Introduction:
The Presumptive Taxation Scheme under Sections 44AD, 44ADA, and 44AE of the Indian Income Tax Act provides a simplified method for calculating and paying taxes for specific categories of taxpayers. This scheme primarily aims at small businesses and professionals needing help maintaining detailed accounting records.
Section 44AD:
This provision applies to small businesses engaged in any business except those involved in transportation, agency, brokerage, or commission. In this scheme, eligible taxpayers can declare a presumptive income at a prescribed rate (typically 6% to 8% of total turnover or gross receipts) and do not need to maintain regular books of accounts. The scheme considers the declared income as final, requiring no further adjustments. This provision simplifies the tax compliance process for small businesses.
Section 44ADA:
This provision applies explicitly to professionals such as doctors, lawyers, architects, engineers, accountants, etc. It allows them to declare a presumptive income equal to 50% of their gross receipts or total turnover, thereby eliminating the need for maintaining detailed books of accounts. Similar to Section 44AD, we consider the declared income as final, which does not necessitate further adjustments.
Section 44AE:
This provision pertains to taxpayers plying, hiring, or leasing goods carriages. Instead of calculating income based on actual profits and expenses, taxpayers can opt for a presumptive income based on the number of vehicles they own and use for business purposes. We determine the hypothetical income by calculating a monthly fixed rate per vehicle, which relies on the gross vehicle weight.
Purpose of Presumptive Taxation Scheme under Sections 44AD, 44ADA, and 44AE of the Indian Income Tax Act:
Simplification:
The main objective of introducing the Presumptive Taxation Scheme is to simplify the tax calculation process for small businesses and professionals. By providing taxpayers with a presumptive percentage of turnover or gross receipts as taxable income, we relieve them from the obligation to maintain detailed books of accounts, thus reducing the compliance burden.
Relief for Small Businesses:
The scheme primarily targets small businesses and professionals with limited resources and turnover. It provides an easy-to-use alternative to the regular taxation provisions, allowing them to focus on their core activities rather than spending excessive time and effort on maintaining complex accounting records.
Promoting Tax Compliance:
The Presumptive Taxation Scheme encourages greater tax compliance among eligible taxpayers by providing a simple tax calculation method. Determining tax liability based on a fixed percentage reduces the likelihood of tax evasion, thus enhancing transparency and simplicity.
Encouraging Formalisation:
The scheme also encourages informal businesses and professionals to formalise their operations by entering the tax net. Many small businesses and professionals may have previously avoided tax registration due to the perceived complexities of maintaining accounts. Still, the Presumptive Taxation Scheme offers a more approachable option for tax compliance.
Boosting Economic Growth:
By facilitating ease of doing business and reducing administrative burdens, the Presumptive Taxation Scheme can stimulate economic growth. Small businesses and professionals play a crucial role in the Indian economy, and this scheme helps them by providing tax relief and reducing red tape.
Supporting Specific Sectors:
Section 44AE, which applies to taxpayers engaged in the business of goods carriages, is designed to provide tax relief to the transport industry. By considering a specified amount per month per vehicle as taxable income, the scheme considers the unique challenges faced by this sector.
Compliance Cost Reduction:
The Presumptive Tax Scheme also contributes to reducing compliance costs for the government as it eases the burden of tax administration for small taxpayers. Tax authorities can streamline processes and allocate resources more efficiently by adopting a presumptive approach.
Who is the intended beneficiary of the presumptive taxation scheme under Section 44AD?
The purpose of the presumptive taxation scheme under Section 44AD is to provide relief to specific categories of small taxpayers involved in any business, excluding the business of plying, hiring, or leasing goods carriages mentioned in Section 44AE. The following individuals and entities can adopt the presumptive taxation scheme under Section 44AD:
1) Resident individuals
2) Resident Hindu Undivided Families (HUFs)
3) Resident partnership firms (excluding Limited Liability Partnership firms)
It’s important to note that non-residents and entities other than individuals, HUFs, or partnership firms (excluding LLPs) are not eligible to opt for this scheme. Individuals or entities claiming deductions under Sections 10A, 10AA, 10B, 10BA, or Sections 80HH to 80RRB in the relevant year cannot adopt the scheme.
Who is the intended beneficiary of the presumptive taxation scheme outlined in Section 44ADA?
The purpose of the presumptive taxation scheme under Section 44ADA is to provide relief to small taxpayers engaged in specified professions. The presumptive person resident in India engaged in the following professions can take advantage of the presumptive taxation scheme of section 44ADA:-
1) Legal
2) Medical
3) Engineering or architectural
4) Accountancy
5) Technical consultancy
6) Interior decoration
7) Any other profession, as notified by CBDT
The Finance Act 2021 introduced amendments to the provisions of Section 44ADA to specify the eligible assesses. Starting from Assessment Year 2021-22, the benefits of Section 44ADA apply exclusively to assess who falls under the category of:
a) Individual; and
b) Partnership firm other than a Limited Liability
Partnership as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008.
Eligible taxpayers and eligible businesses for the presumptive taxation scheme of section 44AE:
Section 44AE applies to individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities. Individuals, HUFs, firms, or companies engaged in operating, renting, or leasing goods carriages can utilise the provision of presumptive taxation under section 44AE, provided they have a maximum of ten goods vehicles at any point in the year.
A person who owns more than ten goods vehicles cannot adopt the presumptive taxation scheme of section 44AE –
The presumptive taxation scheme outlined in section 44AE applies to individuals involved in operating, renting, or leasing goods carriages if they do not possess more than ten goods vehicles at any given time in a year.
The primary requirement of this scheme is the ownership limitation of a maximum of ten goods vehicles at any point during the year. Therefore, if an individual exceeds the ownership limit of ten goods vehicles at any time in the year, they cannot avail themselves of the benefits provided by this scheme.
Regarding the computation of taxable business income for individuals opting for the presumptive taxation scheme of section 44AE, the following guidelines apply:
For Heavy Goods Vehicles, income will be calculated at Rs. 1,000 per ton of gross vehicle weight for each month or part thereof during which the taxpayer possesses the heavy goods vehicle. For vehicles other than heavy goods vehicles, income will be computed at Rs. 7,500 for each month or part thereof during which the taxpayer possesses the carriage of the goods. It is important to note that even a partial month will be considered a whole month for this purpose.
Note 1: Individuals can declare higher income if the actual income surpasses the presumptive rate of Rs. 1,000/Rs. 7,500.
Note 2: A “Heavy Goods Vehicle” refers to a goods carriage with a gross vehicle weight exceeding 12,000 kilograms.
Use of Presumptive Taxation Scheme under Sections 44AD, 44ADA, and 44AE of the Indian Income Tax Act while filing Income Tax Return:
When filing income tax returns under Sections 44AD, 44ADA, and 44AE of the Indian Income Tax Act, taxpayers who have opted for the Presumptive Taxation Scheme have certain obligations and considerations. Here’s how the scheme is utilised during the income tax return filing process:
Reporting Turnover or Gross Receipts:
Taxpayers under Section 44AD need to report their total turnover or gross receipts for the financial year in the relevant section of the income tax return form. Similarly, professionals covered under Section 44ADA must report their gross receipts earned during the financial year.
Calculating Presumptive Income:
Taxpayers determine their presumptive income based on the applicable percentage prescribed under each section. Taxpayers under Section 44AD consider 8% (or 6% for digital transactions) of the turnover or gross receipts as taxable income.
Professionals under Section 44ADA deem 50% of the gross receipts as taxable income. Taxpayers engaged in the goods carriage business under Section 44AE consider a specified monthly amount per vehicle as the taxable income.
No Deductions Allowed:
Taxpayers availing the benefits of the Presumptive Taxation Scheme cannot claim any deductions on actual expenses, as the taxable income is already determined at a specified percentage of turnover or receipts. Therefore, no further deductions can be claimed in the tax return.
Filing Appropriate ITR Form:
Taxpayers opting for the Presumptive Taxation Scheme must file their income tax returns using the relevant ITR form that accommodates the scheme’s provisions. For example, ITR-4 is commonly used for taxpayers under Section 44AD, while ITR-4 applies to professionals under Section 44ADA. Taxpayers under Section 44AE may also use ITR-4 if they meet the form’s criteria.
Maintenance of Records:
While the Presumptive Taxation Scheme relieves taxpayers from maintaining detailed books of accounts for tax purposes, they should retain essential records and documents to support the turnover, gross receipts, and any other information in their tax return.
Filing Tax at the Applicable Rate:
Taxpayers must compute their tax liability using the applicable income slabs and rates once the taxable income is calculated based on the presumptive percentages. They should pay the due taxes while filing their income tax return.
Discretion to Opt for Presumptive Scheme:
Taxpayers eligible for the Presumptive Taxation Scheme can choose whether to opt for it or follow the regular taxation provisions. They should evaluate their business or professional income, assess the scheme’s benefits in simplicity and compliance, and make an informed decision before filing their income tax return.
Frequently Asked Questions (FAQs) about Presumptive Taxation Scheme under Sections 44AD, 44ADA, and 44AE of the Indian Income Tax Act:
Q1: Can taxpayers voluntarily opt for the Presumptive Taxation Scheme under Section 44AD?
Answer: Eligible taxpayers can voluntarily opt for the Presumptive Taxation Scheme under Section 44AD. However, once the taxpayer opts for this scheme for a particular financial year, they must continue to follow it for the next five consecutive financial years. After five years, the taxpayer can withdraw from the scheme and follow the regular taxation provisions.
Q2: Is it mandatory to opt for the Presumptive Taxation Scheme if eligible?
Answer: Eligible taxpayers don’t need to opt for the Presumptive Taxation Scheme. Taxpayers can choose to be taxed under the regular provisions of the Income Tax Act and maintain detailed books of accounts for their business or professional income.
The Presumptive Taxation Scheme is optional and at the taxpayer’s discretion to choose between the scheme and the regular taxation provisions.
Q3: Can a taxpayer claim expense deductions under the Presumptive Taxation Scheme?
Answer: No, taxpayers opting for the Presumptive Taxation Scheme cannot claim deductions on expenses incurred. The scheme is designed to simplify taxation for small businesses and professionals.
The taxable income is determined based on a prescribed percentage of turnover or gross receipts, and no further deductions are allowed, even if expenses are incurred and supported by valid documents.
Q4: How is the taxable income calculated under the Presumptive Taxation Scheme?
Answer: a) Section 44AD: For businesses covered under Section 44AD, the taxable income is calculated at 8% of the total turnover or gross receipts in the financial year. However, if receipts are received through digital transactions, the taxable income rate is reduced to 6%.
b) Section 44ADA: For professionals covered under Section 44ADA, the taxable income is calculated at 50% of the gross receipts in the financial year.
c) Section 44AE: For taxpayers engaged in plying, hiring, or leasing goods carriages, a specific monthly amount per vehicle is considered the taxable income. The amount may vary depending on the type and size of the carriage of the goods.
Conclusion:
In conclusion, the Presumptive Taxation Scheme under Sections 44AD, 44ADA, and 44AE of the Indian Income Tax Act offers a simplified and convenient tax calculation method for eligible small businesses and professionals. By allowing taxpayers to determine their taxable income based on a presumptive percentage of their turnover or gross receipts, the scheme reduces the burden of maintaining detailed books of accounts and streamlines the tax compliance process.
It significantly relieves small businesses and professionals with turnover or gross receipts within the prescribed limits, allowing them to focus on their core activities without becoming entangled in complex tax calculations. However, taxpayers should carefully evaluate their specific circumstances and consider the implications of opting for the Presumptive Taxation Scheme versus the regular taxation provisions to make an informed decision that best aligns with their financial objectives.
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