Presumptive taxation scheme under section 44AD
In order to provide relief to small assessees/businesses from the tedious work of maintaining books of account as per section 44AA and compliances of Income Tax law, a simple scheme called Presumptive Taxation Scheme was incorporated.
The term “presumptive” indicates that there is a legal presumption/assumption that the assessee’s income will be at least a certain percentage of the total turnover/gross receipts. The percentage has been derived from the ‘standard income/profit’ earned by the industry. The government also believes that such an indirect method of taxation reduces the tax avoidance by small taxpayers and it also brings small as well as big taxpayers in parity to share the tax burden.
When you are running a small business, you may not have enough resources to maintain proper accounting information and calculate your profit or loss. This makes it difficult to keep track of your income and taxes from such a business.
There are three types of presumptive taxation scheme
- A scheme under section 44AD of the Income Tax Act, 1961
- A scheme under section 44ADA of the Income Tax Act, 1961
- A scheme under section 44AE of the Income Tax Act, 1961
Assesses opting for any of the schemes are not required to maintain the regular books of account as per section 44AA(2).
Assesses opting for any of the schemes are even exempt from getting the books of account audited as per section 44AB.
It is not mandatory or binding to opt for a presumptive taxation scheme on any assessee even if you eligible for the same. But if the assessee adopts/switches to the scheme then all the provisions must be strictly followed
Let us understand scheme u/s 44AD of Income Tax Act, 1961 in detail
Applicability of the scheme
It is designed to give relief to all the small assessees engaged in any business except
- For the business referred u/s 44AE of the Income Tax Act, 1961 and/or
- Any person who is carrying on any agency business and/or
- Any person who is earning income by way of commission or brokerage and/or
- Any person carrying on profession u/s 44AA(1).
The provisions of section 44AD are applicable only to such resident assessee (not available for a non-resident) who is an
- Hindu Undivided Family and
- Partnership Firm (but does not include Limited Liability Partnership Firm or company etc.)
And the one who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA or under sections 80HH to sections 80RRB in the relevant year.
And whose total turnover or gross receipts does not exceed the amount of Rs. 2 crores.
Salient features of the scheme
Assesses/businesses adopting the scheme have to declare the income at a fixed rate of 8%/6% of the total turnover or gross receipts of the assessee. It will be treated as final taxable income and no further expenses will be allowed or disallowed. The aforesaid sum/income will be considered as deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.
Turnover or Gross Receipts: Turnover or Gross receipts will be total collection/proceeds from the business including GST/VAT/service tax/excise duty. It will also include delivery charges if any and receipts from the sale of scrap but discounts given, loans/advances received, and collection received on sale of assets need to be excluded.
If a person feels that his income from the business is more than the prescribed rate u/s 44AD and intends to voluntarily declare a higher income then the assessee should calculate such higher income and pay tax on it.
If a person feels that his actual income from the business is lower than the fixed-rate (i.e.,8%/6%) prescribed by the presumptive taxation scheme. Then the assessee can declare such lower-income but needs to maintain the books of account and get the accounts audited as per section 44AB if the actual income exceeds the maximum amount chargeable to tax (in case of individual male/female it is 2.5 lacs for A.Y. 2018-19-).
With the view to promote digital transactions amongst the small businesses, Government amended that net taxable income shall be computed at the rate of 6% instead of 8% if the turnover/gross receipts are received in digital form (a/c payee cheque or draft or use of electronic clearing system) and for cash receipts, it will continue to be 8%.
- Turnover/ gross receipts will be bifurcated into two categories for calculation of net income
- Net income in cash will be 8% from total receipts received in cash
- Net income in digital form will be 6% from total receipts received by way of a/c payee cheque or draft or use of electronic clearing system up to the due date of filing of return under section 139(1).
Any allowable deduction/ expenses under the provisions of sections 30 to 38 for calculating profit & gain under the head of business or profession will be considered as if the full effect has been already given to and no further deduction shall be allowed.
Even deduction in respect of the depreciation will not be allowed separately. However, the written down value of any asset shall be calculated as if depreciation u/s 32 is claimed and has been actually allowed.
There is no restriction on assess on claiming benefits of tax deductions under Chapter VI-A (Section 80C to 80U).
If an assessee declares the profit for any assessment year as per the presumptive taxation scheme u/s. 44AD, then it should continue to do the same for at least 5 consecutive years. The condition of 5 consecutive years was incorporated by the Finance Act, 2016, w.e.f. 1-4-2017 in order to discourage the taxpayers to take undue advantage of the scheme.
- If the assessee fails to declare the profit as per section 44AD then it will not be eligible to claim the benefit of the presumptive taxation scheme for the next five assessment years. (Note: for calculation of five assessment years here the year of default as per 44AD will be also counted as the 1st year). In case of the assessee who fails to follow 44AD and the total income exceeds the maximum amount not chargeable to income-tax will be required to maintain books of account and also get them audited and furnish tax audit report u/s 44AB.
The due dates for payment of different installments of advance tax are not applicable to the assessee opting for the scheme, unlike the regular assessee.
- The total amount of tax as advance tax needs to be paid on or before 15th March of the relevant year. (Note: Any amount paid as advance tax up to 31st March of the financial year will be treated as advance tax.)
- The incentive of paying advance tax in one installment is applicable only for the business covered u/s 44AD. If the assessee earns income from other businesses or any other head of income and the tax liability is more than Rs. 10,000/- (for income other than 44AD) then advance tax needs to be paid as per regular provisions for those incomes (for income other than 44AD).
- Interest @ 1% on shortfall u/s 234C will be levied for payment made post 15th March.
ITR -4 (SUGAM) can be filed by the assessee opting for the scheme.
The due date for filing ITR for persons opting for the presumptive scheme will be 31st July of the assessment year (if not extended).
- In case if the assessee is running more than one business, then for calculating the turnover/gross receipt eligibility to qualify for presumptive taxation scheme u/s 44AD from all the businesses shall be taken together.
- In case if the assessee is running a business as well as carrying on professional practice, then professional income will be governed by normal tax provisions and business income will be governed by presumptive taxation scheme u/s 44AD.
You may also like :
- Presumptive Taxation Scheme for Professionals u/s 44ADA
- Filed ITR?.. See What’s next…
- Tax audit u/s 44AB and consequences of non-compliance
- Due date to file ITR extended
- Consequences of non-filing of ITR on the due date
- Income Tax Slab Rates – FY 2018-19 (AY 2019-20)
- A checklist that all the tax deductions have been claimed for the year before filing ITR