To provide relief to individuals and small businesses from maintaining regular books of accounts and audits, the Income Tax Act offers the presumptive taxation scheme under sections 44AD, section 44ADA and section 44AE.
As per the presumptive taxation scheme, the individual or the business can declare the income at a prescribed rate under the sections given below:
Any resident individual, HUF or a partnership firm (not LLP), regardless of the nature of its activity, is eligible to presumptive income determination provisions if his total turnover or gross receipts in the fiscal does not exceed Rs 2 crore.
The presumptive income is 8 per cent of the total turnover or gross receipts. The assessee can voluntarily declare a higher income. No deduction u/ss 30 to 38 and also for depreciation is allowed. TDS as well as advance tax payment will not apply to any such eligible entity.
To promote digital transactions and to encourage small unorganised business to accept digital payments, the rate has been reduced to 6 per cent where total turnover or gross receipts are received through banking channels. The existing rate of deemed profit of 8 per cent will apply on the total turnover or gross receipts received in any other mode.
Once an eligible assessee declares profit for any year in accordance with these provisions, he is expected to continue doing so for at least 5 successive years. If he fails to do so for any of the year during this period, he shall not be eligible to claim the benefit of the provisions of this section for 5 years subsequent to the year for which the profit has not been declared in accordance with these provisions. Such an assessee will have to maintain books of accounts and moreover, he will have to get these audited if Sec 44AB is applicable to him.
However, since the turnover limit has now been enhanced to Rs 2 crore, the eligible assessee shall be required to pay advance tax. To keep the compliance minimum in his case, he may pay the total advance tax by March 15. Provision to charge interest @1 per cent u/s 234C in the case of any shortfall in payment of advance tax has been extended to Sec 44AD.
Now, a difficulty: Suppose the eligible assessee has more than one eligible business?
This section provides for estimating the income by a resident individual, HUF or partnership firm (but not an LLP) who is engaged in a profession such as legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration or any other notified profession, whose total gross receipts do not exceed Rs 50 lakh in a year or a higher amount voluntarily declared by the assessee. The estimated income is 50 per cent of the total gross receipts. No deductions u/ss 30 to 38 or for any depreciation will be allowed. The assessee has the option of adopting the normal method of taxation, if he feels that it is advantageous for him to do so.
The concession of paying advance tax in a single instalment on or before March 15 is also applicable to those covered by 44ADA.
Provisions of Sec 44AE are similar to those of Sec 44AD and are applicable to businesses of plying, hiring or leasing goods carriages. The assessee may be any person, resident or NRI, who owns not more than 10 goods carriages. He can presume his income to be Rs 7,500 for every month or part of a month for all types of goods carriage vehicles, heavy or light.
Sec. 44AE was amended in fiscal 2018 to include heavy goods vehicle with more than 12mt gross weight (unladen weight). For these, the income would be deemed as Rs 1,000 per tonne per month or part of a month for each goods vehicle.
For all those who fall under these sections, presumptive tax is only an option. Those who maintain books of account and furnish audited accounts if applicable, may pay tax and advance tax at the normal rates, if they choose to do so.
The authors, A.N. and Sandeep Shanbhag, are leading financial advisors. Write to them at email@example.com