Small businesses often face challenges when it comes to tax compliance. To alleviate the burden on these entrepreneurs, the Income Tax Act of India introduced Section 44AD, a presumptive taxation scheme. This article explores the key aspects of this scheme, including eligibility criteria, calculation methods, and benefits. By opting for Section 44AD, small business owners can simplify their tax obligations and focus on growing their enterprises.
The purpose of Section 44AD is to provide small taxpayers with a convenient and lawful method to manage their business activities. Eligible individuals, Hindu Undivided Families (HUFs), and partnership firms can take advantage of this section. However, it is important to note that Limited Liability Partnerships (LLPs) and individuals engaged in commission-based businesses, brokerage, or agency activities are not covered under this section.
Previously, professional individuals such as Chartered Accountants, Advocates, Doctors, Engineers, Architects, Technical Consultants, Interior Decorators, and those notified by the Central Board of Direct Taxes (CBDT) were not covered by this section. However, a new section, 44ADA, was introduced from the assessment year 2017-18 onwards to address their taxation requirements.
This section applies to individuals and entities whose turnover or gross receipts are less than two crores of rupees. However, with the enactment of the Finance Act of 2023, the threshold has been increased to three crores of rupees for the assessment year 2024-25. To qualify for this scheme, a condition has been set that during the previous year, the cash received for eligible business activities should not exceed five percent of the total turnover or gross receipts. Any amount received through means other than account payee cheques or drafts is considered as cash.
It is important to note that if an assessee claims any exemptions or deductions under sections 10AA, 10B, 18BA, 80I, 80IAB, 80IB, 80IC, 80ID, or 80I, they are not entitled to the benefits provided by this section.
Calculation of Estimated Income:
Under this scheme, eight percent of the total turnover or gross receipts of the business is considered as the business income. However, if the total income as per the books of account exceeds eight percent of the gross receipts or turnover, the higher income is considered for taxation purposes.
When calculating eight percent of the total turnover or gross receipts, deductions available under sections 30 to 38 (including depreciation on assets under Section 32) are not considered. Additionally, interest paid on borrowed funds is also not eligible for deduction.
Since the enactment of the Finance Act of 2017, more weightage has been given to digital transactions. Sales made through digital transactions are considered at six percent of the turnover, while other transactions are considered at eight percent for income calculation purposes. Digital transactions include any turnover received through account payee cheques, account payee drafts, bank ECS, and even digital payments made before submitting the income tax return.
In the case of a partnership firm, deductions for remuneration and interest paid to partners on their capital are not permissible.
Assessees opting for the benefits of this section on a percentile basis are not required to maintain books of account as per Section 44AA. However, if an assessee maintains books of account and the profit as per the books is less than eight percent, and they wish to declare that profit as income, they must have their books of account audited under Section 44AB of the Income Tax Act.
Conclusion:
The presumptive taxation scheme under Section 44AD offers small business owners a simplified method of managing their tax obligations. By opting for this scheme, entrepreneurs can calculate their income based on a predetermined percentage of their turnover or gross receipts, without the need for complex bookkeeping. Additionally, the scheme provides relief from the obligation to pay advance tax in installments, as the entire tax liability is due by March 15th. Embracing Section 44AD allows small business owners to focus on their core operations while ensuring compliance with tax regulations.
Extract of Section 44AD of Income Tax Act, 1961-
Special provision for computing profits and gains of business on presumptive basis under Section 44AD.
(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assesse engaged in an eligible business, in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assesse, 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”:
Provided that this subsection shall have effect as if for the words,” eight percent” the words “six percent” had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, during the previous year or before the due date specified in sub section (1) of section 139 in respect of that previous year.
(2) Any deduction allowable under the provisions of section 30 to 38 shall, for the purposes of sub section (1), be deemed to have been already been already given full effect to and no further deduction under those sections shall be allowed
(3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assesse had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
(4) Where an eligible assesse declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the live assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub section (1).
(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assesse to whom the provisions of sub section(4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income tax, shall be required to keep and maintain such books of account and other documents as required under sub section (2) of section 44AA and get them audited and furnished a report of such audit as required under section 44AB
(6) The provisions of this section, notwithstanding anything contained in the forgoing provisions, shall not apply to –
(i) a person carrying on profession as referred to in sub-section(1) of section44AA;
(ii) a person earning income in the nature of commission or brokerage; or
(iii) a person carrying on any agency business.
Explanation – For the purpose of this section,-
(a) “eligible assesse” means,-
(i) an Individual, Hindu Undivided Family or partnership firm, who is a resident but not a limited liability partnership firm as defined under section 2(1)(n) of the Limited Liability Partnership Act, 2008; and
(ii) who has not claimed deduction under any of the sections10A, 10AA, 10B, 10BA, or deduction under any provisions of Chapter VIA under the heading “C – Deduction in respect of certain incomes”in the relevant assessment year;
(b) “eligible business” means,-
(i) any business expect the business of plying, hiring or leasing goods carriages referred to in section 44AE, and
(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.
Following provisions shall be inserted after sub clause (ii) of clause (b) of explanation to section 44AD by the Finance Act, 2023, w.e.f. 1.4.2024.
Provided that where the amount or aggregate of the amounts received during the previous year, in cash, does not exceed five percent of the turn over or gross receipt of such previous year, this sub clause shall have effect as if for the words, ”two crore rupees”, the words “three crore rupees” had been substituted;
Provided further that for the purposes of the first proviso, the receipt of amount or aggregate of amounts by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to receipt in cash.
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