As you know income tax in India is on higher side as comparable to other countries , but when you consider and analyze your tax liabilities after considering and applying all rebates, deductions and allowances available in the four corners of Income Tax Act,1961 you will realize that your tax liabilities are not on higher side.
The government has considered the status of all business communities and brought various types of presumptive taxation scheme in the Income Tax Act,1961. Some Presumptive Schemes are for small traders and businesses in which they even not required to maintained books of accounts and allow to pay Income Tax @ 6-8% and on this tax liability they are allowed to claim various deductions u/s. 80C to 80U of the Income Tax Act,1961.
MEANING OF PRESUMPTIVE TAXATION SCHEME
As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA and 44AE.
A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited.
For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below:
- The presumptive taxation scheme of section 44AD.
- The presumptive taxation scheme of section 44ADA.
- The presumptive taxation scheme of section 44AE.
LET’S FIRST CONSIDER PROVISIONS OF SECTION 44ADA
The presumptive taxation scheme of section 44ADA is designed to give relief to small taxpayers engaged in specified profession.
Eligible persons who can take advantage of the presumptive taxation scheme of section 44ADA
A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA: -
- Legal
- Medical
- Engineering or architectural
- Accountancy
- Technical consultancy
- Interior decoration
- Any other profession as notified by CBDT
The Finance Act, 2021 has amended provisions of section 44ADA to define eligible assessee, w.e.f. Assessment Year 2021-22, the benefit of section 44ADA is eligible only in case of assessee who is an:
a) Individual; and
b) Partnership firm other than a Limited Liability Partnership as defined under clause (n) of sub-section (1) of section 2 of Limited Liability Partnership Act, 2008.
NOTE THAT
i) This scheme is available only to a resident individual or a partnership firm engaged in a specified profession but not to a limited liability partnership (LLP). So, non-resident individuals and partnership firms or an HUF are not eligible to opt for this scheme.
ii) It is important to note that many working as a consultant opt for this scheme without realizing that they are not eligible for this presumptive tax scheme. So, all journalists who are either working as freelancers or consultants are not eligible for this scheme. Likewise, all insurance advisors, mutual fund distributors or investment advisors cannot opt for this scheme.
iii) All the persons who are working as consultants with their ex-employer cannot opt for it unless they have the specified professional qualification.
MANNER OF COMPUTATION OF TAXABLE INCOME IN CASE OF A PERSON ADOPTING THE PRESUMPTIVE TAXATION SCHEME OF SECTION 44ADA
i) 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 can declare income higher than 50%;
ii) In other words, in case of a person adopting the provisions of section 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts;
iii) The presumptive income computed @ 50% is the final income and no further expenses will be allowed;
iv) A person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%;
v) While computing income as per the provisions of section 44ADA, separate deduction on account of depreciation is not available;
vi) However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed;
vii) Payment of advance tax in respect of income from professions covered under section 44ADA;
viii) Any person opting for the presumptive taxation scheme under section 44ADA is liable to pay whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.
ix) Maintenance of books of account if a person opts for presumptive taxation scheme of section 44ADA;
In case of a person engaged in a specified profession as referred in section 44AA (1) and opts for presumptive taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of books of account will not apply. In other words, if a person opts for the provisions of section 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.
Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44ADA and declares his income from profession at lower rate (i.e., less than 50%).
NOTE THAT
i) A person can declare income at lower rate (i.e., less than 50%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB .
ii) It means, if your net profits from the profession is less than 50% of receipts and you do not wish to offer the minimum 50% as your income, you can certainly do so, but in that case, you will have to maintain your books of accounts and get those accounts audited from a Chartered Accountant for that year.
iii) However, you need not get your accounts audited in case total income from all the sources including the professional income does not exceed the amount of basic exemption limit. Presently the basic exemption limit is Rs 2.50 lakh for those who have not completed 60 years of age.
IF YOUR INCOME IS HIGHER THAN 50%
i) In case your actual income from profession is more than 50%, in our opinion, you have to offer such higher percentage of your professional receipts as your professional income as the law does not just stipulate the fixed percentage but has provision for offering such higher percentage as your income. Since you are not required to maintain your books of accounts, it may be generally difficult to prove that your actual income is more than 50% of your gross receipts.
ii) However, higher income can be easily established from the investments made and personal expenses incurred by you through the banking channel. So, for those who carry out their major transactions through the banking channel, it will not be possible to hide the fact of actual income being higher than 50% of gross receipts. So, before you decide to opt for the bare minimum percentage of 50% which you have to offer as income, have a look at the aggregate of investments made and personal expenses incurred by you during the year. Such concealed income may be taxed as unexplained amount at 60% along with interest and penalty in case the department is able to prove it conclusively.
CAN A PROFESSIONAL ALLOW TO CHANGE PRESEMPTIVE SCHEME
i) From the current year a salaried person has the option to choose between the old tax regime, offering various deductions, exemptions, but with higher returns, and the new tax regime, without such exemptions and deductions but offering the lower rate, every year.
ii) However, as persons engaged in a profession or business cannot opt out of the new scheme once you have exercised the option until you cease to have the business income.
iii) However, in case of the presumptive scheme of taxation, a professional can exercise the option to have or not to have the presumptive taxation scheme every year.
CONCLUSION
Presumptive Scheme for professional is an appreciable step from the government. It is beneficial for small professionals and they are not required to maintain, book of accounts as prescribed u/s. 44AA of the Income Tax Act,1961 and not required to get its accounts audited u/s. 44AB. They have to declare 50% of their total receipts as Income and they are not allowed to claim any deductions from provisions of Section 30 to 36 of the Income Tax Act,1961. They are also not allowed to claim depreciation u/s. 32 of the Act. But in their book of accounts, they have to show their assets on WDV basis. If they do not opt for Presumptive Taxation Scheme, then it is mandatory to keep book of accounts as per Section 44AA and required to get their accounts audited by the accountant. Please note that above Presumptive Scheme is only available for Individuals and Partnership Firms and not available for other persons and this scheme is only applicable to specified scheme as defined under Section 44ADA of the Income Tax Act, 1961. Once a professional has adopted this scheme, then he is not allowed to change the same in near future. If you have taxable income more than 50%, then you can declare the same, since this scheme has not prescribed any threshold limit, but you have to prove through documents that your income is more than 60% of your gross receipts during relevant previous year. So please do a thorough exercise before applying or adopting this Presumptive Scheme.
DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.
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