Presumptive Taxation Scheme

Presumptive taxation scheme is a provision introduced within the Income Tax Act for providing relief to small taxpayers. For the purpose of the scheme, a small taxpayer is one whose turnover is less than two crore rupees. The Government of India (GoI) wished to allow assessees in the specified businesses to carry on the trade without being burdened by excessive compliance-related requirements. Hence, Section 44AD was introduced in the Income Tax Act. The section allows assessees to declare income at a prescribed minimal rate and be relieved from the strenuous work of maintenance of books of account. Relaxation shall also be given for the requirement to undergo auditing of accounts. Entities who have enrolled under the presumptive taxation scheme are allowed to compute income on an estimated basis under Section 44AD. The section allows taxpayers to pay tax at a minimum rate. Also, entities enrolled under the scheme are exempt from maintaining books of accounts. Hence, the presumptive taxation scheme can be used by taxpayers to reduce the compliance burden. The present article discusses the presumptive taxation scheme under the Income Tax Act.

Eligibility

To be eligible for the scheme, the assessee should satisfy the following conditions:

The assessee should be an individual, a Hindu Undivided Family or a partnership firm. Limited Liability Partnerships (LLPs) cannot make use of the scheme.
The assessee shall NOT be engaged in the specified profession. The specified profession refers to the commission, brokerage, agency, goods carriage operation, legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representative, film artist, information technology and company secretary services.
The assessee should not have claimed deductions under Sections 10A, 10AA, 10B, 10BA, 80HH to 80RRB.
The turnover of the assessee should not exceed two crore rupees.

Presumptive Taxation Scheme for SMEs

The rates of presumed income chargeable to tax under the scheme are set at 8%. Hence, if a business has a total turnover of Rs.1.0 crores, then the income chargeable to tax would be Rs.8 lakhs. Further, though the minimum amount chargeable to tax is determined under the presumptive taxation scheme, there is no higher limit. Hence, a taxpayer can also willingly declare a higher income than the mandatory 8% of gross receipts or total turnover, while filing income tax returns. So, it is up to the discretion of the business to declare a higher income if the profit margin applicable to the business is more than the mandatory 8%.

Presumptive Taxation Scheme for Professionals

The presumptive taxation scheme is also available for professionals. However, professionals who wish to enrol under the presumptive taxation scheme should have gross receipts from professional services not exceeding Rs.50 lakhs in a financial year.
For professionals enrolled under the presumptive taxation scheme, 50% of the total receipts of the professional during the financial year would be considered as profit. The profit shall undergo taxation under the head, “Profits and gains of business or profession”. For example, if a professional has total receipts from profession amounting to thirty lakh rupees, then the taxable income would be a minimum of Rs.15 lakh under the presumptive taxation scheme.
Professionals are allowed to declare income more than the mandatory 50% of the total receipts. Further, while calculating income under presumptive taxation scheme, professionals can claim a deduction for salary and interest paid to partners. It may be noted that professionals will not be eligible to claim deduction under Sections 30 to 38, including depreciation on assets.

Presumptive Taxation Scheme for Transporters

The scheme available to transporters can be availed by persons involved in plying, hiring or leasing of goods carriages. Individuals who own less than ten goods carriage can enrol under the scheme.
Taxpayers enrolled under the particular scheme for transporters can calculate income to be Rs. 7,500 for every month (or part of a month) for light goods carriage vehicles.
For heavy goods vehicles, the amount of presumptive income to be declared shall be calculated as one thousand rupees for the gross weight of each vehicle.

Restriction

Once a taxpayer declares the profit for any year as per the presumptive taxation scheme, the taxpayer is expected to continue doing so for at least five successive years. If the taxpayer fails to do so for any of the years during the five year period, the benefit under the scheme cannot be claimed for five years subsequent to the year for which the profit has not been declared. Also, the taxpayer would be required to maintain books of accounts and get it audited, if applicable under Section 44AB of the Income Tax Act.

Special Incentive for Digital Payments

The Government has introduced a special incentive for businesses enrolled under the scheme to promote digital transactions and digital payments. As per the latest amendment, a reduced rate of 6% can be charged on the total turnover received by a business through banking channels. The existing rate of deemed profit of 8% will continue to apply in respect of total turnover or gross receipts received in any other mode. This benefit is available for the revenue generated during the entire financial year. To know about GST registration for transporters, click here.

Income Tax E-Filing

Partnership Compliance