Section 44AD of the Income Tax Act provides for a presumptive taxation scheme for businesses with an annual turnover of up to 2 crores. Under this scheme, businesses can choose to pay taxes on a presumptive basis, which is calculated as 6% of the total turnover or gross receipts, without maintaining detailed books of accounts. However, this scheme has certain limitations and areas for improvement.
Monetary Limit for Presumptive Basis
As per the current provisions of Section 44AD, the presumptive taxation scheme is only applicable to businesses with a turnover of up to 2 crores. However, with the growth of economic activity and the volume of business, it has been suggested that the monetary limit for presumptive basis should be increased to Rs. 5 crores for the infrastructure industry. Additionally, it has been suggested that the rate of 6% may be reduced to 5% for certain specified contractors.
Remuneration and Interest to Partners
Section 44AD and 44ADA, which cover the provisions of presumptive taxation, do not allow for the payment of remuneration and interest to partners in a firm. However, other presumptive taxation provisions such as Section 44AE do allow for such payments. This creates a disparity and it has been suggested that payment to partners in the form of salary and interest should be allowed as a deduction from presumptive incomes under Sections 44AD and 44ADA.
The benefit of Presumptive Taxation to LLP
Currently, the presumptive taxation scheme under Section 44AD only applies to businesses run by residents, individuals, HUF, and firms, and does not apply to LLP (Limited Liability Partnership) assessees. It has been suggested that the benefit of Section 44AD should be extended to LLP assessees as well, as there appears to be no cogent reason for excluding them from the scheme.
In conclusion, while the presumptive taxation scheme under Section 44AD provides a simplified tax compliance process for businesses with a turnover of up to 2 crores, there are areas for improvement and suggestions for rationalization of the provisions. The suggestions include increasing the monetary limit on a presumptive basis, allowing remuneration and interest payments to partners, and extending the benefit of presumptive taxation to LLP assessees.