What is a Presumptive Taxation Scheme?

How much of the taxes in the country are you aware of? All of it? If you think you do, there is a very high possibility you do not. A lot of us are not quite aware of all of the taxes that pass us on a daily basis – don’t you think so?

This post is going to be talking about presumptive taxes in our country. So, let’s get going. 

What is Presumptive Taxation?

Presumptive taxation is a concept adopted in the Income Tax Act to provide assistance to taxpayers with less than two crore rupees in annual revenue. The dictionary defines “presumptive” as “presumed in the lack of further knowledge.” Thus, the presumptive taxation scheme is one in which the individual adopting it can declare income at a predetermined rate while being relieved of the time consuming process of maintaining books of account and auditing accounts.

Presumptive Taxation – In Depth

According to the Income-tax Act of 1961, businessmen and professionals must keep regular books of accounts. They must also have their finances examined and income tax forms filed (ITRs). However, in order to relieve small taxpayers of the time-consuming task of keeping regular books of account and having them audited, income tax law has instituted a presumptive taxation structure.

The Income-tax Act has established two presumptive taxation schemes for small taxpayers, as shown below:

• Section 44AD presumptive taxation method.
• Section 44ADA’s presumptive taxation method.
• Section 44AE’s presumptive taxation scheme.

Section 44AD

Section 44AD’s presumptive taxation method is intended to provide relief to small taxpayers engaged in any business (excluding the business of hiring, plying, or leasing goods carriages, as defined in section 44AE).

Section 44AD’s presumptive taxation plan is available to qualifying individuals whose total turnover or gross receipts from the firm do not exceed Rs. 2,00,00,000. Section 44AD’s presumptive taxation mechanism can be used by the following individuals:

• The individual in residence.
• Hindu family living in the area.
• Resident Partnership Corporation (not Limited Liability Partnership Firm.)

When is the Scheme Not Applicable?

1. The scheme is not open to non-residents or anybody other than an individual, a Hindu Undivided Family, or a partnership firm (not a Limited Liability Partnership Firm).
2. This plan cannot be used by anyone who has claimed deductions under sections 10A, 10AA or 10B or 10BA or 80HH to 80RRB in the preceding year.
3. A person generating commission or brokerage income (insurance agent) cannot use the presumptive taxation scheme of the section.
4. A person who is already engaged in any profession as defined as it is in section 44AA(1) is not permitted to utilize the presumptive tax scheme of section 44AD.

Types of Businesses that are Not Covered

Section 44AD’s scheme is intended to provide assistance to small taxpayers operating in any business, and the following is excluded:

1. Section 44AE means the business of hiring, transporting, or leasing goods carriages.
2. A person who conducts any agency business.
3. A person who earns money through commissions or brokerage.
4. Aside from the firms mentioned above, a person engaged in a profession, as defined in section 44AA (1), is not eligible for a presumptive taxation system.
5. If the total turnover or also the gross receipts of the firm exceed Rs. 2,00,000, the section 44AD plan cannot be used.

What Happens When You Opt Out of Presumptive Taxes?

If a person chooses a presumptive taxation scheme, he must continue to use the same scheme for the next five years. If he does not comply, a presumptive taxation system will be unavailable to him for the next five years. Furthermore, he is expected to record and maintain books of account, and he is subject to tax audits under section 44AB of the AY, in which he opts out of the presumptive taxation plan.

Due Dates for Presumptive Taxes

• The deadline for filing a tax audit report is September 30 of the assessment year.
• The return filing deadline (if a tax audit is required) is September 30 of the assessment year.
• The return filing deadline (assuming no tax audit is required) is July 31 of the assessment year.

What are the Perks of Presumptive Taxation?

• The Central Government established the National Defense Fund.
• National Relief Fund of the Prime Minister
• Presumptive taxation under Section 44AD considers your net income to be 8% of your turnover, and you must pay tax on that income.
• You must pay advance tax, but rather than predicting your income and paying tax each quarter; you can pay all of your advance tax by March 31. If you foresee your income tax burden to exceed Rs.10,000 in the fiscal year and have chosen the presumptive plan, you must pay advance tax by March 15 of the relevant fiscal year.
• If your receipts are digital (non-cash), your net income is just 6% of your receipts, and you must pay tax on that amount.
• You are not required to keep accounting records.
• You are not required to have your accounting records audited.

The Computation of Taxable Business Income

In the case of a person who follows the provisions of section 44AD, income is estimated on a presumptive base at the percent of 6 or 8 of the qualified business’s turnover or gross receipts for the year.

In order to encourage all of the small unorganized businesses and to accept digital payments and to promote digital transactions, section 44AD has been amended since the 2017-18 tax year to provide that income needs to be computed at the rate of 6% rather than 8% if turnover receipt has been received by an account payee cheque and more.

The income computed at the required rate will be the business’s final taxable income under the presumptive taxation scheme, and no additional expenses will be allowed or disallowed.

Book Maintenance

If a person follows the terms of section 44AD and declares income at 6% or 8% of turnover, he is not required to keep the books of account required by section 44AA in respect of the business covered by the scheme of section 44AD.

Conclusion

The presumptive taxation scheme is a good endeavor to lessen your tax processing and filing burden. This law allows you to lower your tax liability even if your business expenses are low.