Section 44ADA emerges as a practical and beneficial approach for professionals to manage their taxation obligations, fostering simplicity, transparency, and efficiency in the complex realm of income tax regulations. According to Section 44ADA of the Income Tax Act, a professional can assume a certain percentage of their gross receipts as their income. This is known as presumptive taxation, and it helps simplify the tax compliance process for small professionals. Eligible professionals have the option to declare an amount equivalent to 50% of their total gross receipts in the financial year related to the said profession, or a higher amount if desired, as their income under the head “Profit & Gain of Business or Profession” (PGBP).
In cases where such a professional is employed, their salary shall be taxable under the head “Salaries”. Every payment made by the employer to their employee for services rendered shall also be taxable under the head “Salaries”. To be considered taxable under the head “Salaries”, a relationship of employer and employee must exist between the payer and the recipient. It’s important to note that the presumptive taxation option is not available to employees. The employer shall be liable to deduct tax at source under section 192.
Individuals, Hindu undivided families (HUFs), and partnership firms engaged in a “Specified Profession” will be eligible to opt for this section, provided their total gross receipts do not exceed ₹50 lakh in a financial year. The individual, HUF, and partnership firm must also be a resident, as defined in section 6. However, a Limited Liability Partnership (LLP) firm is not eligible to avail the benefits of this section.
The professions specified include legal, medical (Doctor), engineering, architecture, accounting, technical consultancy, interior decoration, and certain other professions as notified by the government. Additionally, other professionals notified for this purpose are movie artists, company secretaries, information technology professionals, and authorized representatives.
Movie artists for this purpose mean actor, cameramen, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, and dress designer.
The assessee will be exempt from the obligation to maintain books of accounts as outlined in section 44AA. Furthermore, they will not need to undergo the process of having their books of accounts audited as prescribed by section 44AB. Where the eligible assessee declares an income lower than 50% of the gross receipts and their total income exceeds the basic exemption limit, they will be obligated to maintain books of account, along with other necessary documents, and arrange for their auditing.
Opting for Section 44ADA comes with several implications. All deductions for business expenses are considered to have been accounted for. With profits being taxed at 50% of the gross receipts, the remaining 50% is assumed to cover all the business expenses of the assessee.
Business expenses can comprise various items, such as consumables, daily operational expenses, staff salary, telephone charges, costs of services obtained from other professionals, rent paid for premises, expenditures on books and stationery, and depreciation on assets like laptops, vehicles, printers, surgical equipment, and other necessities essential for the profession.
The written down value (WDV) of assets for tax purposes will be computed as if depreciation had been allowed every year. This calculated WDV would serve as the asset’s value for tax purposes, particularly if the assessee decides to sell the asset at a later point.
Section 208 read with section 211 provides that the eligible professional opting for section 44ADA shall be required to pay advance tax by 15th March of the Financial Year. They shall be liable to pay simple interest at the rate of 1% on the amount of the shortfall, where the assessee has failed to pay advance tax or the advance tax paid by him is less than the tax due on the returned income as given under section 234C.
Section 194J falling under Chapter XVII of the Income Tax Act, 1961 cast an obligation on the payer of professional fees to deduct tax at source. The tax shall be deducted at the rate of 10% of the sum paid or payable. Tax is required to be deducted when a single payment or aggregate payments made in the financial year exceed ₹30,000. Payments made to professionals like doctors, accountants, engineers, or chartered accountants for their services are subject to tax deducted at source.
Conclusion: Section 44ADA of the Income Tax Act presents a streamlined approach to taxation for professionals, offering benefits that simplify compliance and reduce administrative burdens. This provision enables eligible professionals to calculate their income based on a predetermined percentage of their gross receipts, fostering ease and efficiency in the tax declaration process. By allowing professionals to declare 50% of their total gross receipts as income, or a higher amount if preferred, the provision empowers individuals, Hindu undivided families, and eligible partnership firms engaged in specified professions.
Disclaimer: The information provided in this article is for general informational purposes only. It is not intended as professional advice and should not be construed as such. No action should be taken based solely on the information contained in this article. Always consult with a qualified professional for advice tailored to your specific situation.