A. Definition of Presumptive Income Scheme
The Presumptive Income Scheme is a tax compliance mechanism under the Indian Income Tax Act. It allows certain small taxpayers to calculate their taxable income on a presumptive basis. In other words, instead of calculating their actual profits and gains, they can declare their income based on a presumptive rate fixed by the government.
B. Benefits of Presumptive Income Scheme
The Presumptive Income Scheme is aimed at reducing the compliance burden on small taxpayers and providing them with a simpler tax calculation mechanism. It also reduces the scope for tax evasion and brings more small taxpayers under the tax net.
C. Overview of Sections 44AD, 44ADA, and 44AE
Under the Presumptive Income Scheme, there are mainly three sections that provide for presumptive income schemes for small taxpayers:
Section 44AD - Presumptive income scheme for eligible businesses: This section applies to resident assessees carrying on eligible businesses with a turnover or gross receipt of two crore rupees or less. Under this section, the eligible business can declare its income at a presumptive rate of 6% or 8% of the total turnover or gross receipts.
Section 44ADA - Presumptive income scheme for certain professions: This section applies to resident assessees engaged in certain professions with total gross receipts not exceeding fifty lakh rupees in a previous year. Under this section, the profession can declare its income at a presumptive rate of 50% of the total gross receipts.
Section 44AE - Presumptive income scheme for owners of goods carriages: This section applies to owners of goods carriages who do not own more than ten goods carriages at any time during the previous year. Under this section, the owner of the goods carriage can declare his income at a presumptive rate per goods carriage per month.
In the following sections of this blog, we will discuss each of these sections in more detail and explain how they benefit small taxpayers.
Section 44AD: Presumptive Income Scheme for Eligible Businesses
A. Eligibility Criteria:
Section 44AD of the Income Tax Act, 1961 provides for the presumptive income scheme for eligible businesses. To be eligible for the scheme, a resident assessee must be engaged in an eligible business, which includes all businesses except the business of plying, hiring or leasing of goods carriages, and profession. The scheme is applicable to individual, Hindu Undivided Family (HUF), or partnership firm, but not to Limited Liability Partnership (LLP) or Company.
B. Threshold Limit:
The threshold limit for the scheme is set at three crore rupees for financial year 2021-22 onwards. If the turnover or gross receipts of the eligible business does not exceed three crore rupees in a financial year, the taxpayer can opt for presumptive taxation under Section 44AD.
C. Computation of Income:
Under this scheme, the taxable income of the eligible business is presumed to be 8% of the total turnover or gross receipts of the financial year. However, the taxpayer can declare income at a higher rate than 8% if they wish to do so.
D. Applicability of Section 44AB:
Section 44AB of the Income Tax Act mandates tax audit for businesses whose turnover or gross receipts exceed one crore rupees in a financial year. However, if a taxpayer opts for presumptive taxation under Section 44AD, they are exempted from the applicability of Section 44AB.
E. Proposed Amendments to Section 44AD:
In the Budget 2023, it is proposed to increase the threshold limit of Section 44AD to three crore rupees, subject to certain conditions. The condition is that the amount or aggregate of the amounts received in cash during the previous year should not exceed five percent of the total turnover or gross receipts. This amendment aims to ease compliance and promote non-cash transactions for small businesses.
Additionally, the proposed amendment also grants exemption from Section 44AB of the Income Tax Act to taxpayers who declare their profits and gains in accordance with the provisions of sub-section (1) of Section 44AD. These amendments will come into effect from 1st April 2024 and will apply to the assessment year 2024-2025 and subsequent assessment years.
In conclusion, Section 44AD of the Income Tax Act provides an easy and hassle-free way for eligible businesses to pay their taxes. The scheme helps to reduce the compliance burden on small businesses and provides relief to taxpayers from the need for tax audit, allowing them to focus on their business operations. The proposed amendments to the section aim to further promote non-cash transactions and ease compliance for small businesses.
Section 44ADA: Presumptive Income Scheme for ProfessionalsSection 44ADA of the Income Tax Act provides a presumptive income scheme for professionals, making it easier for them to comply with tax regulations. In this section, we will discuss the eligibility criteria, threshold limit, computation of income, applicability of Section 44AB, and proposed amendments to Section 44ADA.
A. Eligibility Criteria
To be eligible for the presumptive income scheme under Section 44ADA, the assessee must be a resident individual, Hindu Undivided Family (HUF), or partnership firm engaged in one of the professions listed in Section 44AA(1) of the Income Tax Act, such as legal, medical, engineering, architectural, accountancy, technical consultancy, or interior decoration.
B. Threshold Limit
The threshold limit for availing of the presumptive income scheme under Section 44ADA is INR 50 lakhs, which means that if the gross receipts of the eligible professional do not exceed this limit, they can declare their income at a flat rate of 50% of their gross receipts.
C. Computation of Income
The income of the eligible professional is computed at a flat rate of 50% of the gross receipts for the financial year. Therefore, the professional does not need to maintain books of accounts and can declare income based on the gross receipts.
D. Applicability of Section 44AB
If the eligible professional opts for the presumptive income scheme under Section 44ADA, they are exempted from the provisions of Section 44AB, which requires the assessee to get their accounts audited by a chartered accountant if the total turnover or gross receipts exceed a certain threshold.
E. Proposed Amendments to Section 44ADA
The Union Budget 2023 proposes to increase the threshold limit for availing of the presumptive income scheme under Section 44ADA to INR 75 lakhs. Moreover, similar to Section 44AD, eligible professionals under Section 44ADA will also be allowed to receive up to 5% of their gross receipts in cash. However, any amount exceeding this limit will not be eligible for the presumptive income scheme.
In conclusion, the Presumptive Income Scheme under Section 44ADA offers a simple and easy compliance mechanism for eligible professionals. It enables them to declare their income at a flat rate of 50% of their gross receipts without the need for maintaining detailed books of accounts. The proposed amendments will increase the threshold limit and promote non-cash transactions.
Section 44AE: Presumptive Income Scheme for Transporters
Section 44AE of the Income Tax Act, 1961, provides a presumptive taxation scheme for taxpayers engaged in the business of plying, hiring, or leasing goods carriages. This section aims to simplify the tax compliance process for transporters and reduce their tax burden by allowing them to declare their income at a presumptive rate.
A. Eligibility Criteria:
To be eligible for the presumptive taxation scheme under Section 44AE, a taxpayer should fulfill the following conditions:
- The taxpayer should be engaged in the business of plying, hiring, or leasing goods carriages.
- The taxpayer should own not more than 10 goods carriages at any time during the previous year.
- The goods carriages should not be used for any purpose other than the business of plying, hiring, or leasing.
- The taxpayer should not have opted for the presumptive taxation scheme under Section 44AD or Section 44ADA for any other business.
B. Threshold Limit:
Under Section 44AE, the income of the taxpayer engaged in the business of plying, hiring, or leasing goods carriages is presumed to be at least Rs. 7,500 per month or part of a month for each goods carriage. Thus, the minimum presumptive income per annum per goods carriage would be Rs. 90,000 (i.e., 7,500 x 12).
C. Computation of Income:
The income of the taxpayer under the presumptive taxation scheme is calculated by multiplying the number of goods carriages owned by the taxpayer with the minimum presumptive income per goods carriage, i.e., Rs. 7,500 per month or part of a month. The income calculated as such is deemed to be the taxpayer's income from the business of plying, hiring, or leasing goods carriages for the purposes of taxation.
D. Applicability of Section 44AB:
If the taxpayer declares his income under the presumptive taxation scheme of Section 44AE, he will be exempt from the tax audit provisions of Section 44AB of the Income Tax Act, subject to certain conditions. The conditions include maintaining books of account and other documents related to the goods carriage business and getting them audited by a chartered accountant if the income declared under Section 44AE is less than the presumptive income calculated on a per goods carriage basis.
E. Proposed Amendments to Section 44AE:
No proposed amendments have been announced by the government regarding Section 44AE. However, transporters can still benefit from the presumptive income scheme and ease their compliance burden by opting for the scheme.
Advantages and Disadvantages of the Presumptive Income Scheme
- Simplified Compliance: The Presumptive Income Scheme simplifies the compliance requirements for small taxpayers, as they are not required to maintain detailed books of accounts or undergo auditing procedures.
- Reduced Tax Liability: The scheme offers a more straightforward and efficient way of calculating tax liability, as it allows taxpayers to declare income at a fixed percentage of their turnover or receipts. This, in turn, can result in lower tax liabilities for eligible taxpayers.
- Increased Financial Discipline: The scheme promotes financial discipline among small taxpayers by encouraging them to maintain proper records and receipts of their transactions.
- Encourages Digital Payments: The proposed amendments to the Presumptive Income Scheme promote non-cash transactions by imposing a limit on cash receipts. This encourages taxpayers to adopt digital payment methods, which is in line with the government's push towards a cashless economy.
- Time-Saving: The Presumptive Income Scheme saves time and resources for small taxpayers as they do not have to hire accountants or spend time maintaining detailed accounts.
- Limited Applicability: The Presumptive Income Scheme is applicable only to certain categories of taxpayers such as small businesses, professionals, and transporters, and may not be suitable for larger enterprises.
- Flat Rate: The fixed rate of taxation under the scheme may not always be reflective of the actual income earned by the taxpayer. In some cases, it may lead to higher tax liabilities for the taxpayer.
- Limited Deductions: Taxpayers under the scheme are not eligible for certain deductions and exemptions that may be available to regular taxpayers, which could result in higher tax liabilities.
- Limited Flexibility: The scheme does not offer much flexibility in terms of declaring expenses or losses. Taxpayers are required to declare their income based on a fixed percentage of their turnover or receipts, which may not always reflect the true picture of their financial situation.
- Limited Audit Coverage: Although the Presumptive Income Scheme simplifies compliance requirements for small taxpayers, it also reduces the scope for audit coverage. As a result, there may be instances of tax evasion that go unnoticed, leading to revenue losses for the government.
A. Summary of Key Points
The Presumptive Income Scheme is a taxation system introduced by the Indian government for small taxpayers to simplify their tax compliance. The scheme allows eligible taxpayers to declare their income based on a presumed profit rate, without having to maintain detailed accounts or records.
Section 44AD, 44ADA, and 44AE of the Income Tax Act provide different presumptive income schemes for eligible businesses, professionals, and transporters, respectively. Each scheme has its own eligibility criteria, threshold limits, and computation methods.
The proposed amendments to Section 44AD and 44ADA aim to ease compliance and promote non-cash transactions for small businesses and professionals by increasing the threshold limits for presumptive income schemes.
B. Final Thoughts
The Presumptive Income Scheme has been a boon for small taxpayers in India, who have been struggling to comply with complex tax regulations. The scheme has not only simplified the tax compliance process but has also reduced the burden of maintaining detailed records and accounts.
While the scheme has its advantages, it also has certain limitations and drawbacks. Taxpayers need to carefully evaluate their eligibility and assess the benefits of the scheme against its limitations before opting for it.
The proposed amendments to the scheme are a step in the right direction toward easing compliance and promoting non-cash transactions. It is expected that the amendments will benefit a larger number of small taxpayers in India and contribute to the growth of the economy.