What is the actual meaning of 44ADA's presumptive taxation at 50% of the gross receipts

Tax queries 278 views 3 replies

NaviN

Consultant

122 Points Joined May 2016

Varied opinions on this thread made me relook at the 44ADA law and the 44ADA FAQ.

The law says: "...a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax...".
The FAQ says: "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%. 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."

Does it mean that there is nothing wrong if a person opting for 44ADA declares income at 50% even if their actual deductible expenses were 10%? Is the spirit of the 44ADA law about reducing the freelancer's burden of maintaining books of accounts, and simply allowing people to declare income at 50%?

Or, does it mean that they are actually supposed to maintain accounts to whatever extent possible, and if their actual deductible expenses are 10%, then they should declare their income as 90% of the gross receipts?

Or, is the provision to ease the burden on the Assessing Officer (AO)? Is the AO required to cross-verify the actual expenses and income of people who use 44ADA?

What is the truth of the matter?

Replies (3)

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

The matter is unclear. But as practitioner , I advise to maintain books and report actual real Income

NaviN

Consultant

122 Points Joined May 2016

Reporting actual income is not the issue. The issue is with maintaining details of the business expenses. I used to ask the guy at the petrol bunk to give me a receipt each time. I used to keep bills of the stationery I purchased. Then there's the cost of depreciation of electronic items I have. There's this huge amount of things to keep track of, as deductions. Since this gets cumbersome to track and for CA's to audit, is this the reason the income tax department allowed the "presumptive" 50% deduction as a standard? So that we don't have to keep track of the deductions? So if someone wants to keep track of it and report less than 50% of deductions, they are allowed to, while others (especially individuals) for whom it is difficult to keep track all this, and would prefer to dedicate their time and energy toward growing their freelance business, they can simply declare deductions as 50% of their gross receipts. If this is the logic, I think it makes sense, and is a merciful relief from what would have otherwise been a cumbersome process of documentation.

polinkuer12

miami

22 Points Joined December 2023

In simpler terms, if a professional's gross receipts are Rs 50 lakhs or less in a financial year, they can consider 50% of their total receipts as their taxable income. This is a simplified method of calculating income tax liability for professionals under the presumptive taxation scheme.