Presumptive Income & its Taxation – under section 44AD
The Income Tax Department has laid out some simple provisions, where your income is assumed based on the gross receipts of your business.
This method is called the presumptive method, where tax is paid on an estimated basis.
Features of this Scheme
a. Your Net Income is estimated to be 8% of the gross receipts of your business. But From FY 2016-17 onwards, if gross receipts are received through a digital mode of payment, then Net Income is estimated at 6% of such gross receipts and for cash receipts. However, the rate is the same at 8% of such cash receipts.
b. You don’t have to maintain books of accounts for the business.
c. You have to pay 100% Advance Tax by 15th March for such a business. No need to comply with the requirement of quarterly instalments due dates (June, sep, Dec) of advance tax.
d. You are not allowed to deduct any business expenses against the income.
If you are running more than 1 business, the scheme has to be chosen for each business. For example, if you run 3 businesses where only 1 is assessed under section 44AD. The relief of not maintaining accounting records & no requirement of an audit is only applicable to the business to which this scheme applies. For other 2 businesses which are not covered under this section – the accounting records have to be maintained and audit is also required.
Similarly, in case of Advance Tax, the benefit of paying the advance tax in one instalment by 15th March is only granted for the business for which this scheme has been opted for.
If the taxpayer has income which is other than from such business, where his tax liability exceeds Rs 10,000 in a year, he has to pay advance tax on such other income.
Eligibility Criteria for this Scheme
a. Your gross receipts or turnover of the business for which you want to avail this scheme should be less than Rs 2 crore.
b. You must be a Resident in India.
c. This scheme is allowed to an individual, a HUF or a partnership firm. It is not available to a Company.
d. The scheme cannot be adopted by the taxpayer, if he has claimed deduction under section 10, 10A, 10B, Section 10BA, or Section 80HH to 80RRB in the relevant year.
The taxpayer may be in any business – retail trading or wholesale trading or civil construction or any other business to avail this scheme. But this method of income computation is NOT applicable to:
a. Income from commission or brokerage
b. Agency business
c. Business of plying, hiring or leasing goods carriage (see section 44AE)
d. Professionals – who are carrying on a profession of legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, an authorized representative, film artist, company secretary and information technology.
Authorized representative means – any person, who represents someone, for a fee or remuneration, before any Tribunal or authority under any law. Film Artist includes a producer, actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, dress designer basically any person who is involved in his professional capacity in the production of a film.(see Sec 44ADA). These are the professions listed under section 44AA(1).
Deduction for Business Expenses
No business expenses are allowed to be deducted from the net income. Depreciation is also not deductible. However, in case of a partnership firm, a separate deduction for remuneration of partners and interest paid to partners is allowed. This must be within the limit specified under section 40(b). Even though depreciation is not allowed as a deduction, written down value (WDV) of the assets shall be considered as if depreciation has been allowed.
Can the taxpayer declare higher or lower income than 8% of gross receipts?
The taxpayer can voluntarily declare a higher income and pay tax on it. In case the taxpayer chooses to declare lower income than 8% of gross receipts – he shall have to maintain books of accounts and get them audited.
Computing Turnover or Gross Receipts :
Gross receipts or Turnover mean the total collections of the business. The receipts shall be inclusive of GST. The receipts shall also include delivery charges as well as receipts from the sale of scrap.
Discounts given, advances received and money received on sale of assets should be excluded.