Publications

Tax guide on presumptive taxation

The scheme of presumptive taxation enables taxpayers to calculate tax at specific rates without going through the hassle of maintaining accounts. The scheme of presumptive taxation covers:

1. 1. Small businesses run by resident individuals, HUFs and partnership firms having turnover up to Rs 2 crore (Section 44AD)
   2. Notified professions carried on by resident individuals and partnership firms having gross receipts up to Rs 50 lakh (Section 44ADA)
   3. Small taxpayer running the business of plying, hiring or leasing goods carriages who owns up to 10 goods carriages (Section 44AE).

Section 44AD:

A taxpayer who is an individual or HUF or partnership firm running any type of business can offer a minimum of 8% of the total turnover or gross receipts as income from business. However, if their actual profit is higher than 8%, then the actual profit will be taxable. The calculation of profit is at 6% in respect of the portion of the turnover or receipts which are received through banking channels, during the financial year or on or before the due date to file tax return. Section 44AD applies only where turnover does not exceed Rs 2 crore.

A taxpayer covered under section 44AD need not pay advance tax in quarterly instalments. The entire advance tax is due only in the last instalment on or before 15 March of the financial year.

The option is not available to person earning income from commission or brokerage or a person carrying on agency business and to those covered under section 44ADA and section 44AE.

Also, the benefit of section 44AD is not available to a taxpayer who claims deduction under section 10A, 10AA, 10B, 10BA or incentive deductions under section 80HH to section 80RRB in the assessment year.

Go Top

Section 44ADA:

Individuals carrying on notified professions individually or as a partnership firm are covered under presumptive taxation:

1. 1. Where gross receipts are up to Rs 50 lakh
   2. Profit from profession is deemed at 50% of the gross receipts

However, if the actual profit is greater than 50% of the gross receipts, then the actual profit will be taxable.

The notified professions are legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, film artist or authorized representative or any other profession as notified by CBDT.

A taxpayer covered under section 44ADA need not pay advance tax in quarterly instalments. The entire advance tax is due only in the last instalment on or before 15 March of the financial year.

Go Top

Section 44AE:

Any taxpayer whether individual, HUF, partnership firm etc., having up to 10 goods carriages is eligible to declare income under section 44AE. Such taxpayer should be engaged in the business of plying, hiring or leasing of goods carriages.

Profits are calculated at:

1. 1. For a heavy goods vehicle, Rs 1,000 per ton of the gross vehicle weight for each month/part of month during which the vehicle is owned by the taxpayer. A heavy goods vehicle is a goods carriage whose gross vehicle weight exceeds 12,000 KGS
   2. For a vehicle other than a heavy goods vehicle, Rs 7,500 per ton of the gross weight for each month/part of month during which the vehicle is owned by the taxpayer.

For a taxpayer who chooses section 44AE, the advance tax liability should be discharged in the regular quarterly instalments.

Go Top

A taxpayer who declares income under section 44AD should follow through for the next five assessment years. In case such taxpayer declares income by opting out of section 44AD, then such taxpayer cannot choose section 44AD again for the five years succeeding the opt out year.

Go Top

Maintaining books of accounts:

A person who pays income-tax under section 44AD is not required to maintain any books of accounts. However, if such person does not declare income under section 44AD, the below conditions apply:

The threshold limits applicable for maintaining books of accounts for business or profession not covered under section 44AD or section 44AE are:

 In case a taxpayer opts out of section 44AD, then such taxpayer should maintain books of accounts if their income exceeds the threshold limit of Rs 2,50,000 (individuals) or the basic taxable limit.

The books of accounts are not prescribed by law. The books should be such as would enable the assessing officer to calculate their total income. Such books should be accounting records of income, expenses, assets and liabilities of their profession.

However, a professional or partnership firm of professionals paying income-tax under section 44ADA is required to maintain prescribed books of accounts. The prescribed books of accounts are:

1. 1. Cash book
   2. A journal
   3. A ledger
   4. Copies of bills or receipts where the value is more than Rs 25
   5. Original bills wherever such originals are issued to customers or where expenditure is incurred by the taxpayer. In the absence of bills or receipts, the taxpayer can keep payment vouchers prepared and signed by them.

A taxpayer carrying on medical profession should also maintain the following additional books:

1. 1. A daily case register showing details of patients, fees received, services provided and date of receipt
   2. The details of inventory of medicines and other consumables used in the profession as on the beginning and end of the accounting year.

Go Top

Effect of choosing presumptive taxation:

A taxpayer who declares income under section 44AD or section 44ADA or section 44AE is not eligible to claim separate deduction for expenses or deductions under section 30 to 38. All such deductions are deemed to be given full effect. For example, the depreciation on assets is deemed to be allowed. Hence, the written down value of asset gets calculated reducing the deemed depreciation.

A partnership firm can separately claim deduction for salary and interest paid to partners as per the limits prescribed under section 40(b).

Go Top

Declaring lower profits and Tax Audit:

In case of taxpayers who are eligible for presumptive taxation scheme, but have profits lower than the deemed profits, then they can declare such lower profits after getting their accounts audited under section 44AB (tax audit). In such case, such taxpayer should maintain the prescribed books of accounts and get them audited. However, in case of a taxpayer opting out of section 44AD or section 44ADA, their accounts are liable to audit only if their income exceeds the basic exemption limit.

Go Top