PRESUMPTIVE TAXATION UNDER THE INCOME TAX ACT, 1961
In order to alleviate the burdensome task of bookkeeping and the obligation of undergoing audits for small-scale taxpayers, the Income-tax Act has instituted the presumptive taxation scheme outlined in sections 44AD, 44ADA, and 44AE. This section provides comprehensive insights into the various provisions of the presumptive taxation scheme encapsulated within Section 44AD, Section 44ADA, and Section 44AE.
Presumptive Taxation Scheme Defined
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As per the provisions of the Income-tax Act, individuals engaged in business or profession are typically required to maintain meticulous books of account and undergo audits.
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In recognition of the challenges faced by small-scale taxpayers in adhering to these rigorous standards, the Income-tax Act has instituted the presumptive taxation scheme, outlined comprehensively in sections 44AD, 44ADA, and 44AE.
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Under this scheme, individuals opting for presumptive taxation can declare their income at a prescribed rate, thereby exempting themselves from the burdensome tasks of bookkeeping and mandatory audits.
Presumptive Taxation Schemes for Small Taxpayers
The Income-tax Act introduces two distinct presumptive taxation schemes tailored for small-scale taxpayers:
1. Presumptive Taxation Scheme of Section 44AD
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The scope of the presumptive taxation scheme under section 44AD is crafted to provide relief to small taxpayers engaged in any business, excluding the business of plying, hiring, or leasing goods carriages as specified in section 44AE.
Eligible entities to adopt the scheme include:
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Resident Individuals
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Resident Hindu Undivided Families
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Resident Partnership Firms (excluding Limited Liability Partnership Firms)
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It’s crucial to note that non-residents and entities beyond the ambit of individual, HUF, or a partnership firm (excluding Limited Liability Partnership Firms) are ineligible to adopt this scheme.
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Additionally, entities making claims for deductions under specified sections, such as 10A, 10AA, 10B, 10BA, or sections 80HH to 80RRB in the relevant year, cannot avail themselves of this scheme.
Exclusions from Section 44AD Presumptive Taxation Scheme
The presumptive taxation scheme outlined in Section 44AD is specifically crafted to ease the compliance burden for small taxpayers engaged in various businesses. However, certain businesses and professionals are excluded from availing the benefits of this scheme. Here are the key exclusions:
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Goods Carriage Business:
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The scheme does not extend its relief to businesses involved in the plying, hiring, or leasing of goods carriages as specified in Section 44AE.
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Agency Business or Commission Earning Activities:
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Individuals involved in agency businesses or earning income in the form of commission or brokerage are ineligible for the presumptive taxation scheme under Section 44AD.
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Profession as per Section 44AA(1):
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Those engaged in professions specified under Section 44AA(1) cannot opt for the presumptive taxation scheme.
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Insurance Agents:
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Insurance agents, who derive their income through commissions, are specifically barred from adopting the presumptive taxation scheme of Section 44AD.
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Turnover Threshold:
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Entities whose total turnover or gross receipts for the fiscal year exceed Rs. 2,00,00,000 are not eligible for the presumptive taxation scheme under Section 44AD.
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Note that, starting from the Assessment Year 2024-25, if the cash receipts during the previous year do not surpass 5% of the total turnover or gross receipts and are not received through account payee cheques or bank drafts, the threshold limit is increased to Rs. 3,00,00,000.
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It’s imperative to understand these exclusions to ensure compliance with the eligibility criteria for availing the benefits of the presumptive taxation scheme under Section 44AD.
Computation of Taxable Business Income under Normal Provisions
Under the regular provisions of the Income-tax Act, when an individual or entity opts not to adopt the presumptive taxation scheme of Section 44AD, the taxable business income is calculated through the following methodology:
Particulars | Amount |
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Turnover or gross receipts | XXXXX |
Less: Expenses incurred | (XXXXX) |
Taxable Business Income | XXXXX |
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In adherence to the Income-tax Act, the taxable business income is derived by subtracting the total expenses incurred in the process of earning income from the overall turnover or gross receipts.
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This meticulous calculation ensures an accurate representation of the taxable income for individuals or entities not availing themselves of the presumptive taxation scheme outlined in Section 44AD.
Computation of Taxable Business Income under Section 44AD Presumptive Taxation Scheme
1. Computation Methodology:
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For individuals adopting the presumptive taxation scheme of Section 44AD, the computation of taxable business income differs significantly from the regular provisions:
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Normal Provisions:
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Taxable Business Income = Turnover – Expenses
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Presumptive Taxation Scheme (Section 44AD):
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Taxable Business Income = Presumptive Rate * Turnover
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2. Presumptive Rates:
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Initial Rate: 8% of turnover or gross receipts
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Reduced Rate (Digital Transactions): 6% of turnover if received via account payee cheque, bank draft, or electronic clearing system before the due date of filing return under Section 139(1).
3. Voluntary Disclosure:
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Taxpayers have the option to disclose business income voluntarily at rates higher than the prescribed 8% or 6%, as applicable.
4. Finality of Presumptive Income:
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The income computed at the prescribed rate is considered final, and no further expenses are allowed or disallowed.
5. Deductions and Allowances:
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Unlike under normal provisions, no deductions or disallowances are considered for expenses. The income computed at the presumptive rate is conclusive.
6. Depreciation:
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Separate deduction for depreciation is not available. Still, the written-down value of assets is calculated as if depreciation as per Section 32 is claimed and allowed.
7. Bookkeeping Requirements:
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Businesses under Section 44AD are exempted from the obligation to maintain books of account, as prescribed under Section 44AA.
8. Advance Tax Payment:
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Taxpayers opting for Section 44AD must pay the entire advance tax by March 15 of the previous year to avoid interest charges under Section 234C.
9. Exemption from Tax Audit (Section 44AB):
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Tax audit under Section 44AB is not applicable to individuals opting for the presumptive taxation scheme of Section 44AD.
10. Consequences of Opting Out:
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If a taxpayer opts out from the presumptive taxation scheme, he must follow the regular provisions for the next 5 years. Failure to do so renders the presumptive taxation scheme unavailable for the subsequent 5 years.
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The taxpayer is required to maintain books of account and may be subject to tax audit as per Section 44AB from the assessment year in which he opts out.
Presumptive Taxation Scheme of Section 44ADA
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Intended Beneficiaries: The presumptive taxation scheme of Section 44ADA is designed to provide relief to small taxpayers engaged in specified professions.
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Eligible Professions: Individuals or partnership firms in India engaged in the following professions are eligible for the presumptive taxation scheme:
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Legal
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Medical
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Engineering or architectural
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Accountancy
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Technical consultancy
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Interior decoration
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Any other profession as notified by CBDT
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Amendment for Eligible Assessee (Effective AY 2021-22): The Finance Act, 2021 defines eligible assessees for Section 44ADA as individuals or partnership firms (excluding Limited Liability Partnerships under the Limited Liability Partnership Act, 2008).
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Gross Receipts Threshold: Entities with total gross receipts exceeding Rs. 50,00,000 are ineligible for the presumptive taxation scheme. However, if cash receipts do not exceed 5% of the total gross receipts, the threshold is increased to Rs. 75,00,000 (effective from AY 2024-25).
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Computation of Taxable Income: In the presumptive taxation scheme of Section 44ADA, income is computed on a presumptive basis at 50% of the total gross receipts of the profession. Individuals can declare a higher income if desired.
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Finality of Presumptive Income: The income computed at 50% is considered final, and no further expenses are allowed. Deductions for additional expenses are not permitted.
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Depreciation and Books of Account: No separate deduction for depreciation is available under Section 44ADA. However, the written-down value of assets is calculated as if depreciation under Section 32 has been claimed and allowed. Individuals opting for this scheme are not required to maintain books of account.
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Advance Tax Payment: Entities under Section 44ADA must pay the entire advance tax by March 15 of the previous year. Failure to do so may incur interest as per Section 234C.
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Exemption from Tax Audit (Section 44AB): Individuals opting for the presumptive taxation scheme of Section 44ADA are exempt from tax audits under Section 44AB.
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Consequences of Not Opting or Declaring Lower Income: Individuals who do not opt for the presumptive taxation scheme or declare income lower than 50% must maintain books of account as per Section 44AA and undergo account audits as per Section 44AB if their income exceeds the maximum amount not chargeable to tax.
These provisions aim to simplify tax compliance for small professionals and encourage the adoption of digital transactions.
Presumptive Taxation Scheme of Section 44AE
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Purpose and Applicability: The Section 44AE presumptive taxation scheme is designed to offer relief to small taxpayers involved in the business of plying, hiring, or leasing goods carriages.
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Eligibility Criteria: The provisions apply to all entities (individuals, HUF, firms, companies, etc.) engaged in the business of plying, hiring, or leasing goods carriages. However, eligibility is subject to not owning more than 10 goods vehicles at any time during the year.
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Computation of Taxable Income: For eligible businesses, income is computed on an estimated basis. The calculation depends on the type of goods vehicle:
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Heavy Goods Vehicle (gross weight exceeding 12,000 kilograms):
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Income computed at Rs. 1,000 per ton of gross vehicle weight for each month or part of a month during ownership.
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Other Goods Vehicles:
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Income computed at a rate of Rs. 7,500 per vehicle for each month or part of a month during ownership.
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Illustrative Calculations:
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Example 1: Mr. Khush owned 9 goods vehicles (other than heavy goods vehicles) throughout 2023-24.
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Monthly income per goods vehicle: Rs. 7,500
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Total annual income: Rs. 8,10,000
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Example 2: Mr. Sunil owned 5 heavy goods vehicles and 4 other goods vehicles during 2023-24.
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Monthly income for heavy goods vehicles: Rs. 65,000
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Monthly income for other goods vehicles: Rs. 30,000
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Total annual income: Rs. 11,40,000
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Finality of Presumptive Income: The presumptive income computed at the prescribed rates is considered final. No further expenses will be allowed or disallowed.
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Partnership Firms: In the case of a taxpayer being a partnership firm opting for the presumptive taxation scheme, further deductions can be claimed for remuneration and interest paid to partners as per the Income-tax Act.
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Depreciation and Books of Account: No separate deduction for depreciation is available. However, the written-down value of assets used in the business is calculated as if depreciation under Section 32 has been claimed and allowed.
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Exemption from Bookkeeping (Section 44AA): Entities adopting the presumptive taxation scheme under Section 44AE are not required to maintain books of account as prescribed under Section 44AA.
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Advance Tax Payment: No concession is provided for advance tax payment. Entities adopting the presumptive taxation scheme are liable to pay advance tax.
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Consequences of Not Opting or Declaring Lower Income: If an entity does not opt for the presumptive taxation scheme or declares income lower than the prescribed rates, they must maintain books of account as per Section 44AA and undergo account audits as per Section 44AB.
These provisions aim to simplify tax compliance for small businesses engaged in goods carriage, providing a streamlined approach to income computation and reducing administrative burdens.
Disclaimer: The views expressed herein are strictly personal. This document is intended solely for informational purposes and does not constitute professional advice or recommendations. The entire content of this document has been formulated based on relevant provisions and information available at the time of preparation. Although diligent efforts have been made to furnish authentic information, it is advised to seek a better understanding and obtain professional advice after a thorough examination of the specific situation. The author disclaims any liability for any loss or damage of any kind arising from the information in this article and any actions taken in reliance thereon.
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