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Under the ‘presumptive taxation scheme’, newly established and/or small scale businesses or professions, sections 44AD and 44ADA of the Income Tax Act 1961 (the Act) may be entitled to comply with Income Tax obligations by declaring ‘profits and gains of business or profession’ at a pre-determined (‘presumptive’) rate and pay the said tax thereupon.


Benefits of Presumptive Taxation Scheme

  • Potentially lower effective rate of Income Tax (compared to rate for incorporated entities and ‘tax slab or marginal rates’)
  • Option to declare lower profits or gains, including loss
  • Potential avoidance of adverse assessment or reassessment orders
  • Minimal compliance and reporting obligations etc.

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Profits and Gains of Business on ‘presumptive basis’

(section 44AD)

  • Available to ‘eligible assessees’ and engaged in an ‘eligible business(see below for definition);
  • 8 percent^ of total turnover or gross receipts of said assessee in a previous year (or a sum higher, as the case may be) claimed as earned, will be the deemed profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”;
  • ^6 percent (inserted by Finance Act 2017) for the amount of total turnover or gross receipts, received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account;
  • Deduction from such profits or gains etc. allowable under the provisions of sections 30 to 38 of the Act is deemed to have been already given full effect to and no further deduction under them will be allowed;
  • ‘Written down value’ of any asset of an eligible business will be deemed to have been calculated and given effect to (as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years);
  • The scheme does not apply to—
    (a) Person carrying on profession as referred to in section 44AA(1);
    (b) Person earning income in the nature of commission or brokerage; or
    (c) Person carrying on any agency business.


Scheme Disqualification and Mandatory Compliances
– section 44AD(4)

  • Where an eligible assessee declares profit for any previous year in accordance with the scheme and thereafter declares profit for any of the 5 assessment years succeeding such previous year, not in accordance with the scheme, such person will be ineligible to claim the benefits there under for 5 assessment years subsequent to the assessment year in which the profit has not been so declared in accordance with the scheme.
  • Such disqualified assessee whose total income exceeds the maximum amount which is not chargeable to Income Tax, is required to keep and maintain such books of account and other documents as required under section 44AA(2) and get them audited and furnish a report of such audit as required under section 44AB.

Eligible assessee” means —
(i) An individual, Hindu undivided family (HUF) or a partnership firm, who is a resident, but not a limited liability partnership (LLP) firm; and
(ii) Who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA of the Act under the heading “C. – Deductions in respect of certain incomes” in the relevant assessment year.

Eligible business” means —
(i) Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
(ii) Whose total turnover or gross receipts in the previous year does not exceed an amount of Rs.2 crores.


Profits and Gains of Profession on ‘presumptive basis’

(section 44ADA)

  • Available to an Assessee (individual, Hindu undivided family (HUF) or partnership firm, but
    not Limited Liability partnership (LLP) firm), resident in India;
  • Applicable to a profession (referred to in section 44AA(1) of the Act) and whose total gross receipts does not exceed Rs.50 lacs in a previous year;
  • 50 percent of the said total gross receipts in the previous year (or a sum higher than the aforesaid sum, as the case may be) claimed to have been earned, will be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”;
  • Deduction allowable under the provisions of sections 30 to 38 of the Act, will for the above said purposes will be deemed to have been already given full effect to (and no further deduction under those sections will be allowed).
  • ‘Written down value’ of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
  • Assessee who claims that such profits and gains to be lower than deemed, and whose total income exceeds the maximum amount which is not chargeable to Income Tax, will be required to keep and maintain such books of account and other documents as required under section 44AA(1) and get them audited and furnish a report of such audit as required under section 44AB.

Persons carrying on prescribed professions or businesses (see below) are required to keep and maintain such books of account and other documents as may enable the relevant Assessing Officer (AO) to compute the concerned person’s ‘total income’ in accordance with the provisions of the Act.


Prescribed Professions

  • Professions
  • Law
  • Medicine
  • Engineering
  • Architecture
  • Accountancy
  • Technical consultancy
  • Interior decoration
  • Any other profession as is notified by the Board in the Official Gazette.


Business or Profession

Every person carrying on business or profession (excluding the above mentioned professions) is required to maintain such accounts etc. where —

  • Income from business or profession exceeds Rs.120,000^^ or total sales, turnover or gross receipts (as the case may be) in business or profession exceed or exceeds Rs.10 lacs^^^ in any 1 of the 3 years immediately preceding the previous year; or
  • Business or profession is newly set up in any previous year, if income from business or profession is likely to exceed Rs.120,000^^ or his total sales, turnover or gross receipts (as the case may be), in business or profession are or is likely to exceed Rs.10 lacs^^^, during such previous year; or
  • Profits and gains from the business are deemed to be the profits and gains of the concerned assessee under section 44AE or section 44BB or section 44BBB (as the case may be), and the said assessee has claimed income to be lower than the profits or gains so deemed thereunder during such previous year; or
  • Provisions of section 44AD(4) are applicable and income exceeds the maximum amount which is not chargeable to Income Tax in any previous year.

^^Rs.250,000 for Individuals and HUFs for Assessment year 2018-19 onwards (inserted by Finance Act 2017)

^^^Rs.25 Lacs for Individuals and HUFs for Assessment year 2018-19 onwards (inserted by Finance Act 2017)


Prescribed Books of Accounts and Documents – Rule 6F

The Central Board of Direct Taxes (CBDT) having regard to the nature of the business or profession carried on by any class of persons, has prescribed the books of account and other documents required to be kept and maintained which are detailed in Rule 6F of the Income Tax Rules 1962 (the Rules), particulars contained therein, form and manner, place as well as the period for which they are to be so kept and maintained.

 


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Prescribed persons (see below) carrying on business or profession are required to get their accounts audited by an accountant before the specified date and furnish by that date the report (see rule 6G of the Rules) of such audit in the prescribed form, duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

Prescribed person so required to get their accounts audited, include those —

  • Carrying on business, where total sales, turnover or gross receipts (as the case may be) exceed or exceeds Rs.1 crore** in any previous year ; or
  • Carrying on profession, where gross receipts exceed Rs.50 lacs in any previous year; or
  • Carrying on the business, where profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB (as the case may be) and has claimed his income to be lower than the profits or gains so deemed thereunder, in any previous year; or
  • Carrying on profession, where profits and gains therein are deemed to be computed under section 44ADA and the concerned person has claimed such income to be lower than the profits and gains so deemed, and such income exceeds the maximum amount which is not chargeable to Income Tax in any previous year; or
  • Carrying on business, where the provisions of section 44AD(4) are applicable and income exceeds the maximum amount which is not chargeable to Income Tax in any previous year.


Audit Compliance under other Law

Where such person is required by or under any other law to get such accounts audited, it will be sufficient compliance with the provisions of the above said section and provision of the Act, if such person gets the accounts of such business or profession audited under such other law before the specified date*** and furnishes by that date the report of the audit as required thereunder, by an accountant in the form prescribed (see rule 6G) under this section.

**This section will not apply to the person, who declares profits and gains of business for the previous year in accordance with the provisions of section 44AD(1) and total sales, turnover or gross receipts (as the case may be) thereunder, does not exceed Rs.2 crores in such previous year (inserted by Finance Act 2017)

***“Specified date”, in relation to the accounts of the assessee of the Previous year relevant to an Assessment year, means the due date for furnishing the return of income (ITR) under section 139(1) of the Act

 


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