Income Tax: What is presumptive taxation scheme?

Filing Income Tax Return (ITR) can be a very tedious process as it demands heavy documentation and preparation. However, for individuals who earn income through business or in the form of a professional fee, the process is much simpler. They can opt for the presumptive taxation scheme. But before that, one must have a clear understanding of the beneficial provisions of this scheme and compliances for those who don’t wish to be taxed under it.

With a view to bringing relief to the small taxpayers for maintenance of books of accounts and audit, the Centre had introduced a framework of presumptive taxation. It was initially operating under sections 44AD and 44AE, however, section 44ADA was introduced to the Income-tax Act, 1961 (“the Act”) with effect from April 1, 2017.

Also, there are separate provisions for presumptive taxation specific only to non-residents but for the ease of understanding the same have not been discussed here. Even though the essence and purpose of all the three sections are the same but all vary in their applicability and provisions.

Presumptive tax: Key facts 

“Section 44AD of the Act covers resident individual, HUF and partnership firm (excluding LLP) engaged in any business other than agency business, commission or brokerage, business covered under section 44AE, profession referred to in 44AA wherein the turnover or gross receipts do not exceed 2 crores. Presumptive income @ 8% of the turnover or gross receipts (6% in case of digital transactions) has to be offered to tax,” said Shailesh Kumar, Partner, Nangia & Co LLP.

An individual or partnership (other than LLP) undertaking profession as listed in section 44AA of the Act and having receipts less than Rs 50 lakhs can opt for taxation under the provisions of 44ADA wherein 50% of the gross receipts from profession have to be offered to tax.

“The benefit of section 44AE of the Act can be availed by every person who is engaged in the business of plying, hiring, or leasing of goods carriages (not more than 10 goods vehicles at any time during the year). Under this section, for heavy goods vehicle (carriage capacity of more than 12 ton) income shall be computed at the rate of Rs 1,000/ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by the taxpayer,” Kumar explained.

In the case of vehicles other than heavy goods vehicles, income will be computed at the rate of Rs 7,500 for every month or part of a month during which the carriage of the goods is owned by the taxpayer. Part of the month would be considered as a full month.

The above sections share some common provisions. A taxpayer claiming income under the presumptive framework is not liable to maintain books of accounts. No further expenses shall be allowed from the presumptive income declared. In case any taxpayer wishes to declare income lower than the provisions of the above-specified sections, he shall have to get its accounts audited by a chartered accountant.

Meanwhile, Section 44AD and Section 44ADA give a relaxation to the taxpayer where only the last instalment in the month of March for advance tax is to be complied with.

“Any individual or a partnership firm carrying on any professional referred to in sec 44ADA (eg CA, lawyer, engineer, etc.) can declare income at minimum 50% or a higher amount as claimed to have been earned by the assessee. No need to maintain books of accounts in this case too if the total receipts do not exceed Rs 50 lakhs,” said Gauri Chadha, a tax expert.

At the same time, for taxpayers not opting for presumptive taxation, Chadha advised that books of accounts must be maintained as per the provisions of section 44AA of the Act.

Adding to this, Kumar stated, “Such taxpayers should also get their accounts audited as per the applicability mentioned in section 44AB of the Act. Further, the taxpayers can only file their return of income in ITR-3 which is comparatively more detailed than ITR-4.”

Common mistakes 

While filing the ITR, one must fill in accurate personal details. Fill the income heads carefully to avoid mismatching later. Besides, both Chadha and Kumar stressed that taxpayers must remember that Section 44AD once adopted, shall continue to be adopted for 5 years. This provision is very important to analyse before claiming the benefit of this section and is generally missed out by many taxpayers.

“In case an assessee fails to do so, h/she shall not be allowed to claim the benefit under this section for next 5 years from the year in which he opts out and also shall be required to get the accounts audited in that year if income exceeds maximum amount which is not chargeable to tax,” Kumar said.

Also, the taxpayers generally fail to choose the correct ITR form for declaring the presumptive income. The taxpayer opting for presumptive taxation should fill in the relevant information in the schedule provided in ITR 3 or ITR 4 depending upon the nature of income other than business.