Presumptive taxation is a simplified tax scheme intended to ease the tax compliance burden on small businesses by allowing them to pay a fixed percentage of their turnover as tax, rather than maintaining detailed accounts and computing their income under normal tax provisions. This system has gained prominence in various countries, including India, where it is governed under Sections 44AD, 44ADA, and 44AE of the Income Tax Act, 1961. This article discuss the presumptive tax schemes for business income, focusing on their implementation, benefits, and the specific income tax provisions that apply.
1. Overview of Presumptive Taxation
Presumptive taxation simplifies the tax process by assuming a certain percentage of turnover or gross receipts as the income of the business, thereby reducing the compliance burden. This scheme is particularly beneficial for small businesses and professionals, as it eliminates the need for detailed bookkeeping and auditing.
2. Historical Context and Evolution
Presumptive tax schemes have evolved to accommodate the needs of small taxpayers. In India, the scheme was introduced to facilitate easier tax compliance and to bring a greater number of small businesses into the tax net. Over the years, the presumptive taxation provisions have been refined to balance simplicity with adequate revenue collection.
3. Sections Governing Presumptive Taxation
a. Section 44AD:
This section applies to resident individuals, Hindu Undivided Families (HUFs), and partnership firms (other than LLPs) engaged in eligible businesses. It excludes certain businesses, such as those engaged in plying, hiring, or leasing goods carriages.
- Eligibility: Businesses with a turnover or gross receipts not exceeding INR 2 crore.
With effect from April 1, 2024, the Finance Act of 2023 introduces the following provisions after sub-clause (ii) of clause (b) of the Explanation to section 44AD:
Provided that where the amount or aggregate of the amounts received during the previous year, in cash, does not exceed five per cent of the total turnover or gross receipts of such previous year, this sub-clause shall have effect as if for the words “two crore rupees”, the words “three crore rupees” had been substituted:
Provided further that for the purposes of the first proviso, the receipt of amount or aggregate of amounts by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the receipt in cash.
- Presumptive Income: 8% of the turnover or gross receipts (6% in case of digital transactions).
- Benefits: No need to maintain detailed books of accounts or undergo auditing.
b. Section 44ADA:
Introduced for professionals, this section applies to resident individuals engaged in specified professions such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, or any other profession notified by the Board.
- Eligibility: Professionals with gross receipts not exceeding INR 50 lakh.
- Presumptive Income: 50% of the total gross receipts.
Following provisos shall be inserted after sub-section (1) of section 44ADA by the Finance Act, 2023, w.e.f. 1-4-2024:
Provided that in case of an assessee where the amount or aggregate of the amounts received during the previous year, in cash, does not exceed five per cent of the total gross receipts of such previous year, this sub-section shall have effect as if for the words “fifty lakh rupees”, the words “seventy-five lakh rupees” had been substituted:
- Benefits: Simplified accounting and exemption from audit requirements.
c. Section 44AE:
This section is designed for businesses engaged in the business of plying, hiring, or leasing goods carriages.
- Eligibility: Any taxpayer who owns not more than ten goods carriages at any time during the year.
- Presumptive Income: For a heavy goods vehicle, the tax shall be either one thousand rupees per ton of gross vehicle weight or unladen weight, for each month or part thereof that the vehicle is owned by the assessee in the previous year, or an amount corresponding to the actual earnings from such vehicle, whichever is greater.
For vehicles other than heavy goods vehicles, the levy shall be seven thousand five hundred rupees for each month or part thereof during which the goods carriage is owned by the assessee in the previous year, or an amount claimed to have been actually earned from such goods carriage, whichever is higher.
- Benefits: Simplified calculation of income and reduced compliance requirements.
4. Key Features and Benefits
a. Simplification and Ease of Compliance:
The presumptive taxation scheme significantly reduces the compliance burden on small businesses and professionals by eliminating the need for detailed bookkeeping and auditing. Taxpayers can file their returns using simplified forms, thus saving time and resources.
b. Certainty and Predictability:
Taxpayers benefit from the certainty of knowing their tax liability in advance, which aids in financial planning and management. The fixed percentage of turnover or gross receipts as presumptive income ensures predictability in tax payments.
c. Inclusion of Digital Transactions:
The reduced presumptive income rate of 6% for digital transactions under Section 44AD encourages small businesses to adopt digital payment methods, thereby promoting a cashless economy and enhancing transparency.
d. Broadened Tax Base:
By simplifying tax compliance, presumptive taxation brings more small businesses and professionals into the tax net, thereby broadening the tax base and increasing overall tax revenue.
5. Compliance Requirements
a. Maintenance of Records:
While presumptive taxation schemes exempt taxpayers from maintaining detailed books of accounts, they are still required to keep basic records that support the turnover or gross receipts declared in their tax returns.
b. Filing of Returns:
Taxpayers opting for the presumptive taxation scheme must file their income tax returns by the due date, using the appropriate ITR form (ITR-4 for presumptive taxation under Sections 44AD, 44ADA, and 44AE).
c. Penalties for Non-compliance:
Non-compliance with the provisions of presumptive taxation can result in penalties. For instance, if a taxpayer declares income lower than the prescribed presumptive income without maintaining books of accounts and getting them audited, penalties under Section 271B for failure to get accounts audited may be applicable.
6. Challenges and Criticisms
a. Risk of Overstatement:
One criticism of presumptive taxation is the risk of overstating presumptive income, especially in sectors with thin profit margins. For instance, businesses operating with high turnover but low profit margins may find the presumptive income rate too high.
b. Potential for Tax Evasion:
While presumptive taxation aims to simplify compliance, it may inadvertently provide opportunities for tax evasion if taxpayers underreport their turnover or gross receipts to reduce their tax liability.
7. Case Studies and Practical Implications
a. Small Retail Business:
A small retail business with an annual turnover of INR 1.5 crore can benefit significantly from the presumptive taxation scheme under Section 44AD. Instead of maintaining detailed accounts and undergoing audit, the business can declare 8% (or 6% for digital transactions) of its turnover as income, simplifying tax compliance.
b. Professional Services:
A freelance architect with gross receipts of INR 40 lakh can opt for presumptive taxation under Section 44ADA, declaring 50% of the receipts as income. This not only reduces the compliance burden but also provides certainty in tax payments.
c. Transport Business:
A transport operator owning eight goods carriages can utilize Section 44AE, declaring presumptive income based on the number of vehicles and months of operation. This streamlined approach allows the operator to focus on business operations rather than extensive tax compliance.
8. Future Prospects and Recommendations
a. Revising Turnover Limits:
To widen the scope of presumptive taxation, authorities could consider revising the turnover limits upward, allowing more small and medium-sized businesses to benefit from the scheme.
b. Enhancing Digital Transactions:
Encouraging the adoption of digital transactions by providing further incentives can help increase transparency and reduce tax evasion. The reduced presumptive income rate for digital transactions under Section 44AD is a step in the right direction.
c. Continuous Monitoring and Adjustment:
The tax authorities should continuously monitor the effectiveness of the presumptive tax scheme and make necessary adjustments to ensure it meets the evolving needs of small businesses and professionals while safeguarding revenue interests.
d. Awareness and Education:
Increasing awareness and providing education about the benefits and compliance requirements of presumptive taxation can help more small taxpayers avail themselves of this simplified regime.
