To reduce the tax burden and to provide relief from tedious work to small tax assessees, the government of India has incorporated a scheme of presumptive taxation. Businesses adopting the presumptive taxation scheme are not required to maintain regular books of account. They can declare the income at a prescribed rate.
The presumptive taxation scheme is framed under two sections- Section 44AD and 44AE of the Income Tax Act, 1961. Person adopting presumptive taxation schemes are exempt from getting their books of account audited.
In this article, let’s go through the provisions of presumptive taxation scheme under Section 44AD in detail.
Eligibility Criteria to avail the Benefits of Presumptive Taxation Scheme under Section 44AD
Below are the types of tax assesses who can adopt the provisions of presumptive taxation scheme Under Section 44AD :
- Resident Individual tax payers
- Hindu Undivided Families
- Partnership Firm (except LLP or Limited Liability Partnership Firm)
Below conditions are to be satisfied for adopting presumptive taxation scheme under Section 44AD of the Income Tax Act:
- The firm or individual’s gross receipt or annual turnover in the previous year should not have exceeded Rs. 2 crores.
For Example, Mr. Mohan has a provisions store. The annual turnover of his shop for the last year was Rs. 90 lakh. He can adopt the scheme of presumptive taxation under Section 44 AD to avoid tedious paperwork involved in filing taxes at the end of the financial year. Provisions of Section 44AD primarily concentrates on small and medium size businesses.
- Any firm or a person who has not claimed tax deduction under the Sections 10A, 10AA, 10B, 10BA during the assessment year can adopt the provisions of Section 44AD. Same applies for the individuals or firms who have not claimed deductions under Section 80HH to 80 RRB.
- Individuals or firms engaged in the business of plying and hiring goods carriages cannot adopt these provisions.
- Firm or an individual assessee involved in professional services in which the income is earned in the nature of brokerage or commission cannot adopt presumptive taxation schemes. The same is now amended and professionals can adopt the provisions of presumptive taxation scheme under the new Section 44ADA with effect from 1st April 2017.
For understanding the applicability of the presumptive taxation scheme under Section 44AD, let’s take an illustration. XYZ Pvt Ltd. is involved in the business of manufacturing. Now, even if the company satisfies all the above mentioned conditions, it cannot opt for presumptive taxation scheme under Section 44A as private limited companies are not eligible under the provisions of the scheme.
Applicable Rate and Income Computation under Section 44AD
Eligible assessees who are willing to adopt the presumptive taxation scheme under the provisions of Section 44AD has to compute their income on the estimation basis. It is calculated at the rate of 8% of Gross receipts or total annual turnover of the business for the previous year. Assessee can even declare an income in his income tax return higher than the presumptive income shown as per the scheme.
For example, Mr. Lokesh is running a stationary shop whose turnover is Rs. 80 lakh for the previous year. He is willing to adopt the provisions of presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961 with regards to taxation of his business. As per the provisions of Section 44AD, income will be computed on the basis of estimation at the rate of 8% of gross receipts or total turnover of the eligible business for the previous year. In this case, Mr. Lokesh having a stationary business with Rs. 80 lakh turnover (less than Rs. 2 cr as per the provisions of Section 44AD) can adopt the provisions of the scheme. And his annual presumptive tax will be Rs. 6.4 lakhs (i.e. 8% of 80 lakh).
Amendments to Section 44AD in Union Budget 2018
Budget 2018-19 presented by Finance Minister, Arun Jaitley, did not had any amendments related to Section 44AD. Section 44AD had the same structure as amended in 2017-18 budget.
Section 44AD Bare Act
Section 44AD deals with special provisions for computing profits and gains of business on presumptive basis.
It is defined as under:
(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee engaged in the business of civil construction or supply of labour for civil construction, a sum equal to eight per cent of the gross receipts paid or payable to the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income, shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession:
Provided that nothing contained in this sub-section shall apply in case the aforesaid gross receipts paid or payable exceed an amount of forty lakh rupees.
(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.
Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.
(3) The written down value of any asset used for the purpose of the business referred to in sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
(4) The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub-section (1) and in computing the monetary limits under those sections, the gross receipts or, as the case may be, the income from the said business shall be excluded.
(5) Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are lower than the profits and gains specified in subsection (1), and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under subsection (3) of section 143.]
(6) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub-section (1), if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.]
Explanation: For the purposes of this section, the expression civil construction includes –
(a) the construction or repair of any building, bridge, dam or other structure or of any canal or road;
(b) the execution of any works contract.]
Section 44ADA Limits
Section 44ADA was introduced for small professionals with the objective to simplify taxation, reduce compliance burden and facilitate the ease of doing business for certain small professionals. It also aims at bringing parity between small businesses who enjoy Presumptive Taxation Scheme under Section 44AD and small professionals.
In case of a person adopting the provisions of section 44ADA, income will be computed on a presumptive basis, i.e. @ 50% of the total gross receipts of the profession. In other words, total gross receipts from profession should not exceed Rs 50 lakh for a financial year.
Section 44AD Conditions
The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:
- Business of plying, hiring or leasing of goods carriages referred to in section 44AE.
- A person who is carrying on any agency business.
- A person who is earning income in the nature of commission or brokerage
Apart from above discussed businesses, a person carrying on profession as referred to in section 44AA(1)is not eligible for presumptive taxation scheme.
Section 44AD for Businesses
The presumptive taxation scheme under these provisions can be opted for by the eligible assessee who is engaged in any business (except the business of plying, hiring or leasing goods carriages referred to in section 44AE), whose turnover or gross receipts from such business do not exceed the limit of audit prescribed under section 44AB (i.e., Rs. 60,00,000 for the previous year 2011-12 and Rs. 1,00,00,000 from the previous year 2012-13). Further, these provisions can be adopted by the assessee only if he has not claimed deduction under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.
Important Points to Note
- In case the assessee is running more than one business, turnover of all the businesses in question need to be considered to check the eligibility to adopt presumptive taxation scheme under Section 44AD.
- In case the assessee is involved in both business and professional practice, then provisions of presumptive taxation under Section 44AD can be adopted only for the business, income pertaining to profession has to be computed as per the normal provisions of the Income Tax Act, 1961.
- An assessee can claim tax deductions and avail benefits under Chapter VI-A (Section 80C to 80U) even if he is declaring income as per presumptive taxation scheme under Section 44AD of the Income Tax Act.
Section 44ADA extends the benefit of presumptive taxation to professionals, which was only available to specific businesses before. Section 44ADA allows professionals to adopt the provisions of presumptive taxation scheme provided their gross receipts for the financial year do not exceed Rs.50 lakh. Below are the professionals who can avail the benefits of presumptive taxation under this section:
- Architectural profession
- Technical consultant
- Interior business
Presumptive Tax features under 44AD Scheme
As per the provisions under Section 44AD, computed presumptive income (6% or 8% of gross receipts or turnover of the eligible business for the previous year) is considered as the net income for the business covered under the presumptive taxation scheme. Hence, assessee is not allowed to claim any deductions under Section 30 to 38 of the Income Tax Act.
Let’s take an example to understand this. Mr. Mohan is running a partnership firm in the name of Shree Corporation. Gross receipts of his business for the previous year were Rs. 86 lakhs. He declared his income under the presumptive taxation scheme of Section 44AD. Net income was Rs. 688000 after computing at the rate of 8% of the gross receipts. He wanted to claim further deductions under Section 30 for the depreciation of his firm’s building. But, as per the provisions under Section 44AD, computed presumptive income (6% or 8% of gross receipts or turnover of the eligible business for the previous year) is considered as the net income for the business covered under the presumptive taxation scheme. Hence, assessee is not allowed to claim any deductions under Section 30 to 38 (including depreciation and unabsorbed depreciation) of the Income Tax Act. Hence, Mr. Mohan cannot claim any further deductions after the computation of net income.
Provisions for Eligible Partnership Firm
If the assessee is a partnership firm, it can claim the deductions of interest paid to its partners and also the remuneration paid within the limits prescribed under Section 40 b) of the IT Act. However, in such cases, the firm is not eligible to claim any deductions etc. under Sections 40,40A and 43B after computation of income at the applicable rate. That means disallowances under Sections 40, 40A and 43B are not applicable to an assessee who is willing to adopt the presumptive taxation scheme under Section 44AD.
For example, let’s say Priyam Corporation is a partnership firm engaged in the business of manufacturing wooden photo frames. The firm has declared its income for the previous year as per the provisions of the presumptive taxation scheme under Section 44AD. After computation of income on basis of estimation i.e. at the rate of 8% on gross receipts, the firm wanted to claim further deductions on account of interest paid to its partners. In this case, Priyam Corporation can claim deductions for the interest paid to partners as deductions of interest paid to its partners and also the remuneration paid within the limit prescribed under Section 40 b) of IT Act are allowed as deduction under the presumptive taxation scheme.
Computing Written down Value (WDV) of depreciable assets :
As mentioned above, assessees willing to adopt the provisions of presumptive taxation scheme under Section 44AD are not permitted to claim deduction on account of various expenditures including depreciation and unabsorbed depreciation. With regards to computation of the written down value of depreciable asset, the following provision has to be kept in mind. Though deductions on account of depreciation and unabsorbed depreciation are not available, it is necessary to calculate the depreciation for the purpose of computation of written down value of an asset used for a business or professional practice covered under the presumptive taxation scheme.
Let’s understand this with an illustration. GT Corporation, a steel manufacturing firm has declared its income as per the provisions of the presumptive taxation scheme as under Section 44AD of the Income Tax Act. Presumptive income of GT Corporation was calculated at the prescribed rate i.e. 8% without deducting any depreciation as it is presumed that there is no deduction on account of depreciation is allowed under the provisions of presumptive taxation scheme. In this case, it is important to note that, even though the depreciation on the business asset is not available for deduction, it is necessary for the computation of the written value of the particular asset. Depreciation needs to be calculated and deducted.
Provisions relating to maintenance of books of account :
The main objective of Presumptive taxation scheme is to relieve the small tax payers from the tedious work of maintaining books of accounts. An assessee, who adopts the provisions of presumptive taxation scheme under the Section 44AD of the Income Tax Act, is not required to maintain any books of account. Basically this is applicable to the businesses that are covered under Section 44AA of the IT Act. For such assessees or businesses, it’s not required to get their books audited as per the provisions of Section 44AB.
To understand this, let’s take an example. Mr. Mani is running a provision store. Turnover of his business for the previous year is Rs. 40 lakh. He declared his business income as per the provisions of presumptive taxation scheme of Section 44AD. In this case, Mr. Mani is not obliged to maintain the books of account relating to his business as per the provisions of Section 44AD. And also, he is not required to get his books audited as his business is not covered under Section 44AA and Section 44AB of the IT Act.
Declaring Lower Income or Higher Income under the Presumptive Taxation Scheme:
In case, the assessees’ actual business income is lower than that of the presumptive income as declared under the presumptive taxation scheme of Section 44AD (i.e. 8% of the total turnover or gross receipt), then there is no relief on maintaining the books of account as per the scheme. That means, if assessee’s actual business income is lower than the presumptive income, then he is required to maintain the books of account pertaining to his business as per Section 44AA. And also, he is required to get the books audited as per the provisions of Section 44AB of the Income Tax Act, 1961.
In case, the actual income is more than the presumptive income scheme, this provision allows the assessee to declare the higher income at his option (higher than the prescribed rate of 8%). Lastly, presumptive taxation scheme under Section 44AD is a great relief to small and medium tax payers with regards to maintenance of books of account and getting it audited which is often quite very tedious job with high probability of errors.
Section 44ADA for Professionals :
Presumptive taxation for professionals at 50%
Presumptive taxation under Section 44AD, which was only available to businesses, has now been extended to include professionals effective from FY 2016-17. This is covered under Section 44ADA. Professional with receipts of Rs.50 lakhs or less can opt for this scheme. This also covers freelancers who do technical assignments such as website design or software development.