Important Keyword: Business and Profession Income, Presumptive Taxation Scheme, Section 44AD.
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Section 44AD: Presumptive Taxation for Business
The Presumptive Taxation Scheme, introduced by the Central Board of Direct Taxes (CBDT), aims to alleviate the burden on small taxpayers by simplifying the process of maintaining books of accounts and undergoing audits. Section 44AD of the Income Tax Act outlines this scheme, which is specifically designed for businesses.
Under Section 44AD, businesses with a turnover of up to INR 3 Crore are eligible to avail the benefits of presumptive taxation. This scheme offers a simplified method for calculating taxable income, allowing eligible businesses to declare their income at a prescribed rate based on their turnover, without the need for detailed accounting records or audits.
Section 44AD: Eligibility
Under Section 44AD of the Income Tax Act, certain taxpayers engaged in business activities are eligible to opt for the Presumptive Taxation Scheme. Eligible taxpayers include resident individuals, resident Hindu Undivided Families (HUFs), and resident partnership firms (excluding Limited Liability Partnerships or LLPs).
However, there are certain categories of taxpayers who cannot avail of the benefits of the Presumptive Taxation Scheme under Section 44AD. These include non-resident taxpayers, LLPs, and entities other than individuals, HUFs, or partnership firms. Additionally, taxpayers claiming deductions under specified sections such as Section 10A, 10AA, 10B, 10BA, or Section 80H to 80RRB are not eligible for this scheme.
Furthermore, businesses engaged in specific activities such as plying, hiring, or leasing of goods carriages under Section 44AE, agency business, or earning brokerage or commission income are also excluded from opting for the Presumptive Taxation Scheme under Section 44AD.
To calculate the presumptive income under Section 44AD of the Income Tax Act, taxpayers need to fulfill two conditions:
- Gross Sales or Turnover: The gross sales or turnover of the business should be equal to or less than INR 3 Crore.
- Reporting Income: The taxpayer should report 6% or 8% (depending on the nature of transactions) or more of the gross sales or turnover as income in their Income Tax Return (ITR).
For non-digital transactions, the prescribed rate is 8%, while for digital transactions, it is 6%. This means that taxpayers engaged in businesses with non-digital transactions can consider 8% of their gross sales or turnover as their presumptive income. Similarly, for businesses with digital transactions, 6% of the gross sales or turnover can be considered as presumptive income.
Taxpayers meeting these conditions can opt for the Presumptive Taxation Scheme under Section 44AD and calculate their income accordingly for tax purposes.
Given the scenario, Akshay’s trading business meets the eligibility criteria to opt for the Presumptive Taxation Scheme under Section 44AD:
- Gross Sales: Akshay’s gross sales for FY 2023-24 are INR 1.8 Crore, which is less than INR 3 Crore, making him eligible for the scheme.
- Reporting Income: Akshay needs to report 6% or 8% of the gross sales as income, depending on the nature of transactions. Since the sales include both cash and non-cash payments, and there is no indication of the nature of transactions (digital or non-digital), we’ll consider the higher rate of 8% for calculation purposes.
Now, let’s calculate Akshay’s presumptive income under Section 44AD:
Presumptive Income = 8% of Gross Sales Presumptive Income = 8% of INR 1.8 Crore Presumptive Income = INR 14,40,000
Since Akshay’s presumptive income (INR 14,40,000) is at least 6% of the gross receipts, he can opt for the Presumptive Taxation Scheme under Section 44AD. As a result:
- Akshay can pay tax on INR 14,40,000 as per the applicable slab rate without maintaining books of accounts as per Sec 44AA.
- He is not required to undergo Tax Audit since the income reported meets the minimum threshold required under the scheme.
Under the Presumptive Taxation Scheme outlined in Section 44AD, the following considerations apply:
Income Tax Calculation:
- Income generated under the presumptive taxation scheme falls under the category of business income classified as Profits and Gains of Business or Profession (PGBP). This income is subject to taxation at the slab rates specified in the Income Tax Act.
Expense Claiming:
- Taxpayers reporting income under the presumptive taxation scheme cannot claim expenses against the reported income. However, they are eligible to claim deductions under Chapter VI-A of the Income Tax Act. For instance, in the case of a partnership firm opting for presumptive taxation, partner’s remuneration and interest on capital can be claimed as expenses.
Advance Tax Payment:
- Taxpayers who opt for the presumptive taxation scheme must ensure the payment of the entire advance tax amount on or before the 15th of March of the financial year. Failure to make advance tax payments by the due date may result in the imposition of interest under Section 234C. However, interest is levied only if the tax liability exceeds INR 10,000.
ITR Filing:
- Taxpayers choosing presumptive taxation under Section 44AD are required to report such income as Profits and Gains of Business or Profession (PGBP) and file Form ITR 4 on the Income Tax Website. They must specify the relevant Business and Profession Codes based on the nature of their profession. If the taxpayer earns income from capital gains in addition to presumptive income, they should file Form ITR 3.
Under Section 44AD, income taxed presumptively is categorized as business income under the head “Profits and Gains of Business or Profession” (PGBP). This income is subject to taxation at the slab rates specified in the Income Tax Act.
Expense deductions against this income are limited. Taxpayers reporting a fixed percentage of gross receipts as income cannot claim expenses directly. However, they can still avail of deductions under Chapter VI-A of the Income Tax Act. In the case of a partnership firm opting for presumptive taxation, partner’s remuneration and interest on capital can be claimed as expenses.
Advance tax payments are a crucial aspect for taxpayers opting for the presumptive taxation scheme under Section 44AD. The entire advance tax amount must be paid on or before the 15th of March of the financial year. Failure to do so may result in interest being levied under Section 234C. However, interest is charged only if the tax liability exceeds INR 10,000.
Tax Audit and Books of Accounts for Presumptive Income under Section 44AD
For filing income tax returns (ITR), taxpayers under presumptive taxation (Section 44AD) should report their income as PGBP Income and utilize Form ITR 4 on the Income Tax Website. They are required to specify the relevant Business and Profession Codes based on the nature of their profession. If the taxpayer has income from capital gains in addition to presumptive income, they should file Form ITR 3.
Adhering to these guidelines ensures compliance with income tax regulations and facilitates a smooth tax filing process for taxpayers opting for the presumptive taxation scheme under Section 44AD.
Under Section 44AA of the Income Tax Act, if a taxpayer chooses the presumptive taxation scheme under Section 44AD and reports income at a rate of 6% or 8% or more of the gross receipts, they are relieved from the obligation to maintain books of accounts.
However, if the taxpayer reports income lower than 6% or 8% of gross receipts and their total income exceeds the basic exemption limit of INR 2,50,000, they must maintain books of accounts and have them audited under Section 44AB(e).
Section 44AD of Income Tax: 5 Year Rule
Additionally, there’s a provision known as the “5 Year Rule” under Section 44AD. According to this rule, if a taxpayer opts for the presumptive taxation scheme in a particular financial year, they are required to continue opting for it for the subsequent five financial years continuously. Failure to comply with this rule will render the taxpayer ineligible to avail the benefits of the presumptive taxation scheme for the next five assessment years. For instance, if a taxpayer chooses the Section 44AD scheme for the assessment years 2018-19 and 2019-20 but opts out of it for the assessment year 2020-21, they will lose eligibility for the scheme for the subsequent five assessment years, from 2021-22 to 2025-26.
Read More: Tax Audit Report – Form 3CA, 3CB, 3CD
Web Stories: Tax Audit Report – Form 3CA, 3CB, 3CD
Official Income Tax Return filing website: https://incometaxindia.gov.in/
