What is a presumptive taxation scheme?
The presumptive taxation scheme has been framed under Sections 44AE, Sections 44AD, and Sections 44ADA of the Income Tax Act. The presumptive income system relieves the taxpayer from the requirement to maintain the books of accounts by allowing them to assume the minimum profits at a defined rate of the entire turnover.In order to relieve small taxpayers with a revenue of less than Rs. 2 crores from maintaining books of accounts, Section 44AD was enacted.
What are the benefit from this scheme?
- This scheme mainly benefits small businesses and professionals to not maintain accounting records and further not have to get them audited.
- Deductions under Section 80 can also be claimed over and above presumptive tax.
Which businesses can benefit from this scheme?
Under Section 44 AD, the following can benefit from this scheme
- Resident Individual
- Resident HUF
- Resident Partnership Firm (does not include LLP Firm)
Either of these with a total business turnover of less than ₹2 crores can declare their presumptive income at 6% (for cheque, draft or electronic clearing systems), or 8% (for cash receipts). Tax will be calculated on this income.
Which professionals can benefit from this scheme?
Under Sections 44ADA, professionals who are residents of India belonging to the following professions can benefit from the scheme.
- Interior decorators
- Technical consultants
- Medical practitioners
- Other professionals:
- Film artists, including a producer, actor, editor, director, art director, music director, singer, dance director, cameraman, lyricist, screenplay writer or dialogue writer, story writer, and costume designer.
- Authorized representatives
- Any notified professional other than these
If a professional’s gross receipts do not exceed ₹50 lakhs in a financial year, their Profits are presumptively equal to 50% of gross receipts under the presumptive taxation system.
Who else can benefit from this scheme?
Under Section 44AE, The presumptive taxation scheme can be opted for by an assessee who is engaged in the business of plying, hiring or leasing goods carriages and does not own more than ten goods vehicles at any time during the previous year.
Are beneficiaries of presumptive taxation scheme allowed any further deduction of expenses?
Beneficiaries of this scheme under Sections 44AD, 44ADA, and 44AE are not allowed any deductions after presumptive income. This income is computed after allowing deduction of expenses deductible, and disallowing expenses which are not deductible under the Income Tax Act. However, no further deductions are allowed, except for certain expenses under Section 44AE.
Who is not eligible for this scheme?
- A business of leasing, hiring, or plying goods carriages mentioned in sections 44AE owning more than 10 goods vehicles at any time during the previous year.
- A person involved in the agency business.
- A person who earns income through brokerage or commission.
- Any business of which gross receipts or total turnover exceed ₹2 crores.
Thanks to presumptive taxation, freelancers and professionals who don’t have employers sorting out a good part of their income tax documentation are at a great advantage. So are small businesses who would focus on growing their business rather than on computing taxes.