Section 44AD of Income Tax - Presumptive Taxation Scheme

The evaluation of income tax payable by a business enterprise is dependent on the maintenance of an account book, including profit and loss statements. The account books are subject to audit, determining the corresponding tax liability. Small taxpayers were at the receiving end while complying with the stringent rules for tax compliance.

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However, as per Section 44AD of the Income Tax Act, the government-sponsored Presumption Taxation Scheme provides relief to small assessees. They are exempt from maintaining regular books and audit reducing their tax compliance burden. So, let us delve deeper into the topic for greater clarity. 

Understanding Section 44AD:

The Presumption Taxation Scheme of Section 44AD provides respite to the small business operators to improve tax compliance. Accordingly, the business enterprise enjoys certain conditional privileges, including waiver from maintenance of transaction accounts and audit thereon.    

The primary conditions for adopting the provisions under Section 44AD are:

  • Businesses with an annual turnover of less than Rs. 2 Cr

  • The business entity must declare an 8% profit under the Presumption Taxation Scheme for non-digital transactions

  • The gain to report under the scheme is 6% for digital transactions. 

  • Businesses opting for the tax scheme cannot claim tax deductions for expenses under Sections 30 to 38. 

  • Business entities must continue for a minimum of 5-years under the Presumptive Taxation Scheme.  

However, the following are ineligible for the benefits of presumptive taxation:

  • Life insurance agents

  • Commission agents of any kind

  • Businesses running, plying, hiring, or leasing  goods carriages

That takes us to understand the eligibility criteria for adopting the Presumptive Taxation Scheme. 

Eligibility Criteria for Presumptive Taxation Scheme:

The primary aim of Section 44AD is to provide relief to small taxpayers indulging in business or professions, subject to complying with the underlying conditions. However, amendments leading to Section 44ADA in the 2021 Union Budget clarify the eligibility criteria and the requirements attached. Accordingly, the following can adopt the scheme to their benefit.

  • Resident Individuals

  • Resident HUF

  • Partnership Firm except for Limited Liability Partnership (LLP)

The essential element of the Presumptive Taxation Scheme is that the applicant’s income is estimated. Accordingly, the profits of a person wishing to join the scheme are 8% of the previous year’s turnover. However, it is 50% of total gross receipts in the financial year in the case of professions. Additionally, the indicative disciplines coming within the scheme’s ambit are:

  • Engineering

  • Architecture

  • Accountancy

  • Legal Jurisprudence

  • Medical 

  • Technical Consultancy

  • Interior Decorators 

  • Entertainment Business

  • Artist

  • Information Technology

  • Sports Persons

However, they are subject to compliance with the following conditions under Section 44AD:

  • A financial year’s gross receipts of the professionals must not surpass Rs. 50 Lakhs as 50% of the gross turnover

  • Turnover or gross receipts of persons and business firms in the previous year is less than Rs.2 Cr

  • Entities not claiming deduction benefits under Sections 10A, 10AA, 10B, 10BA, or Sections 80HH thru 80RRB during the relevant assessment year 

  • Entities not engaged in hiring, plying, or leasing goods carriage vehicles described under Section 44AE

  • Persons not engaged in the agency, commission, or brokerage business

Features of Presumptive Taxation Scheme of Section 44AD:

Certain amendments in the 2021 Union Budget redefine the provisions under subsection (4) of Section 44AD. Accordingly, you must adhere to the following to reap the benefits of the Presumptive Taxation Scheme:

  • Declare your profits for at least 5-years in continuation per provision of the scheme.

  • You stand to lose the presumptive benefits if you show and file profits using the regular business ITR 3 before completing 5-years of joining the scheme. In addition, the tax scheme disallows you from reaping presumptive taxation benefits for the subsequent 5-year period.

  • The 5-year count begins when you first file for taxes under ITR 3 applicable to regular business. The government intends to discourage misuse of the scheme, hence the 5-year ban.

  • The amount limit for adopting the Presumptive Taxation Scheme is Rs. 2 Cr during the 2016 budget, raising it from the earlier Rs. 1 Cr.

  • The minimum stipulated net income is 8% of your annual turnover and 6% if the receipts are digital.

  • You get a waiver from maintaining the account books as a regular business entity’s taxation regime. In addition, your books of account do not need an audit evaluation.

  • Before the amendment, the assessee did not pay any advance tax. However, you must pay 100% advance tax before 15 March in the relevant financial year under Section 44ADA’s Presumptive Taxation Scheme if your estimated tax exceeds Rs.10,000. 

  • You must file a much simpler and shorter ITR4 instead of ITR3, thus reducing the compliance burden. 

  • The 5-year stipulation for continuing with the Presumptive Taxation Scheme applies to businesses and not professionals.

  • You cannot claim deduction under Sections 30 to 38, including depreciation or unabsorbed depreciation, and take advantage of the benefits under Section 44AD.

  • However, calculate the written down value (WDV) after factoring in depreciation as if under Section 32 for a valid claim.

Calculation Of Business Turnover Under The Presumptive Taxation Scheme:

Gaining insight into the inclusions and exclusions for arriving at the correct presumptive income or profit from the annual turnover is essential. Accordingly, consider the following for filing your tax under ITR 4S.

  • Eligible partnership firms can claim deduction per limits under Section 40(b) on remuneration and interest paid to the partners.

  • You can deduct the depreciated value of an asset if the net asset’s worth reflects the value after factoring in depreciation. 

  • In addition, calculate the turnover using the following inputs.

    • Value Added Tax (VAT)

    • Excise Duty

    • Cess and other levies

    • Sales of supplies and unusable empties

    • Delivery Service Charges

  • Meanwhile, you cannot include the following

    • Received business deposits and advances

    • Consideration received for fixed asset sales

    • Cash or other discounts

A sample computation below clarifies the calculation of turnover and the taxes thereon. 

  • What is the income under business and profession head using the following variables under the Presumptive Taxation Scheme?

    • Total Gross Receipts: Rs.1.5 Cr

    • Non-Digital Receipts: Rs.70 Lakhs

    • Digital Receipts: Rs. 80 Lac

  • Solution: 

    • Non-digital Receipts: Rs.70 Lakhs * 8% = Rs.5.60 Lakhs

    • Digital Receipts: Rs. 80 Lakhs * 6% = Rs.4.80 Lakhs 

    • Income under the business and profession head: Rs.10.40 Lakhs

Declaring Higher Or Lower Income:

The provisions of Section 44AD apply to the eligible businesses by default as soon as it starts operations. If the business’s income falls below 8% of the gross turnover declared under Section 44AD, you lose the waiver of maintaining account books. In contrast, if the actual income exceeds 8% of the turnover per the Presumptive Taxation Scheme, you can declare the higher revenue at your option. 

Therefore, if you declare a lower income of more than the maximum exemption limit of Rs. 2 Lakhs, you must maintain account books prescribed under Sections 44AA and 44AB. Moreover, you lose the benefits under Section 44AD if you fail to continue with the scheme for 5-years continuously, barring an exception when you are ineligible in the interim due to the annual turnover exceeding Rs.2 Cr.

For Example, if your gross turnover in the first year was Rs. 1.5 Cr, you can opt for the benefit. However, if the gross turnover in the second year is Rs. 2.1 Cr, you are ineligible for that year. You can revert to the scheme in the following years if the turnover is less than Rs.2 Cr without inviting the bar for discontinuance.   

In Conclusion

The Presumptive Taxation Scheme proves beneficial for small businesses while reducing the tax compliance burden in a simplified tax filing regime. On the other hand, you must comply with the underlying conditions to reap the benefits. The provisions under Section 44AD continue to provide relief to eligible assessees as envisaged by the government.

FAQ's

  • What is the due date for filing an income return by an individual engaged in business or profession?

    A: The due for filing a return by an individual engaged in business or profession is 31 July of the assessment year. However, the due date is 30 September if the individual must comply with the tax audit. Moreover, these dates are statutory unless changed by the Central Board of Direct Taxes (CBDT), as happened during the pandemic. 
  • What are the tax exemption limits for individuals, businesses, and firms?

    A: The basic tax exemption for individuals is Rs. 2.5 Lakhs, while the amount is nil for businesses and firms.
  • Is there any variation to the gross turnover criteria for adopting the Presumptive Taxation Scheme:

    A: The gross turnover limit of Rs. 2 Cr as the eligibility criteria for adopting the Section 44AD scheme was raised to Rs. 5 Cr in 2020 with a rider of 95% or more digital receipts. 
  • How do you file income tax returns under Section 44AD?

    A: You can file an income tax return using the simplified form ITR 4S if eligible to declare a presumptive income under Sections 44Ad and 44AE without the compulsion of maintaining books. 
  • Does the taxpayer need to maintain books of account if the income declared under the Presumptive Taxation Scheme is higher than the prescribed 8% of the gross turnover?

    A: No, maintenance books of account are necessary only when you declare a lower income than the computed 8% but higher the Rs. 2 Lakhs.

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