Presumptive Taxation Scheme for Business and Profession

Article explains Presumptive taxation scheme, Amendment under Presumptive taxation scheme in budget 2023, Presumptive taxation scheme for business u/s 44AD, Presumptive taxation scheme for Professionals u/s 44ADA, Presumptive taxation scheme for taxpayers who are engaged in the business of plying, hiring, or leasing goods carriages and Benefits of opting Presumptive taxation scheme.

What is Presumptive taxation scheme?

Presumptive taxation scheme is a simplified tax system that is designed to provide relief to small taxpayers from the burden of complying with the complex tax laws. Under this scheme, taxpayers are allowed to declare their income based on a presumptive income, which is determined by the tax authorities based on certain presumptions about the taxpayer’s income and expenses.

The presumptive taxation scheme is typically applicable to small businesses and professionals, who may find it difficult to maintain proper books of accounts and comply with the complex tax laws. By offering a simplified tax system, the government aims to encourage more taxpayers to come into the tax net and improve tax compliance.

The presumptive taxation scheme is based on the principle of estimation, rather than actual income, and it allows taxpayers to pay tax on a presumed income, which is typically lower than the actual income. This makes it easier for small taxpayers to comply with the tax laws and reduces the compliance burden for both taxpayers and tax authorities.

The presumptive taxation scheme is governed by various sections of the Income Tax Act, such as Section 44AD for small businesses and Section 44ADA for professionals. Under these sections, eligible taxpayers can declare their income based on a presumptive income, which is calculated at a prescribed rate of their gross receipts or turnover.

Amendment under Presumptive taxation scheme in budget 2023

In the budget 2023 the government has extended the limit for presumptive tax scheme for  business u/s 44AD from Rs 2 crore to Rs 3 crore and for professionals u/s 44ADA from Rs 50 lakhs to Rs 75 lakhs.

Presumptive taxation scheme for business u/s 44AD

Section 44AD of the Income Tax Act, 1961 provides for the presumptive taxation scheme for small businesses with a turnover of up to Rs. 3 crores. Under this scheme, eligible taxpayers can declare their income at a prescribed rate, which is a percentage of their gross receipts. The scheme is applicable to resident taxpayers, who are engaged in any business.

The key features of the presumptive taxation scheme for business under Section 44AD are as follows:

1. Presumptive income rate: Under this scheme, eligible taxpayers can declare their income at a presumptive rate of 6% of their gross receipts. This means that if a taxpayer has a turnover of Rs. 1 crore, their presumed income would be Rs. 6 lakhs.

2. Limited deductions: Taxpayers who opt for this scheme are not allowed to claim deductions for any expenses related to their business. This means that their income is presumed to be after deducting all expenses related to their business.

3. Maintenance of books of accounts: Taxpayers who opt for this scheme are not required to maintain regular books of accounts. However, they need to maintain certain documents such as a cash book, a register of purchases and sales, and an inventory of stock.

4. Applicability: The presumptive taxation scheme under Section 44AD is applicable to individual taxpayers, Hindu Undivided Families (HUFs), and partnership firms. Companies, Limited Liability Partnerships (LLPs), and other types of entities are not eligible for this scheme.

It is important to note that taxpayers who opt for the presumptive taxation scheme under Section 44AD are still required to file their tax returns by the due date and pay any taxes due. Failure to comply with the provisions of the scheme may result in penalties and interest being levied on the taxpayer.

Presumptive taxation scheme for Professionals u/s 44ADA

Section 44ADA of the Income Tax Act, 1961 provides for the presumptive taxation scheme for professionals with gross receipts of up to Rs. 50 lakhs. This scheme is designed to provide relief to small professionals from the burden of maintaining detailed books of accounts and complying with the complex tax laws.

The key features of the presumptive taxation scheme for professionals under Section 44ADA are as follows:

1. Presumptive income rate: Under this scheme, eligible professionals can declare their income at a presumptive rate of 50% of their gross receipts. This means that if a professional has gross receipts of Rs. 20 lakhs, their presumed income would be Rs. 10 lakhs.

2. Limited deductions: Professionals who opt for this scheme are not allowed to claim deductions for any expenses related to their profession. This means that their income is presumed to be after deducting all expenses related to their profession.

3. Maintenance of books of accounts: Professionals who opt for this scheme are not required to maintain regular books of accounts. However, they need to maintain certain documents such as a cash book, a register of receipts and payments, and a list of assets and liabilities.

4. Applicability: The presumptive taxation scheme under Section 44ADA is applicable to resident individuals who are engaged in any profession

Presumptive taxation scheme for taxpayers who are engaged in the business of plying, hiring, or leasing goods carriages.

Section 44AE of the Income Tax Act, 1961 provides for the presumptive taxation scheme for taxpayers who are engaged in the business of plying, hiring, or leasing goods carriages and who does not own more than 10 goods carriage vehicles at any time during the relevant year. This scheme is designed to simplify the tax compliance process for small transporters who may not have the resources to maintain detailed books of accounts and comply with the complex tax laws.

Presumptive income rate: Under this scheme, eligible taxpayers can declare their income at a presumptive rate based on the number of goods carriages they own and operate. The presumptive income rates are as follows:

Rs. 7,500  per vehicle per month during which the vehicle is owned by you and where the part of the month would be consider as full month.

Benefits of opting Presumptive taxation scheme

There are several benefits of opting for the presumptive taxation scheme under various sections of the Income Tax Act. Some of these benefits are as follows:

1. Simplified tax compliance: The presumptive taxation scheme is designed to simplify the tax compliance process for small taxpayers who may not have the resources to maintain detailed books of accounts and comply with the complex tax laws.

2. Reduced tax liability: The presumptive taxation scheme allows eligible taxpayers to declare their income at a lower rate than the regular tax rates. This can result in a lower tax liability for the taxpayer.

3. Limited deductions: Taxpayers who opt for the presumptive taxation scheme are not allowed to claim deductions for expenses related to their business or profession. However, this can also be a benefit as it reduces the burden of maintaining detailed records of expenses.

4. Reduced compliance cost of maintaining books of accounts: The presumptive taxation scheme can help small taxpayers save on compliance costs such as fees paid to accountants and other professionals for maintaining books of accounts and filing tax returns.

5. Faster processing of tax returns: As the presumptive taxation scheme involves declaring income at a predetermined rate, the processing of tax returns is faster and less time-consuming for the taxpayer.

Overall, the presumptive taxation scheme can be a beneficial tax system for small taxpayers who want to simplify the tax compliance process and reduce their tax liability.

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The author is an Income Tax and GST Practitioner and can be contacted at 9024915488.