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Small business owners often grapple with the complexities of maintaining detailed financial records and undergoing tedious audits. In India, the Income Tax Act has introduced the Presumptive Taxation Scheme to alleviate these burdens for small taxpayers. This scheme, governed by sections 44AD, 44ADA, and 44AE of the Income Tax Act, allows eligible taxpayers to declare their income at prescribed rates, simplifying the taxation process.

Ease of Taxation for Small Taxpayers (Presumptive Taxation)

What is Presumptive Taxation?

To give relief to small taxpayers from the tedious job of maintenance of books of account and getting the books of account audited, the Income Tax Act has framed the Presumptive Taxation Scheme under sections 44AD, 44ADA and 44AE of the Income Tax Act, 1961. The taxpayer adopting the presumptive taxation scheme can declare income at a prescribed rate instead.

A) Presumptive Taxation Scheme u/s 44AD :-

The following assessees are eligible for presumptive taxation u/s 44AD: –

An Individual, Hindu undivided family (HUF) 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,

(i) 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;

Note: In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).

The following business are eligible for presumptive taxation u/s 44AD: –

(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 following Category of Persons not eligible for Presumptive Taxation u/s 44AD.

(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;

(ii) a person earning income in the nature of commission or brokerage; or

(iii) a person carrying on any agency business.

Computation of Income under Section 44AD:-

In case of a person adopting the provisions of section 44AD, income is computed at a presumptive basis at a rate of 8% of the turnover or gross receipts of the eligible business during the financial year is deemed to be the total (taxable) income.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, income shall be computed at the rate of 6% instead of 8% for turnover/gross receipts which are received by account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date for filing of Return of Income.

No further deduction under the provisions of sections 30 to 38 shall be allowed.

The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

Consequences if a person opts out from the presumptive taxation scheme u/s 44 AD:-

If an eligible assessee declares profit for any previous year in accordance with the provisions of section 44AD and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1) of Section 44AD, he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1) of Section 44AD.

B) Presumptive Taxation Scheme u/s 44ADA:-

To be eligible for presumptive taxation u/s 44ADA, the assessee must be: –

(a) an individual or a partnership firm other than a limited liability partnership as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009),

(b) a resident in India, and

(c) engaged in a profession referred to in sub­section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year.

An assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

Computation of Income under Section 44ADA:-

In case of an assessee opting the provisions of section 44ADA, income will be computed on presumptive basis, i.e., @ 50% of the total gross receipts of the profession. However, such person can declare income higher than 50%.

Any deduction allowable under the provisions of sections 30 to 38 of Income tax Act, 1961 shall be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

C) Presumptive Taxation u/s Scheme 44AE:-

Any assessee, who owns not more than ten goods carriages at any time during the previous year and who is engaged in the business of plying, hiring or leasing such goods carriages.

Computation of Income under Section 44ADA:-

In case of an assessee opting for the presumptive taxation scheme of section 44AE, income will be computed on an estimated basis. For heavy goods vehicle, income will be computed at the rate of Rs. 1,000/- per ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by taxpayer. In case of vehicles other than heavy goods vehicle, income will be computed at the rate of Rs.7,500/- for every month or part of a month during which the goods carriage is owned by taxpayer. Part of the month would be considered as full month.

What are the benefits of declaring income under the Presumptive Taxation Scheme?

(i) No need to maintain books of accounts or carry out Income Tax audit of accounts as prescribed under section 44AA or 44AB as the case may be.

(ii) Any person opting for the presumptive taxation scheme is liable to pay whole amount of advance tax on or before 15th March of the previous year.

(iii) Income tax returns (ITRs) can be filed in simpler and shorter form ITR-4 (Sugam).

(iv) Reduces compliance burden and facilitates ease of doing business.

(v) Option to declare income at higher rate than the prescribed rate.

Can a higher or lower income be declared under presumptive taxation?

(i) A person may voluntarily disclose his business income at rates more than those prescribed under section 44AD, 44ADA and 44AE.

(ii) A person can declare his income at a rate lower than those prescribed under section 44AD, 44ADA and 44AE. However, then he is required to maintain the books of account and to get his accounts audited as prescribed under section 44AA or 44AB as the case may be.

Conclusion: The Presumptive Taxation Scheme in India offers a simplified tax regime for small businesses and individuals. By allowing them to declare income at prescribed rates, it reduces the administrative burden associated with complex accounting and audits. Small taxpayers can benefit from this scheme’s flexibility, providing relief and encouraging ease of doing business. Whether opting for the prescribed rates or declaring income higher or lower, this scheme aims to simplify the tax process for small businesses and promote financial transparency.

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