The aim of the Presumptive Taxation Scheme is to simplify the process of computation of Income. Income Tax is levied on the income earned by the person during the year. It is important to understand that there is a difference between Sales Revenue and Income.
Income Tax is levied on the Income and not on the Sales. Once Income is computed, Income Tax will be levied at the rates applicable for the year in which the income is earned.
It is very difficult for small taxpayers to keep track and maintain a copy of all invoices of Sales, Expenses and Depreciation. He is also required to maintain the books of accounts and get them audited.
It is very difficult for a small taxpayer to do so many things for the computation of Income. Therefore, to ease this process, the government has introduced a Presumptive Taxation system wherein the Income is computed as a percentage of Sales
Income = defined% of Sales
It is very easy for a small taxpayer to compute his Income in the above manner. He only has to calculate the value of his total sales turnover for the year. He is not required to keep a track of all his expenses.
The small taxpayer is also not required:
- To maintain Invoices and record of all expenses
- To deduct TDS on Salary Payments and other Expenses
- To maintain Books of Accounts
- To comply with Provisions of Tax Audit
It also saves a lot of time and money for complying with the Tax Laws.
Whether the taxpayer opts for the Presumptive Scheme of Taxation or not, the rate of tax will remain the same. It is only the manner of computation of income on which the tax rate is applied changes.
The Presumptive Taxation Scheme is applicable to all types of Businesses and Professionals. The Taxpayer is free to choose between Presumptive Taxation or Normal Taxation.
In the current scheme of Presumptive Taxation, the profits of a business are calculated as follows:
Section 44AD – Profits are assumed at 8% of Sales turnover for Businesses with turnover of less than Rs 2 Crores in a year.
Section 44ADA: Profits are assumed at 50% of Service Sales for Professionals with services provided of less than Rs. 50 Lakhs in a year.
Section 44AE: Profits are assumed at 7500 per Vehicle per month for Transporters.
Presumptive Taxation under Section 44AD
Applicability and Non- Applicability of 44ADA
Section 44AD is only applicable to
- Individuals (Proprietor/ Proprietorship Firms)
- Hindu Undivided Family (HUFs)
- Partnership Firms
Section 44AD is not applicable to
- Employees – Taxable under Salary head of Income
- Professionals – Section 44ADA is applicable for professionals.
- Transporters – Section 44AE is applicable for transporters.
- Commission Agents or Brokers – A person carrying on any business as an agent.
The income of any person adopting Section 44AD will be considered at a flat rate of 8% of Sales.
For all payments received digitally, the profits will be assumed at 6% of such payments provided the payments are received before the due date of filing of Income Tax Return.
This income will be the final income and no separate deduction for expenses or depreciation will be allowed. Salary, Interest paid to Partners will also not be allowed as a deduction. (Amendment applicable from FY 2016-17)
In case the taxpayer has earned an income that is higher than the rates specified (i.e. 6%/8%), he has an option to disclose such higher income. If the taxpayer feels his Income is lower than 8% or 6%of Sales, he can opt for the Normal Taxation Scheme.
In that case, the taxpayer will also be required to maintain proper books of accounts under Section 44AA if his Annual Income exceeds Rs. 1,50,000 or Annual Sales exceed Rs. 25,00,000. He will also be liable to tax audit if his Sales turnover during the year is more than Rs. 1 Crore.
A taxpayer can opt-out of the Presumptive Taxation scheme at any time. However, he cannot avail the benefit of this scheme again for the next 5 years. Also, Tax Audit is mandatory for the next 5 years in case a person opts out of the presumptive taxation scheme.
Presumptive Taxation under Section 44ADA
Before 2016, the Presumptive Taxation scheme was only available to Businesses under Section 44AD and to Transporters under Section 44AE. Professionals were kept out of this scheme of Presumptive Taxation.
These professionals were required to maintain all books of accounts, maintain a copy of invoices for all expenses and get their Tax Audit conducted if applicable.
To simplify the taxation for these Professionals, the government introduced Presumptive Taxation for Professionals under Section 44ADA which is applicable from FY 2016-17.
Applicability and Non- Applicability of 44ADA
Presumptive Taxation under Sec 44ADA is introduced to give relief to small taxpayers who are engaged in specified professions. It is only applicable to a resident Indian who is an Individual, HUF or Partnership Firm. It is not applicable for any other type of entity like LLP, Company etc.
Any person resident in India and engaged in any of the following professions can take advantage of the presumptive scheme of taxation under Section 44ADA:
- Architectural or Engineering
- Technical Consultancy
- Interior Decoration
- Any other profession as specified by CBDT
- Authorised Representative
- Film Artist (incl. Music Director , Actor, Cameraman, Director, Art Director, Editor, Singer, Lyricist, Story Writer, Dialogue Writer, Dress Designer)
- Company Secretary
- Information Technology Professionals
Following business are considered as Profession:-
|Business Code||Type of Professional Work|
|14002||Other Software Consultancy|
|14004||Database activities & Electronic Content Distribution|
|14005||Other IT enabled services|
|16002||Accounting, Book-keeping & Auditing Profession|
|16005||Engineering & Technical Consultancy|
|18002||Specialities & Super Specialities Hospitals|
|18015||Nurses, Physiotherapists and other Para Medical Practitioners|
|18016||Veterinary Hospitals and Practice|
|18017||Other Healthcare Services|
|20012||Other Cultural activities|
All other businesses (except the ones mentioned above) are considered as Business.
Contract Employees cannot be classified as Salaried Employees and are considered as Freelancers.
Freelancers pursuing any of the above-mentioned professions can avail the benefit of Section 44ADA.
Computation of Income
Any professional taxpayer claiming the benefit of Section 44ADA can show his Income as 50% of the Value of Services Provided in that year.
Income = 50% of Value of Services Provided in a year
The income of any person adopting Section 44ADA will not be computed as per the normal system of computation of Income and will be considered as 50% of the Value of Services Provided. In the case of Professionals who are providing services – the total value of services provided during the year will be considered as the Sales.
A taxpayer opting for the Presumptive Taxation scheme under this section will be assumed to have claimed deduction of all expenses. Any further claim of deduction will not be allowed after declaring the Income at 50% of the Value of Services Provided.
If a person opts for Presumptive Taxation, is he required to maintain books of Accounts?
Presumptive taxation is introduced to reduce compliances so it exempts businesses from maintaining books of accounts subject to certain conditions.
What is the turnover limit to opt for 44ADA
44ADA can be opted by those specified professionals whose annual gross receipts from services are under Rs 50 lakh.
Can an agent or broker avail the benefit of presumptive taxation?
Any person who is carrying on any business as an agent or a person who is earning income in the nature of Commission or Brokerage is not allowed to avail the benefits of presumptive taxation.