Presumptive Taxation Scheme

Presumptive Taxation Scheme

EVERYTHING ABOUT PRESUMPTIVE TAXATION SCHEME

What is the meaning of presumptive taxation scheme?

As per sections 44AA of the Income-tax Act, 1961, a person engaged in business or profession is required to maintain regular books of account under certain circumstances.

To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, sections 44ADA, sections 44AE., Section 44BB and Section 44BBB​A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account.

For small taxpayers, the Income-tax Act, 1961 has framed presumptive taxation schemes as given below:

  • Section 44AD :  Computation of income on estimated basis in the case of taxpayers [being a resident individual, resident Hindu undivided family or resident partnership firm (not being a limited liability firm] engaged in certain business subject to certain conditions.
  • Section 44ADA :  Computation of professional income on estimated basis for assessee being a resident in India and engaged in a profession referred to in section 44AA(1) subject to certain conditions.
  • Section 44AE : Computation of income on estimated basis in the case of taxpayers (being an Individual, HUF, AOP, BOI, Firm, Company, Co-operative society or any other person may be resident or non-resident) engaged in the business of plying, leasing or hiring goods carriages, subject to certain conditions.
  • Section 44B : Taxation of shipping profits derived by a person being a non-resident in India, subject to certain conditions.
  • Section 44BB :  Computation of taxable income of a person being a non-resident (may be an India citizen or a foreign citizen) from activities connected with exploration of mineral oils, subject to certain conditions.
  • Section 44BBA : Computation of income in respect of foreign airlines, subject to certain conditions.
  • Section 44BBB :  Computation of profits and gains of foreign companies engaged in the business of civil construction, subject to certain conditions

Eligibility Criteria:

The presumptive taxation scheme of section​ 44AD can be adopted by following persons :

1) Resident Individual

2) Resident Hindu Undivided Family

3) Resident Partnership Firm (not Limited Liability Partnership Firm)

In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).

Further, this Scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under  sections 80HH to​ 80RRB in the relevant year. ​

The scheme of   section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

  • Business of plying, hiring or leasing goods carriages referred to in sections 44AE.
  • A person who is carrying on any agency business.
  • A person who is earning income in the nature of commission or brokerage
  • Any business whose total turnover or gross receipts exceeds two crore rupees.

Apart from above discussed businesses, a person carrying on profession as referred to in section 44AA(1) ​is not eligible for presumptive taxation scheme under section 44AD. ​

FAQ’S ON PRESUMPTTIVE TAXATION SCHEME:

1. If a person adopts the presumptive taxation scheme of section 44AD, then is he liable to pay advance tax in respect of income from business covered under section 44AD?

Ans: ​​​​​​​Any person opting for the presumptive taxation scheme under section 44AD is liable to pay whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th march of previous year, he shall be liable to pay interest as per section 234B and s​ection 234C.

Note: Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

2. If a person adopts the presumptive taxation scheme of section 44AD, then is he required to maintain books of account as per section 44AA?​​​​​​​​

Ans: Section 4​4AA​ deals with provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA  relating to maintenance of books of account will not apply.

In other words, if a person adopts the provisions of section 44AD and declares income @ 8%/6% of the turnover, then he is not required to maintain the books of account as provided under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD

3. As per the presumptive taxation scheme of section 44AD, income of a taxpayer will be computed @ 8%/6% of the turnover or gross receipt and from such income can the taxpayer claim any further deductions?

Ans: ​​Under the normal provisions of the Income-tax Law, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.

In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided under the Income-tax Law will not apply and income computed at the presumptive rate of 8%/6% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed. However, the assessee can claim deduction under chapter VI-A.​While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32​ is claimed and has been actually allowed.

4. Can a person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 adopt the presumptive taxation scheme of section 44AD?​​​​​​​

Ans: The presumptive taxation scheme of section 44AD can be opted by the eligible per​sons if the total turnover or gross receipts from the business do not exceed the limit prescribed under section 44AB​ (i.e., Rs. 2,00,00,000). In other words, if the total turnover or gross receipt of the business exceeds Rs. 2,00,00,000 then the scheme of section 44AD cannot be adopted. ​

5. What is the manner of computation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA?

Ans: ​​​​​​​​In case of a person adopting the provisions of sections 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession.

However such person can declare income higher than 50%. In other words, in case of a person adopting the provisions of sections 44ADA​, income will not be computed in normal manner but will be computed @50% of the gross receipts.

6. What provision will apply if a person opt for the presumptive taxation scheme of section 44ADA and declares his income from profession at lower rate (i.e. less than 50%)?

Ans: ​​​​​​​​​A person can declare income at lower rate (i.e. less than 50%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of sections​​ 44AA and has to get his accounts audited as per sections 44AB.

7.  For whom the presumptive taxation scheme of section 44AE is designed?

​​​​​​​Ans: The scheme of sections 44AE​ is available to the person who owns not more than ten goods carriages at any time during the previous year and who is engaged in the business of plying, hiring or leas​ing such goods carriages.​

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