Presumptive taxation- Section 44AD, 44ADA, 44AEAC

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Presumptive Tax Scheme

The presumptive scheme option has always been an exciting and confusing story for taxpayers. As the 2016 Budget comes into effect from FY 2016-17, there have been some important additions/deletions in the system, which you should be aware of. The presumptive tax scheme is designed to provide relief to small taxpayers in the tedious task of maintaining account books u/s 44AA and creating audited accounts u/s 44AB. Under the aforementioned scheme, the taxpayer may disclose the income in the prescribed manner and obtain benefits u/s 44AD, 44ADA, and 44AE.  This article will discuss the presumptive tax scheme.

Table of Contents

Key Abstract

The government has implemented a new presumptive taxation scheme for professionals, under whom professionals can file a return declaring 50% of their gross receipts (up to 50 lakhs) as income, and professionals must pay tax on the balance total income after deducting section 80 deductions.

Among the creative professions eligible to participate in this plan are architects, interior designers, advertising, and technological experts. Even if you get revenue from a foreign customer in your international bank account, if you are a resident of India, it will be taxed in India.

As per the Income Tax Act, 1961 a person engaged in business or profession is required to maintain regular books of account, and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income Tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA, and 44AE. A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from the tedious job of maintenance of books of account and also from getting the accounts audited.

Presumptive Taxation under Income Tax Act, 1961

Section 44ADA presumes the computation of revenues from profession.

Profits and gains of business or profession shall be determined to be “an amount equivalent to or more than 50% of total gross revenues” under the heading “Profits and gains of business or profession.”

In other words, Sec 44ADA applies to anyone who is a recognized professional with a gross income of less than or equal to Rs. 50 lakhs!

Section 44ADA requires him to give at least 50% of his gross profits as profit, i.e. the amount on which tax would be levied. Alternatively, the government considers 50% of your gross profits to be costs and 50% to be profit.

Section 44AD under Income Tax Act, 1961

It is designed to provide relief to small taxpayers by being a single person, a resident of HUF, and a resident cooperative firm (not LLP) who do any business who have not claimed deductions u/s 10A/10AA/10B/10BA or 80HH to 80RRB appropriate year, but does not include the following businesses:

  • Business of leasing, renting, or plying goods carriages referred to in section 44AE;
  • An individual running any agency business;
  • An earnings in the form of commission or brokerage by an individual;
  • A person performing any category as prescribed is u/s 44AA (1).
  • The proposed 44AD tax scheme can only be used if your total profit or total receipts from the business do not exceed Rs. 2 crores [Previously, the same was Rs. 1 crore].
  • If you accept the provisions of section 44AD, your income will not be calculated normally but will be calculated @ 8% of the total profit or receipts for the relevant business for the year. The revenue calculated under this scheme will be the last taxable business covered under the projected tax scheme and no additional costs will be allowed or disallowed even due to depreciation. However, the recorded value of any assets used in that business will be calculated as if a decrease in section 32 is required and indeed permitted.
  • Higher revenue, i.e., more than 8% can be declared if actual revenue is more than 8%.
  • You can claim income at a lower rate (i.e., less than 8%), however, if you do, and your income exceeds the basic exemption limit, you will need to keep the section 44AA account books and get your accounts checked. s 44AB.
  • In addition, the total amount of advance tax will be paid on or before 15 March and no separate quarterly dates are specified [Previously, no advance taxes were payable by taxpayers for choosing this scheme].
  • Discouraging provisions have been introduced in the 2016 Budget which means that if you choose this plan you will have to follow the same for the next 5 years and if you fail to do so, the presumptive tax scheme will not be available for the next 5 years. In that case, you will also need to keep and maintain account books and find that your accounts have been audited.

Section 44ADA under Income Tax Act, 1961

The presumptive tax scheme u/s 44ADA is designed to give exemption to a person living in India whose total receipts do not exceed Rs. 50 lakh and do the following specific work:

  • Medical 
  • Legal
  • Interior decoration
  • Accountancy
  • Technical consultancy
  • Architectural
  • Engineering
  • Any other category as notified by CBDT.
  • In that case, if you accept the provisions of section 44ADA, the income will be calculated @ 50% of the total amount of work receipts for the year, and any other deduction claim is not allowed after declaring profit @ 50% though you can declare a profit of more than 50% and if you wish.
  • However, if you declare a profit of less than 50%, and your income exceeds the basic release limit, you will need to take care of account u/s 44AA and have your accounts u/s 44AB.
  • The revenue calculated under this scheme will be the final taxable income for the work performed under the proposed tax plan and no additional costs will be allowed or disallowed even due to depreciation.
  • Provisions relating to previous taxes, bookkeeping, and auditing are the same as discussed above. In addition, the provision of scheme selection for the next 5 years does not apply to specialists.

Section 44AE under Income Tax Act, 1961

The u/s 44AE system is designed to relieve everyone who is in the business of paying, renting, or leasing freight cars and who does not own more than 10 freight vehicles during the relevant year.

  • One major difference compared to Section 44AD is that “person” in this category includes everyone i.e. person, HUF, firm, company, etc.
  • If you accept the provisions of section 44AE, your income will be calculated by Rs. 7,500 per vehicle per month for which the vehicle is yours and where part of the month will be considered as a full month.
  • And if the actual income is higher than the estimate, that is, it is more than Rs. 7,500, and then the highest income can be declared at the request of the taxpayer.
  • In addition, you can claim income at a lower cost (i.e., less than Rs. 7,500 per cargo per month) but if you do, and your income exceeds the basic release limit, you will need to keep accounts book u/s 44AA and have your accounts checked u/s 44AB.
  • The provisions relating to the receipt of deductions, depreciation, asset value note, advance tax, and auditing are the same as discussed above. Only a joint venture can claim additional deductions for income and interest paid by our partners.

Benefits to File Returns under Presumptive Tax

The following are some of the advantages of Presumptive Tax:

  • Easier to File: The tax form is much shorter and easier to file than a hefty 30 page ITR form.
  • Save money: Instead of hiring a tax professional, professionals may now file their own tax returns. For such files, consultants frequently charge between Rs. 5000 and Rs. 15000.
  • Save Tax: Most professionals do not have many expenses to report. Many tax reductions can be realized by declaring 50% of revenue as profit and the remaining 50% as expense.

Using Section 44ADA to claim expenses

Any deduction covered by sections 30 to 38, i.e. expenditures incurred in connection with your company or profession, is deemed to have already occurred, and no deduction under those sections is authorized. This means that once income is presented for taxation under this condition, it is no longer permissible to claim expenses such as rent, transportation, and phone bills. Deductions under Chapter VIA (Sec 80C, 80D, and so on) such as LIC, PPF, and medical claims, on the other hand, will continue to be allowed.

ITR Filing for companies in Jaipur

Final words

To alleviate the burden of compliance with small taxpayers’ law, the Government is providing an easy-to-understand and compliant Presumptive Taxation Scheme. Under the Presumptive Taxation Scheme, small taxpayers are not required to take care of any account books and their profits are considered to be a certain percentage of Total Sales. This is an old and useful system and various improvements have been made by the Government from time to time to ensure that it remains useful and easy to understand for taxpayers.

If you need a professional opinion on the Presumptive Taxation Scheme, contact our Experts at Legal Window.

CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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