Digitising Section 44AD: A change for businessmen

CA Akarsh Gupta

Introduction:

With so many chopping and changes happening almost daily in taxation laws it is hard to keep a track of all of them. Latest change being brought about in Section 44AD a presumptive taxation

scheme for taxpayers. With few greedy bank personnel and people giving blemish to the scheme of demonetisation, the govt. in order to achieve its mission of moving towards a less-cash economy and to incentivise small traders and businessmen for their pursuit to accept payments by digital means, has reduced the presumptive rate from 8% to 6% on the turnover/gross receipts received through banking channels or digital means. A press release has been issued in this regard by the CBDT for now, while the legislative amendment shall be carried out through the Finance Bill, 2017.

Extract of the Press release:

The extract of the press release is as under:

“Measures for Promoting Digital Payments & Creation of Less-Cash Economy 

Under the existing provisions of section 44AD of the Income-tax Act, 1961 (the Act), in case of certain assesses (i.e. an individual, HUF or a partnership firm other than LLP) carrying on any business (other than transportation, agency, brokerage and commission) and having a turnover of Rupees Two Crore or less, the profit is deemed to be 8% of the total turnover.

In order to achieve the Government’s mission of moving towards a less cash economy and to incentivise small traders / businesses to proactively accept payments by digital means, it has been decided to reduce the existing rate of deemed profit of 8% under section 44AD of the Act to 6% in respect of the amount of total turnover or gross receipts received through banking channel / digital means for the financial year 2016-17. However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in cash.

Legislative amendment in this regard shall be carried out through the Finance Bill, 2017.”

Understanding the changes:

Now let us understand how the changes happen to impact the small businessmen.

Section 44AD of the Income Tax Act, 1961 as applicable for financial year 2016-17, reads as under:

“44AD. Special provision for computing profits and gains of business on presumptive basis.- (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

…. Explanation.—For the purposes of this section,—

(a)  “eligible assessee” means,—

 (i)  an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and

(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” in the relevant assessment year;

(b) “eligible business” means,—

(i)  any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.”

The above section states that if an Individual, HUF or a Parnership firm (except for an LLP) is an eligible business (having turnover or gross receipts of less than 2 crore rupees), the profits and gains of the business shall be a sum equal to eight percent of the total turnover or gross receipts, which shall be the deemed profits chargeable to tax.

The change in the presumptive rate of 8% to 6% on digital transactions made by the govt. can be understood through the below examples depicting the tax savings in each scenario which can be availed by the businessmen if they shift to a less-cash mode in their businesses:

Example 1: 40% Digital Turnover

	Presumptive Taxation (8% scheme)	Presumptive Taxation (8%/6% scheme)
Cash Turnover (A)	1,20,00,000	1,20,00,000
Turnover through banking channels/digital modes (Cheque/other modes of Digital payment)(B)	80,00,000	80,00,000
Total Turnover (C)=(A+B)	2,00,00,000	2,00,00,000
Presumptive Income(D)	2,00,00,000*8%= 16,00,000 Total= Rs. 16,00,000	1,20,00,000*8%=9,60,000 80,00,000*6%=4,80,000   Total= Rs. 14,40,000
Less: Chapter VI-A deductions (E)	1,50,000	1,50,000
Taxable Income (F)= (D-E)	14,50,000	12,90,000
Tax payable on above(G)	2,67,800	2,18,360
Tax savings	2,67,800-2,18,360= Rs. 49,440 (18.46%)

Example 2: 60% Digital Turnover

	Presumptive Taxation (8% scheme)	Presumptive Taxation (8%/6% scheme)
Cash Turnover (A)	80,00,000	80,00,000
Turnover through banking channels/digital modes (Cheque/other modes of Digital payment)(B)	1,20,00,000	1,20,00,000
Total Turnover (C)=(A+B)	2,00,00,000	2,00,00,000
Presumptive Income(D)	2,00,00,000*8%= 16,00,000 Total= Rs. 16,00,000	80,00,000*8%=6,40,000 1,20,00,000*6%=7,20,000 Total= Rs. 13,60,000
Less: Chapter VI-A deductions (E)	1,50,000	1,50,000
Taxable Income (F)= (D-E)	14,50,000	12,10,000
Tax payable on above(G)	2,67,800	1,93,640
Tax savings	2,67,800-1,93,640= Rs. 74,160 (27.69%)

Example 3: 80% Digital Turnover

	Presumptive Taxation (8% scheme)	Presumptive Taxation (8%/6% scheme)
Cash Turnover (A)	40,00,000	40,00,000
Turnover through banking channels/digital modes (Cheque/other modes of Digital payment)(B)	1,60,00,000	1,60,00,000
Total Turnover (C)=(A+B)	2,00,00,000	2,00,00,000
Presumptive Income(D)	2,00,00,000*8%= 16,00,000 Total= Rs. 16,00,000	40,00,000*8%=3,20,000 1,60,00,000*6%=9,60,000 Total= Rs. 12,80,000
Less: Chapter VI-A deductions (E)	1,50,000	1,50,000
Taxable Income (F)= (D-E)	14,50,000	11,30,000
Tax payable on above(G)	2,67,800	1,68,920
Tax savings	2,67,800-1,68,920= Rs. 98,880 (36.92%)

Some of the frequent questions that may be asked:

Question 1: From which financial year this lower presumptive rate of 6% is applicable?

Answer: As per the wordings of the press release, this is applicable for the current financial year 2016-17. However, we expect that the amendments would be made applicable for future years also since the motive of the government is to promote less-cash economy or cash-less economy.

Question 2: Who all assesses are covered under such provision? Is this applicable to companies also?

Answer: It is a straight forward answer. This provision is applicable only to eligible assessees who are Individual, HUF or a Partnership Firm and as this section was never applicable to company assesses this beneficial rate is not available to company assesses.

Question 3: Are cheque transactions also covered for this beneficial rate?

Answer: Yes, since this beneficial rate has been given to incentivise the digital transactions or transactions undertaken through banking channels, cheque payments are covered under this provision.

Question 4: What will happen in case the businessmen has earned lesser net profit than 6% on digital transactions?

Answer: It is an important question. What happens currently is in case your profits are lower than the deemed profits under Section 44AD, you are required to prepare books of accounts and also have your books audited under Section 44AB(d) of the Act, if your income exceeds the maximum amount which is not chargeable to income-tax in any previous year. In the instant scenario, if your deemed profits are lower than 6% on digital transactions, this should call for preparing books of accounts and getting them audited, however, in my view, in case total profits and gains of the business including the business through digital means is higher than the presumptive rate of 8%, you need not get your accounts audited.

In my view, for the purpose of applicability of Section 44AB (d) nature of transactions should not matter and total profits and gains of the business would be seen, since a rate of 6% is itself below the other prescribed rate of 8% and would trigger Section 44AB(d). Thus, only if the total profits are lower than deemed profits of 8%, Section 44AB would be applicable. A clarification in this regard from the tax authorities would be most helpful for the interplay of Section 44AB and Section 44AD and whether Section 44AB provisions would be triggered if the profit from transactions through digital means is lower than 6%.

Question 5: Is 6% rate applicable to total turnover or just the digital turnover?

Answer: Again, since the motive of the authorities is to promote cash less economy, 6% rate is applicable only on the portion of digital turnover.

Concluding remarks:

This is certainly a welcome step for businessmen, as they were looking for something like this from the government to motivate them for doing business through digital means. We hope that the government is going to give many more incentives like this in the nearby future. It is certainly difficult for an

economy to become a less-cash economy, and much more far sighted actions are awaited and required from the tax authorities.

(The author is a practising Chartered Accountant based in Delhi and can be reached at guptaakarsh92@gmail.com)

Disclaimer: The contents of this document are solely for informational purpose. While due care has been taken in preparing the above article, possibility of any errors and omissions cannot be ruled out. Moreover, the views expressed herein above are solely author’s personal views. No part of it should be copied or reproduced without written or express permission of the Author.