The government’s ease of doing business policy helped many small firms and seed-funded start-ups to grow at pace. Several policies were also announced for new ventures to access easy credit facilities with minimal reporting. The Presumptive taxation Scheme of Income Tax introduced in late 1995-1996, was also one of the key policies of the government which benefited several business entities and saved their compliance burden by minimizing their bookkeeping.
The below post will help you understand what the Presumptive Taxation Scheme is all about. And how a taxpayer can avail benefits of it?
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Presumptive Taxation Scheme
As per the Income Tax Act, 1961, under the presumptive taxation scheme, a taxpayer engaged in business or profession is not required to maintain his books of accounts. The scheme provides special provisions under Section 44AD, Section 44ADA, and Section 44AE. Under the scheme, a taxpayer can declare his income at the rate of 8 % (6% of all transactions held digitally) of his total annual turnover of the business and can pay the Online Income Tax Return Service in Delhi as per the applicable tax slab rate.
Also, under the presumptive taxation scheme, a taxpayer is exempted from maintaining his books and getting his accounts audited through a tax professional. Audit as said is exempted under this scheme, up to a certain limit notified by the tax department (Rs 2 crore for FY 2019-2020).
Eligibility and Provisions Section 44AD
The Section prescribes tax filing rules for certain taxpayers being residents of India, to declare their profits and gains from their business at a prescribed rate being 8% (6% If all transactions held digitally )of the total annual turnover of the business.
Applicability
Benefits of Opting Presumptive Taxation Scheme under Section 44AD
- Profits / Business total taxable income under Section 44AD can be declared at a prescribed rate of 8% or 6% of the annual gross turnover of the business, which reduces tax ambit on the taxpayer.
- The section exempts the taxpayer from the maintenance of books of accounts and to declare profits on a presumption basis.
- Income tax return filing under Section 44AD for business entities can be done using the ITR Form -4 which is much simpler than filing ITR.
- Taxpayer opting for this scheme can claim tax benefits provided under Chapter VI-A of the Income-tax Act, 1961.
Note: In case the taxpayer carries more than one business, turnover then shall have to be calculated taking into account all his business entities.
Section 44ADA
The Section extends the benefits of the presumptive taxation scheme to professionals where, if the taxpayer carrying on any profession under this section, can claim tax charges on the assumed value of 50% of his total gross receipts during a financial year. Under this section, taxpayers whose total gross receipts are below the limit of Rs 50 lakh shall be covered ( limit subject to change ).
Taxpayers being residents of India and those engaged in the following professions can claim the benefit of Section 44ADA :
- Medical
- Legal
- Engineering
- Accountancy
- Technical Consultancy
- Interior Decoration
- Architectural Designing
Taxpayers who want to declare their income less than 50% of the gross receipts have to maintain their books of accounts and have to get an Income tax audit conducted through a tax professional.
Section 44AE
The Section provides rules and guidelines for the use of the Presumptive Taxation Scheme of Income Tax by all those business entities who are engaged in the business of :
- Plying
- Hiring
- Leasing Goods
- Carriages &
- Entities having more than 10 goods vehicles.
Under this scheme, the income of the taxpayer is calculated on a vehicle weight estimation basis where:
For Instance, if Rishabh owns 6 trucks which on average carry 14000 kg goods, then the income of Rishabh as per provisions of Section 44AE shall be estimated in the following way:
Income Tax Audit under Presumptive Taxation Scheme (Section 44AB)
Under the presumptive taxation scheme (Section 44AD, Section 44ADA, and Section 44AE), the taxpayer’s income is presumed at a specified rate of the specified turnover limit of business or profession. In case, the turnover is more than the prescribed limit or if the taxpayer wants to declare profit/income more than the prescribed rate, he shall then have to undergo an income tax audit of his accounts under Section 44AB.
Also, other than availing the presumptive taxation scheme, the taxpayer opts to declare his income or profit lower than the prescribed rate then he shall have to maintain his books of accounts and have to furnish an income tax audit report of the same to the department for such financial year.
The income tax audit Section 44AB prescribes the manner, rules, and the provisions related to the conduct of income tax audit, it also prescribes for punishment & penal consequences in case of misconduct or if any discrepancy is found in records during the audit.
Things to Know
- Opting for Presumptive Taxation Scheme under Section 44AD, the taxpayer shall not be eligible to claim any deduction on account of depreciation. Any deduction provided under Section 30 to 38 shall be deemed to be already given and no further deduction can be claimed if the presumptive taxation scheme is availed.
- Salary / Remuneration to partners paid if any, shall not be permitted to be claimed as a deduction if Section 44AD is availed.
- Businesses/Entities those availing presumptive taxation scheme and obliged to compliance of provisions of advance are required to pay 100% advance tax to the department before 15th March of the Financial year.
- Taxpayers that availing presumptive taxation scheme, can any time opt-out of the scheme in any financial year, while once opted out the taxpayer becomes ineligible for the scheme for the next 5 years.
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