For providing relief to minor and small taxpayers from the tiresome job relating to maintaining of books of account and getting them audited, the Government has framed the Income-tax Act with presumptive taxation scheme with various sections of 44AD, 44ADA and 44AE. Here, in the blog we will discuss various provisions relating to presumptive taxation scheme as covered under various sections of the Income Tax Act viz. section 44AD, 44ADA and 44AE.
Understanding presumptive taxation scheme
According to Income-tax Act, any person who is engaged in profession or business should maintain his books of account and moreover, get his books of account audited. For providing relief to minor and small taxpayers from this tiresome work, the Government has come up with this scheme of presumptive taxation which would help the small taxpayers.
Any person adopting this scheme could declare income at a specified rate and, is released from tiresome work of maintaining the books of account and getting them audited.
Presumptive Taxation Scheme: Section 44AD
For whom Section 44AD is intended?
Section 44AD is intended for providing relief to small taxpayers who are engaged in business other than the business of plying, hiring or leasing of goods carriages as provided in section 44AE.
Section 44AD of the presumptive taxation scheme could be adopted by following persons:
1) Resident Individual
2) Resident Hindu Undivided Family (HUF)
3) Resident Partnership Firm (not LLP Firm)
This scheme cannot be adopted by any non-resident and any person apart from an individual, a HUF or a partnership firm which is not a LLP firm.
Further, the presumptive taxation scheme also cannot be adopted by any person who has claimed deductions under section 10A/10AA/10B/10BA or under sections 801111 to 80RRB in relevant year
Businesses which are covered under Section 44AD
This scheme is designed for offering relief to the small taxpayers who are engaged in any business, apart from the following businesses:
- The business of plying, hiring or leasing of goods carriages referred to in section 44AE.
- Persons carrying on agency business.
- Persons earning income by way of brokerage or commission.
Apart from above-mentioned businesses, any person who is carrying on profession as provided in section 44AA(1) is not allowed to opt presumptive taxation scheme.
Insurance agent not allowed under section 44AD for availing presumptive taxation scheme
Any person earning income in form of brokerage or commission cannot enjoy Section 44AD for presumptive taxation scheme. Since Insurance agents earn in form of commission and, they are not allowed using section 44AD for the purpose of presumptive taxation scheme.
Any person who is engaged in any profession which is prescribed under section 44AA(1) are not allowed using presumptive taxation scheme under section 44AD
Any person whose turnover or gross receipts is more than Rs. 2,00,00,000 is not allowed using Section 44 AD for presumptive taxation scheme
Section 44AD for the purpose of presumptive taxation scheme could be opted only by eligible persons, if his turnover or gross receipts from the business is less than Rs. 2,00,00,000.
Computation of taxable business income under the regular provisions
Usually, according to Income-tax Act, the taxable business income of every person is computed as follows:
For computing taxable business income under normal provisions of the act, the taxpayers need to maintain books of account. Income is required to be computed as per the information appearing in the books of account.
Computation of taxable business income under presumptive taxation scheme of section 44AD
For persons adopting presumptive taxation scheme under section 44AD, income would be calculated at the rate of 8 percent of the total turnover or gross receipts during the year.
Computation of income under presumptive taxation scheme of section 44AD
Higher income, i.e., higher than 8 percent could be declared in cases where actual income is more than 8 percent.
Income computed as per presumptive at 8 percent is considered final and no further expenses is permitted
As per the general provisions of the Income-tax Act, business income would be calculated after deducting expenses that are allowed in the Income-tax Act and disallowing expenses that are not allowed in the Income-tax Act.
Persons opting section 44AD for the purpose of presumptive taxation scheme, allowance and disallowance of expenses provisions would not be allowed and income computed at rate of 8 percent would be the total taxable income as per the presumptive taxation scheme.
When computing the income according to the provisions of section 44AD, additional deduction for depreciation is not permitted. Though, the written down value (WDV) of assets which is used for the purpose of the business would be computed as if depreciation was available as per section 32.
Maintaining books of account as specified under section 44AA
Section 44AA requires maintaining books of account by any person who is engaged in business or profession. Hence, any person who is engaged in business or profession is required to maintain his books of account as per the provisions of section 44AA.
However, if any person who is engaged in a business opts for presumptive taxation scheme under section 44AD, maintaining of books as per the provisions of section 44AA would not apply.
Advance tax payment for income from business under section 44AD
People who opt for the presumptive taxation scheme under section 44AD are liable for paying the entire sum of advance tax on or before March 15 of the relevant previous year. In case he does not pay the advance tax by March 15 of the relevant previous year, he would be liable for paying interest as per section 234C.
Applicable provisions for people who do not opt for scheme under section 44AD and declares income less than 8 percent
Any person could declare his income at a lower than 8 percent, however, in case he does so, and his total income is more than the maximum amount that is not chargeable to tax, he would be required to maintain his books of account and has to get them audited under section 44AB.
Consequences of opting out of the scheme of section 44AD
In case a person opts for the presumptive taxation scheme, he is then required to follow the same for future 5 years. In case he fails to do so, the presumptive taxation scheme would not be allowed to him for a period of 5 years. Moreover, he is also required for maintaining books of account.
Continue Reading- Presumptive Tax Scheme under Income Tax– Part 2