceed INR 50 Lakhs.
These professionals can declare their net income as 50% or more of their gross receipts in the previous year.
All the other conditions as applicable and mentioned for small business owners would also apply to professionals.
It indeed is a big relief to the small business owners and professionals to not to maintain books of accounts for their business/profession and declare a profit which is a certain percentage of its business turnover or professional receipts. The business owner or professional thus will not be required to indulge in explaining all the deduction of its expenses and justification of claims for the expenses incurred in the course of their business to the tax officer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.