Section 44AD Presumptive Income 6% / 8% -Practical Issues

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:

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 31^st 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.

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:

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.

Conclusion:

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)