Understanding Presumptive Taxation: Benefits and Applicability in India

Introduction:

In simple words, presumptive means likely but not certain, so while computing presumptive taxation, the government does not expect certain amounts, but it must be probably certain. Presumptive taxation is a benefit to small businesses. As per Section 44AB, a tax audit is applicable to a person carrying on a business with a turnover of more than 1 crore, but if he fills out his return on a presumptive basis and has a turnover of less than 2 crore, he is not required to maintain books of accounts as per Section 44AA and is not required to do a tax audit under Section 44AB. If a person carrying on business has an aggregate cash receipt of less than or equal to 5% of total receipts and an aggregate cash payment of less than or equal to 5% of total payments, then a tax audit is required only when the turnover of the business exceeds 10 crore instead of 1 crore. This is how the government will digitalize and encourage cashless receipts and payments. If a person is carrying a business having a turnover of less than or equal to 200 lakhs and he is showing lower income compared with presumptive income (i.e., lower than 6/8%), then a tax audit applies to him. As per 44AE, if a person owns less than 10 goods carriages at any time during the P.Y. and if he declares income lower than the presumptive income, then a tax audit is applicable to him.

Section 44AD:

• This section is applicable to resident individuals, HUFs, and partnership firms (not LLPs), but not to every person, and the turnover of their businesses doesn’t exceed two crores in the previous year.
• As per Section 44AD, taxable business income must be at least 6/8% of total turnover, or we can declare higher profits but not lower than 6/8%. On cash sales, a higher rate is always applicable, and on cashless sales, 6% is applicable.
• Sometimes we receive amounts from debtors after the due date of return of income (i.e., July 31^st), but they are related to the previous year. That amount is also to be a part of turnover, and a presumptive rate of 8% is applicable to it irrespective of mode of receipt. If we receive it before the due date after the end of the previous year, then normal provisions are applicable, i.e., 6% and 8%.
• This section is not applicable to a person who is earning commission or brokerage, a person who is doing agency business, a person who is doing a notified profession because 44ADA is applicable to them, a resident company, LLP, AOP, or BOI, and to all non-residents and businesses whose turnover is more than two crores.
• If the assessee fails to declare profit under Section 44AD in any five consecutive years after the relevant previous year, he is not eligible to declare profit under this section for the next five years from the year of contradiction.
• While filing a return under Section 44AD, the assessee should not be eligible to claim a deduction under Section 10AA or Under heading C in chapter 6A deductions (heading C doesn’t mean 80C deductions), they are income deductions, i.e., from 80H to 80RRB.
• There is only one due date for the payment of advance tax, i.e., March 15^th.

Section 44ADA:

• This is applicable to any resident who is a notified professional under Section 44AA, namely, a legal, medical, engineering, architectural profession, profession of accountancy, technical consultancy, interior decoration, or other notified profession whose gross receipts were not more than fifty lakhs in the previous year.
• On a presumed basis, 50% of your income is deemed taxable, and you can declare more than 50% but not lower than
• While filling out the return of income, if the assessee declares income lower than 50%, then a tax audit is applicable under Section 44AB, and the assessee is required to prepare books of accounts under Section 44AA.
• No five-year criteria are applicable like in Section 44AD, i.e., you have the option to declare income under Section 44AE in the next year even if you don’t opt for presumptive taxation in the current year.
• As with 44AD, the due date for Advance tax is March 15 only.

Section 44AE:

• This section is applicable to persons who own less than ten goods carriage vehicles at any time and do business leasing and hiring goods carriage vehicles.
• The presumed rate of taxation for heavy-weight goods vehicles (ability to carry a minimum of 12000 kg of goods) is 1000/- per tonne of goods carriage weight*number of months or part months*number of vehicles.
• The presumed rate of taxation for light-weight goods vehicles or simply other than heavy goods vehicles (Not able to carry 12000 kg or 12 tonnes) is 7500/-*number of months or part months*number of vehicles.
• Under Sections 44AD, 44ADA, and 44AE, we declare income on a presumption basis, so deductions under Sections 30 to 38 are not applicable. In the case of a firm, Remuneration and interest paid to partners are also not allowed as deductions, but only in the case of Section 44AE are remuneration and interest allowed as deductions.
• Unlike 44AD and 44ADA, advance tax must be paid in 4 installments as per regular norms; otherwise, sections 234A, B, and C will apply.
• Under sections 44AD, 44ADA, and 44AE, In business or profession, depreciation will be calculated on the written-down value of an asset.

Conclusion:

In businesses, No one is willing to disclose their income, so it is one of the best ways to disclose their income because there is no requirement to show books of accounts; they just need to disclose the turnover part in 44AD and total receipts in 44ADA, and in the case of 44AE,even you don’t need to disclose how much you earn from hiring and leasing, just as per heavy goods vehicles, and other than heavy goods vehicles, we compute income under Section 44AE. If you opt for presumptive taxation, then irrespective of your profits, whether you get twenty percent or thirty percent, you must show at least six or eight percent, and in the case of a profession under Section 44ADA, you have to show only half of your total receipts as taxable income. So, choose presumptive taxation and get benefits out of it while filling out your income tax returns.

Reference: https://resource.cdn.icai.org/71140bos57143-cp4u3.pdf