Parag Rathi

Before amendment done by Finance Act, 2017 in section 44AD, the Presumptive Income to be 8% which will be amended to 6% in respect of the amount of such total turnover or gross receipts received by an 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 specified in sub-section (1) of section 139 in respect of that previous year.

Section 44AD in Income tax act is the presumptive income section under which prescribed percentage of turnover will be deemed as your income. Till AY 2016-17, prescribed percentage was 8%. But from AY 2017-18,to encourage business to receive payments digitally , the Finance Bill 2017 propose to amend section 44AD of the Act to reduce the existing rate of deemed total income of eight per cent to six per cent in respect of the amount of such total turnover or gross receipts received by an 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 specified in sub-section (1) of section 139 in respect of that previous year Thus all the assessees whose turnover is less than Rs. 2 crore can opt for presumptive income scheme and their income will be as follows:

Particulars                                         Income
Amount received digitally 6% of amount(A)
Amount received in cash 8% of amount(B)
Amount not received before due date under 139(1) 8% of amount(C)
Total Income A+B+C

Issue (1) in Section 44AD

It is to be noted that the person opting under 44AD will not be covered under 44AA (Maintenance of books of Accounts) and 44AB (Tax Audit). However, there may be a possibility that amount for sale made in previous year received in current year and amount for sales made in current year received in next year. Thus, if the amount pertaining to current year sales which is received digitally and which is received in cash is to be calculated separately, proper books of accounts needed to be maintained. Therefore it is to be clarify as to what type of books of accounts are to be kept for the purpose of the above.

Suggestion (1)

A suitable clarification be issued clarifying the books of accounts which are required to be maintained or kept for the purpose of the above. It is to be clarified as to what type of documents will act as a proof that particular amount is received digitally and following amount pertains to current year only.

 Issue (2)in Section 44AD

The proposed amendment does not encourage the credit sales of longer periods as it says that if assessee has not received the amount before due date specified under section 139(1) , then his income will be deemed at a higher rate as 8% and not 6% of the sales amount. However sometimes it necessarily demands credit sales for longer periods. The reason for credit sales may be the nature of business or some other reason like promoting new business. In such a case if the amount is received after due date under section 139(1) then there is no reason to receive that amount digitally in terms of tax saving as the amount received after due date specified under section 139(1) (whether it received in cash or digitally) does not have any impact or bearing on the income of any financial year .Now, since the intent behind the proposed amendment is to encourage firms or individuals to receive more and more amount digitally, the said amendment should encourage the businesses to receive the payments digitally in all the ways.

Suggestion (2)

Government should come with another amendment in section 44AD that sales/turnover amount which is not received before due date specified under section 139(1) but subsequently if in any financial year that amount is received digitally, then deduction of 2% (of following sales amount which is received) can be taken in computing the total income of the assessee in the financial year in which amount is actually received (somewhat related to Section 40(a)(ia)).

So if someone has received Rs 500,000 pertaining to FY 16-17 digitally after 31st July 2017, then deduction of Rs 10000 should be given to the assessee in AY 18-19.

Issue (3) in Section 44AD

Now, again since the intent behind the proposed amendment is to encourage firms or individuals to receive more and more amount digitally, the said amendment should encourage the businesses to receive the payments digitally in all the ways.

One of the best way to do so is to encourage all the individuals or other eligible assesses under section 44AD to get install EDC (Electronic Data Capture) machine i.e card swapping machine at their business establishment. But the concern is that there are some fees and charges applicable on an EDC machine, which include one-time charges on equipment and installation and fixed monthly charges .When someone swipe debit/credit card for purchasing some item, the merchant has to pay some fees (1%-2%) to the Bank or the rental fees for the swipe machine. The charges goes out of their own pocket and to save that big charges, they discourage debit/credit card payment. Being a small retailer or trader whose turnover is less than Rs 2 crore, they generally try to receive their payment on cash basis in such a case.

Example: Mr A is having a sole proprietorship business and the turnover for AY 2017-18 of Mr A is Rs 1.2 crore. The assessee files his income tax return on 1 July 2017 (well before the due date). Now there are various conditions given below and their relevant cost to the assessee. In all the cases it is assumed that the payment received digitally are received through EDC machine and average charges (including installation and monthly charges) for the same is 0.5% of the amount received digitally.

Particulars I-Whole of sales amount is received in cash II-Whole of sales amount is received digitally III-50% of sales amount received in cash and 50% digitally
Income 8% 960000(1.2 crore)   480000(60 lakhs)
Income 6% 720000(1.2 crore) 360000(60 lakhs)
Total 960000 720000 840000
Tax (including cess @ 3%) 107635 58195 82915
Charges on EDC machine Nil 60000 30000
Total relevant cost to taxpayers 107635 118195 112915

It can be clearly seen from the above example that Mr. A benefit more from the case where the whole amount is received in cash rather than from the case where the whole amount is receive digitally. This is very contrasting as the amendment is brought up in the section to encourage businesses to receive amount digitally . So why any business will do so when they are more benefitting from receiving all the amounts in cash and also it is easier to do so.

Suggestion (3)

According to subsection(2) of section 44AD any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of subsection(1) ( calculating deemed income as 8% or 6% as the case may be), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed .However this needs amendment so as to make the section more encouraging for the businesses to receive their payments digitally. All the bank charges or charges/expenses which are necessary for receiving the payments digitally and charges/expense which does not have occurred if the amount is received in cash should be allowed for the purpose of subsection (1) (exception needed to be inserted in section 44AD (2) for these and they should not be deemed to have been allowed and needed to be allowed separately).

After implementing the above the impact will be as follows (Taking the case II of above example)

Case IV:

Particulars Amount
Deemed Income @6% 720000(1.2 crore)
Less: Bank Charges 60000
Net Income 660000
Tax(including cess) 45835
Add :Charges on EDC Machine 60000
Total relevant cost to tax payers 105835

It can be seen that the relevant cost to taxpayers has been decreased after making above change. But important point to be noticed even after the above change is that there is no major difference in amount in Case I and Case IV (above).Thus there is a need to further lower the presumptive income rate from 6% to 5% or 4% so as to make the section more encouraging for digital economy.


Section 44AD is an important section and covers many of the taxpayers of the country. So the issues related to the section should be met as early as possible to avoid the hardships to these most of the taxpayers.

(Republished with Amendments)

Author Bio

Qualification: Student - CA/CS/CMA
Company: chaturvedi shah
Location: Mumbai, Maharashtra, IN
Member Since: 12 Aug 2017 | Total Posts: 3

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  1. Om Prakash Mittal says:

    My turnover is around eighty lac and my business is to provide advice on investment on equity (SEBI Registered Research Analyst). Also registered in GST in category of Financial Adviser. In which category I will cover 44AD or 44ADA? As my business is advisory type of business and net profit margin is around 40%, so please suggest me to what to do.

  2. Sujata Mandake says:

    Sir, Please explain the scenario where in year one – the bills issued to clients (but unrealised as on last day of a/cing year as well as on date of uploading the return) are already considered while computing gross sales u/s 44 AD / ADA. But during next year the same becomes the bad debts. In GST we can reverse GST Liability it in year 2. Can we reduce it from the gross sales of second year

  3. V Srinivasan says:

    The author is misguiding and his assumptions are incorrect. The scenerio created by him shows that the real profit to businessman is only 6% or 8% after all expenses but before paying Bank charges. The fact that the Govt allowed presumptive profit after considering Bank charges also is not brought to light. As per the author’s argument, Bank charges is around 0.5%, whereas the Govt gives concession of 2%. If allowed the author will deduct all business expenses from the presumptive profit which is misleading the business community. The fact that the business turnover improves manyfold due to non cash operations and country also gets benefit is hidden comfortably.

    1. Kavinandan.S says:

      Tax saving on the 2% reduction is only 0.6% that too only when the assesse crosses the Total Income of Rs.10 lakhs threshold. Its not benefiting any one whose total income is under 10 Lakhs or Turnover below 1.25 crores, with the given 0.5% bank charges assumption.

    2. parag rathi says:

      Sir, I think that you have read the article as a critic and you failed to understand the impact even with the example pointed above.I hope that the below points wil help in this regard:

      i) The assumption of bank charges to be 0.5% is very reasonable on an average basis as some banks charges 1%-1.5% charges on the same.

      ii)In the above examples I have assumed that all the transactions other than cash are received through EDC machine .This is only done to understand the real impact of the same.If I have not done that , the real impact of EDC machine(in terms of cost) in this scenario would have hidden somewhere.

      iii)As pointing out by you that bank charges is 0.5% whereas the concession given is 2% by the government ,I would like to make it clear that 0.5% is your actual cost and concession of 2% given by the government is on presumptive income so actual concession in terms of cost is tax on the 2% which may be very less.

      iv)Sir,as said by you that the country will get benefit from cashless transaction is absolutely correct.The above amendment in section 44AD has been proposed only with the motive of encouraging cashless transaction.However if the amendment fails to encourage cashless transactions then there will be more of cash-dominant society and the country will not get benefit.So it is necessary to encourage them to get the benefit to the country.

      v) The assessees covered under section 44AD are the ones who are small businessmen and therefore concerned more of with their benefit. They will opt only that option in which they have to pay less.

      I hope that you will agree with the above.However it may be possible that I may have failed to understand your view.

  4. V Srinivasan says:

    The assumptions are not correct. If left, the author will deduct all expenses from the presumptive profit. Presumptive profit is to be taken as profit after paying Bank charges. The fact that the business improved many fold due to debit/credit card and non cash method transactions are forgotton. The author wants to convince that the real profit for businessman is 6% or 8% only but that too before paying bank charges for the machines only.

    1. Kushal Chopra says:

      V Srinivasan Sir, you are not at all understanding what the author wants to convey in this article here. The author is merely giving suggestion that the bank charges are additional cost being incurred by the businessmen when receiving payments digitally and as the same is being charged on the amount of the sales, even the concessional rate of 2% is not apparently helping the businessmen. So, there is no harm in giving additional deduction to the businessmen to further promote the digital payments

  5. MANOJ BHIDE says:

    Correctly Said, Sir…
    Also, if everyone will wait till the last day of filing of Income Tax Return to check how much debtors pay out their outstanding amount digitally to calculate tax @6% & balance @8%.
    How can a consultant will do the working & file all return on a last day ?

  6. anita says:

    under section 44AD turnover limit should be raised every 3 years so that it will be encourage the businessman to do more ……….

  7. Jay Prakash says:

    A Individual Trader having Turnover of 1 crore opt section 44AD and pay Tax on Deemed income Rs.8,00,000/- but his actual net profit is 20,00,000/-
    and add such (20,00,000/- less Tax paid ) in his capital can he show net profit is 20,00,000/- to Bank for loan purposes

  8. Ajoy Thakur says:

    Another issue, formation of PVT LTD Company to avail the scheme of 44AD shall be discouraged till the entity touch the turnover of INR 2 Crores ?

  9. CA Dinesh Vaidya says:

    The points raised and discussed are meaningful and need to be considered and resolved by CBDT, The ICAI should also take up these issues before appropriate authorities.

    1. Parag Rathi says:

      No,doctors are professionals and will not be covered under this section. Presumptive section for professional is section 44ADA.

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October 2020