Generally, small businesses face a daunting task in respect of starting and running their business due to various reasons like lack of availability of credit, trained manpower, and access to technology. In order to reduce their administrative burden and compliance costs, there is a special provision under the Income Tax Act, 1961, which help them meet their income-tax compliance under the presumptive taxation regime.
An individual, Hindu Undivided Family or a partnership firm engaged in any business except the business of plying, hiring or leasing goods carriages, could avail of the said benefit. A sum equal to 8% of total turnover or gross receipts of the tax payer in a particular financial year 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”.
Accordingly, such deemed income would only be liable to tax at the applicable income-tax rates.
Turnover criterion :-The benefit under the said provision could be availed of by a business whose total turnover or gross receipts in the financial year does not exceed Rs 40 lakh. This is proposed to be enhanced to Rs 60 lakh under the Finance Bill 2010.
No deduction for business expenditure :-In case of presumptive taxation, no deduction otherwise available under the head ‘Profits & Gains from Business or Profession’ in respect of the business expenditure (including depreciation on the assets used in the business) is allowed to be claimed from the deemed profits. The deductions are deemed to have been given full effect to and no additional deductions are allowed except for a few specified deductions as mentioned under the said provision.
No payment of advance tax :- The tax payer is not required to pay advance tax installments which otherwise are required to be paid on a periodic basis as prescribed under the Act. This helps in better management of the funds during the year and also reduces compliance requirements.
No books of account / audit
The tax payer is not required to maintain specified books of account/ other documents in respect of their business. Also, there is no need to get the accounts audited and furnish an audit report. The records maintained by the tax payer are used as the basis for determining the total turnover/ gross receipts.
what if profit falls below 8%?
In case the profits and gains are lower than the 8% of the total turnover/ gross receipts, then taxes on the lower profits should be computed as per the normal provisions of the Act. However, in such case the tax payer would be required to maintain specified books of account and may also be required to furnish an audit report thereof, as the case may be.
Is the current rate justified?
Keeping in view of the real life business challenges, it’s often asked if it’s realistic to presume/deem that 8% of the gross receipts or the turnover actually reflects the profits which small business could make or should this percentage be reconsidered and a lower percentage prescribed? This is a debate worth considering in the long run in respect of future budgets.
Administratively beneficial provision :-Nevertheless, this is a beneficial provision which one may consider and avoid the administrative task of preparing and maintaining detailed books of accounts and rather pay tax under the presumptive regime as mentioned above. Opting for presumptive tax regime may also invite fewer queries from the taxmen.
Where an assessee has been showing incomes by way of commission receipts of upto Rs.50 Lakhs on which the expenditures being only of administrative overhead nature, the margins are high at 90% of the receipt as profit. Can such a person avail of presumptive taxation, when the earlier returns have been showing a huge profit and taxes have been paid thereon. This would imply a taxable income of 400000 on a receipt of say Rs.50 Lakhs, whereas the actual profit could be more than 10 times the presumed income.