Presumptive Taxation- To reduce the burden of compliance for small taxpayers, The Government provides for a scheme called Presumptive Taxation Scheme. Under this scheme, the taxpayer is not required to maintain any books of accounts, and their profit is presumed to be a certain percentage of sales.
Presumptive taxation mainly covers the following 3 sections of the Income Tax Act.
1) Section 44AD of Income Tax Act- Income presumed to be 8%/6% of the turnover.
2) Section 44ADA of Income Tax Act– Presumptive taxation @ 50% for Professionals.
3) Section 44AE of Income Tax Act- Presumptive taxation for transporters.
The following article explains in detail the provision of presumptive taxation for business under section 44AD of The Income Tax Act, 1961.
Section 44AD of Income Tax Act
Section 44AD was introduced by the income tax law in order to ease the tax burden on small taxpayers or say, assessee. The scheme aims to provide relief to small taxpayers, who conduct any kind of business, with the exception of those businesses as mentioned in section 44AE.
Applicability of section 44AD of Income Tax
Eligible Business:- The provisions laid out in section 44AD covers all types of business except those businesses as mentioned in section 44AE.
Turnover:- The person whose gross turnover is below Rs. 2 Crore can opt for the provision of section 44AD.
Assessee:- Under section 44AD Following assessee are eligible to opt for this section provisions.
- Individual Assessee
- Hindu Undivided Family (HUF)
- Partnership Firms- (Limited Liability Partnership (LLP) do not fall under the purview of this section)
Provided that all the above assessee should be Resident in India.
Non-Applicability of section 44AD of Income Tax Act
👉The profession of legal, medical, engineering, architectural, accounting, technical consultancy, interior decoration, film artiest, or authorized representative or any specified profession notified by the board under section 44AA, because these persons are deal with by the separate section of the Income Tax Act i.e Section 44ADA.
👉 A person carrying on any Agency business.
👉 A person earning income in the nature of commission or brokerage.
Feature of section 44AD of Income Tax Act
Under section 44AD, The presumed income of the assessee is deemed to be 8% of the gross turnover for the financial year, however, the assessee can claim a higher profit.
If eligible assessee received, any turnover/gross receipts by way of any digital mode, he can claim 6% in lieu of 8%.
However an assessee can claim profit lower than by 8%/6%, but in such case, he has to maintain books of accounts as mentioned u/s 44AA of the Act and get them audited as per section 44AB of the Income Tax Act.
Assessee opted for presumptive taxation u/s 44AD will not be eligible to claim any type of deduction/expenses from section 30 to 38 (including unabsorbed depreciation.)
In the case of partnership firm, no interest and salary to partners subject to section 40b are deductible from such deemed profit.
Further, sections 40, 40A, and 43B are also not applicable if income is deemed under this section.
If there is any advance tax liability then the eligible assessee is required to pay 100% of its tax liability by 15th March of the financial year. No other provision of advance tax applicable on such assessee.
The assessee opts for section 44AD, is not required to maintained books of accounts under section 44AA.
An assessee declaring his income as per presumptive taxation under section 44AD of Income tax Act can also claim deduction under chapter VI-A.
Amendment in section 44AD w.e.f. FY 2016-17
Any eligible person can at any time opts for presumptive taxation u/s 44AD of Income Tax Act.
Moreover, a person can also opt-out of this at any time. However as per the latest amendments, if a person opts out of the scheme of presumptive taxation of section 44AD, then he can’t avail the benefit of this scheme for the next 5 years.
The following chart summarized the above issue amendment-
|Particulars||Presumptive taxation u/s 44AD for business|
|AY 2017-18, 2018-19 and AY 2019-20||Opts for Presumptive Taxation|
|AY 2020-21||Does not opt for Presumptive Taxation|
|AY 2021-22 to AY 2025-26||Can not opt for Presumptive Taxation|
Note:- In case a person opts out of the provision of section 44AD, he would also be required to get his accounts audited under section 44AB by a Chartered Accountants.
WDV of depreciable assets
If the assessee opts section 44AD then the WDV of any assets of eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of depreciation for each of relevant years.
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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.
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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)