Currently, there are two ways in which you can calculate the taxable income for your business. The tax is calculated on the taxable income and not the gross turnover. The two provisions in which the taxable income can be calculated are:-
- Normal Provisions
- Presumptive Taxation
Let’s know about it in detail……
1. Normal Provision
Under the normal provisions, the taxable income is calculated through the traditional method, i.e.
Taxable Income= Total Sales – Cost of Goods Sold – Expenses
When you subtract the expenses and cost involved from the total revenue earned in the year then you arrive at the taxable income.
What needs to be kept in mind here is that under the Income Tax provisions, not all the expenses are allowed as deduction. You need to check which expenses can be claimed as a deduction for the purpose of calculation of taxable income.
The tax is then calculated on the taxable income based on the slab rates applicable for the financial year.
Let’s understand this better with an example,
Suppose, you have a textile business and the annual turnover for the financial year 2017-18 is Rs. 1.5 crores, which means you have sold clothes worth Rs. 1.5 crores. Here are rest of the details:-
|Annual Turnover||1.5 crores|
|Cost of goods sold||80 lakhs|
|Expenses allowed under Income Tax act||20 lakhs|
|Taxable Income||1,50,00,000 – 80,00,000 – 20,00,000|
= 50,00,000 (50 lakhs)
Thus, the amount on which your tax will be calculated is Rs. 50,00,000.
2. Presumptive Taxation
Another way to calculate the taxable income is through the provisions mentioned under the presumptive taxation scheme.
Under the presumptive taxation scheme, the business owner is not required to maintain a list of expenses and his income would be assumed as a percentage of the sale.
The presumptive taxation scheme is applicable for businesses with an annual turnover of up to Rs. 2 crores and for professionals whose annual value of services provided does not exceed Rs. 50 lakhs.
Annual turnover is the amount of sales you have made in a year.
If you fall in any of the above categories then the taxable income for your business will be calculated as follows-
|Business other than the profession|
|Annual Turnover < 2 crores||8% x Annual Turnover|
|Value of services < 50 Lakhs||50% x Value of services|
The above table shows you how you can calculate the taxable income for your business if you meet the stated condition.
There’s a fixed percentage that the law states will be presumed as your taxable income based on your annual turnover.
Let’s understand this better with an example…..
Suppose, you have a textile business and the annual turnover for the financial year 2017-18 is Rs. 1.5 crores, which means you have sold clothes worth Rs. 1.5 crores.
Now, we check whether your business meets the condition that the turnover should be less than Rs. 2 crores.
The annual turnover of your business is Rs. 1.5 crores which is less than Rs. 2 crores, which means you meet the criteria and hence you can avail the presumptive taxation scheme.
Now, the taxable income will be 8% of your annual turnover-
Taxable income= 1,50,00,000 x 8%= 12,00,000
Thus, the amount on which your tax will be calculated is Rs. 12,00,000.
The tax on Rs. 12,00,000 will be calculated according to the slab rate applicable for the financial year.
Which method is better?
In most cases, the presumptive tax scheme is usually better than the Normal traditional method. However, the business owner should always check which scheme is better in his case and opt for the same accordingly.[/vc_column_text][/vc_column][/vc_row]