👍👍👍👍👍Taxation of taxpayers opting for presumptive taxation schemes

Clipped from: https://taxguru.in/income-tax/taxation-taxpayers-opting-presumptive-taxation-schemes.html

To give benefit to small taxpayers from the exhausting job of maintaining books of account and getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under various sections:

  • Section 44AD: For all business (except business specified under Section 44AE)
  • Section 44ADA: For the taxpayers engaged in specified profession
  • Section 44AE: For the taxpayers engaged in the business of plying, hiring or leasing of goods carriages

Who can opt for Presumptive schemes:

  • Resident Individual
  • Resident HUF (only for Section 44AD & 44AE only)
  • Resident Partnership Firm (excluding LLPs)

Who cannot opt for presumptive schemes:

  • This scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year or
  • A person who is carrying on any agency business
  • A person who is earning income in the nature of commission or brokerage

Let us understand the Sections one by one

 Section 44AD: Taxpayers engaged in any business (except business of plying, hiring or leasing of goods carriages)

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 (Eg-Insurance Agent)

Eligibility Criteria:

Taxpayer has to be

  • Either Resident Individual or HUF or a Partnership Firm (Except LLP)

And

  • Total Turnover or Gross Receipts for the year should not exceed 2 crores (From FY 2023-24 onwards the limits have been revised to 3 crores)

Manner of Computation of Taxable Income under this scheme:

In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1).

Let us understand with an illustration:

Example 1: In case the tax payer has not opted for presumptive scheme i.e. going with the regular income tax provisions

ParticularsAmount in Rs.
Gross Turnover or Receipts from the Business1,00,00,000
Less : Expenses incurred in relation to the income earned75,00,000
Taxable Business Income25,00,000

Example 2: In case the tax payer has opted for presumptive scheme i.e. Section 44AD

ParticularsAmount in Rs.
Gross Turnover or Receipts from the Business1,00,00,000
Minimum Profit Declared8%
Taxable Business Income8,00,000

Analysis: As we can easily derive that person opting for presumptive scheme may plan taxes efficiently and there would be income tax benefits on 17,00,000 as per the above illustration.

Conclusion:

Overall as per my professional opinion it is always better to opt for the presumptive scheme u/s 44AD subject to fulfilling certain conditions and having specified business

Benefits in brief:

  • No hassle of maintaining books of accounts as described u/s 44AA
  • Declaration of profits @ 6% or 8% as per the criteria specified
  • Taxpayer is liable to pay whole amount of advance tax on or before 15th March of the previous year and first three advance tax installments liability will not be applicable

Disadvantages:

  • This scheme is not applicable for Non-Residents and Corporates including LLPs
  • Once the tax payer opts out of presumptive scheme, he will not be eligible for 5 years to re-opt the scheme
  • GST is still applicable in case turnover or gross receipts exceeds 20 lacs or 40 lacs
  • Compulsory Audit of accounts in case the profits are less than 6% or 8% as the case maybe

Section 44ADA: Taxpayers engaged in any specified Profession

The presumptive taxation scheme of section 44ADA is designed to give relief to small taxpayers engaged in specified profession.

Eligibility

A resident taxpayer (only Individual or Partnership Firm) engaged in the below mentioned profession can opt for the Section 44ADA presumptive scheme:

  • Accounting
  • Architecture
  • Engineering
  • Interior Decoration
  • Legal
  • Medical
  • Technical Consultancy
  • Other Notified Professionals :
    > Movie Artists (Movie artists includes a producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designers)
    > Authorised Representative
    > Any other Notified Professional

Turnover Limits:

Any taxpayer opting for presumptive scheme under section 44ADA shall not have gross receipts exceeding 50 Lakhs in a financial year (From FY 2023-34 onwards the limits has raised to 75 Lakhs)

Manner of Computation of Taxable Income under this scheme:

In case of a person adopting the provisions of section 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However, such person may declare income higher than 50%

Let us understand with an illustration:

Example 1: In case the tax payer has not opted for presumptive scheme i.e. going with the regular income tax provisions

ParticularsAmount in Rs.
Gross Receipts from the Profession50,00,000
Less : Expenses incurred in relation to the income earned10,00,000
Taxable Professional Income40,00,000

Example 2: In case the tax payer has opted for presumptive scheme i.e. Section 44AD

ParticularsAmount in Rs.
Gross Receipts from the Profession50,00,000
Minimum Profit Declared50%
Taxable Professional Income25,00,000

Analysis: As we can easily derive that person opting for presumptive scheme may save huge taxes and there would be income tax benefits on 15,00,000 as per the above illustration.

Conclusion:

Overall as per my professional opinion it is always better to opt for the presumptive scheme u/s 44ADA subject to fulfilling certain conditions and having specified profession if the income exceeds the 50% mark

Benefits in brief:

  • No hassle of maintaining books of accounts as described u/s 44AA
  • Declaration of profits @ 50%
  • Taxpayer is liable to pay whole amount of advance tax on or before 15th March of the previous year and first three advance tax installments liability will not be applicable
  • Taxpayer can opt for this scheme for any year he wants and there is no compulsory requirement to opt for the section for regular 5 years

Disadvantages:

  • This scheme is not applicable for HUF, Non-Residents and Corporates including LLPs
  • GST is still applicable in case turnover or gross receipts exceeds 20 lacs
  • Compulsory Audit of accounts in case the profits are less than 50%

Section 44AE: Taxpayers engaged in the business of plying, hiring or leasing of goods carriages

Eligibility

The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.). The presumptive taxation scheme of section 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods vehicles at any time during the year.

Manner of Computation of Taxable Income under this scheme:

On the basis of the vehicle owned

  • Heavy Goods: Heavy Goods Vehicle’ means any goods carriage having gross vehicle weight exceeding 12,000 kilograms
    Income is computed at the rate of Rs. 1,000 per ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by taxpayer.
  • Other than Heavy Goods Vehicle:
    Income will be computed at the rate of 7,500 for every month or part of a month during which the goods carriage is owned by taxpayer.

Let us understand with illustration:

Mr. ABC is engaged is engaged in the business of plying, hiring or leasing of goods carriage. Throughout the year 2022-23 he owned 4 heavy goods vehicle having 15,000 Kgs gross weight and 5 other than heavy goods vehicle.
Income will be computed as follows:

ParticularsAmount in Rs.
Gross Income per Heavy Goods Vehicle1000
Total weight in tons15
Income per month per 1 heavy goods vehicle15000
No. of Months in a year12
Yearly Income from 1 Heavy Goods Vehicle1,80,000
No. of Vehicles4
Total Income (A) from heavy goods vehicle7,20,000
Income per month per goods vehicle (other than heavy goods vehicle7500
No. of other than heavy goods vehicle5
Monthly income of total vehicles37,500
No. of Months12
Total Income (B) from other than heavy goods vehicle4,50,000
Net Total Income11,70,000

Conclusion:

Overall as per my professional opinion it is always better to opt for the presumptive scheme u/s 44AE subject to fulfilling certain conditions

Benefits in brief:

  • No hassle of maintaining books of accounts as described u/s 44AA
  • Declaration of profits as per the above criteria
  • Taxpayer is liable to pay whole amount of advance tax on or before 15th March of the previous year and first three advance tax installment liability will not be applicable
  • Taxpayer can opt for this scheme for any year he wants and there is no compulsory requirement to opt for the section for regular 5 years
  • Further deduction can be claimed in case of a partnership firm on account of remuneration and interest paid to partners (computed as per the Income-tax Act)

Disadvantages:

  • GST is still applicable in case turnover or gross receipts exceeds 20 lacs
  • Compulsory Audit of accounts in case the profits are less than the above criteria

For any queries/discussions, please feel free to reach out at +91-8700785462 or utkarshmishra6@gmail.com

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