What is the Presumptive Taxation Scheme?

Before you go on and read this article, watch this video to have a basic understanding of what the presumptive taxation scheme is!



Do you run a business or offer professional services? If you do, for filing your income tax return, to be able to accurately determine your income and to claim all the expenses you are eligible for, you will have to maintain books of accounts. To put in simple terms, you’ll have to account for all incomes and expenses properly.


But is there a way we can avoid this tedious job of maintaining books? Instead of recording all expenses and incomes and declaring them in the return, can we take a percentage of the turnover/gross receipts as income?


The answer is Yes! The Presumptive Taxation Scheme is an option available to small taxpayers to save them from the tedious work of maintaining books of accounts. The Income Tax Act has framed the presumptive taxation scheme under sections 44AD (for businesses), 44ADA(for professionals) and 44AE(for assessees in businesses of plying, hiring or leasing goods carriages).



IT IS PRETTY STRAIGHT FORWARD...

Lets see each section and understand to whom it is applicable, how to calculate the income under this option and the advantages of availing this option.


Section 44AD- Presumptive Taxation Scheme For Businesses


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

  • Resident Individual

  • Resident Hindu Undivided Family

  • Resident Partnership Firm (not Limited Liability Partnership Firm)

And the following people can not take advantage of this provision:

  • Newly established undertakings in free trade zone, etc. - Covered u/s 10A

  • Newly established Units in Special Economic Zones (SEZs) - Covered u/s 10AA

  • Newly established 100% Export-Oriented Undertakings (EOUs)- Covered u/s 10B

  • Businesses that Export of certain articles or things - Covered u/s 10BA

  • Newly established industrial undertakings or hotel business in backward areas- u/s 80HH

  • Incomes by way of royalty on patents - Covered u/s 80RRB

  • Persons carrying any profession referred in Section 44AA(1), as these professionals are covered in section 44ADA.

  • A person carrying on any agency business; and

  • A person who is in the business of plying, hiring and leasing of goods carriages.

To opt for Presumptive Taxation Scheme, the total turnover of the business during the previous year (i.e financial year) must not exceed Rs. 2Crores.

When all the conditions are satisfied and the assessee opts for the Presumptive Taxation Scheme, Income from the said business is taken as 8% of the turnover. The assessee can, however, declare a higher profit/income in his tax return.


So, What happens when this option under 44AD is availed by the assessee?

  • All deductions under sections 30 to 38, which cover the different expenses a business incurs, are deemed to have been already allowed (in the 8% of turnover that is considered) so no further deductions are allowed.

  • Depreciation on fixed assets, covered under section 32, is also deemed to have been already allowed. So, accordingly, the written down value of the fixed assets is calculated as if depreciation has been allowed.

  • It is also assumed that disallowances, if any, under section 40,40A and 43B have been considered ( while estimating the income at 8% of the turnover).

  • An assessee who opts for this scheme is liable to pay advance tax as well (only if the advance tax provisions are applicable to the assessee). Earlier taxpayers who opted for this scheme were exempted from the advance tax provisions, but that is not the case anymore. However, unlike others, assessees opting for this scheme need not pay advance tax in installments every quarter, they can pay it all at once on or before 15th of March.


Senior citizen having no business income is exempt from paying advance tax!

The major advantage of availing this scheme is, like we have seen before, the assessee will be exempted from maintenance of books of accounts as required under section 44AA.


What if the assessee wants to declare a lower income (less than 8% of turnover)?

  • The assessee will be required to maintain the books of accounts under section 44AA, if his total income exceeds the basic exemption limit; and


There has been no change in the minimum exemption limit!

  • The assessee will have to get his books of accounts audited (by a Chartered Accountant) under section 44AB if his total income exceeds the basic exemption limit.

Everything looks so simple and easy, but something doesn’t feel right…. Why is it so simplified? What’s the catch? Like they say, two sides of a coin or yan and yin, There is one major disadvantage of availing this option under 44AD.

  • Once the assessee opts for this scheme and declares his income from business at 8% of his turnover, he shall declare his profit/income from the business at 8% or more for the next 5 assessment years as well. Which means;

  • If he chooses to declare profit/income from business at less than 8% of his turnover, he will not be eligible to claim the benefits under section 44AD for 5 subsequent assessment years (starting from the assessment year in which he declared lower profit) and;

  • Consequently the provisions of 44AA and 44AB will be applicable, i.e books of accounts are to be maintained and the assessee will be liable for tax audit, if his total income exceeds the basic exemption limit.


Turnover more than Rs. 2 Crores?
When the assessee declares income at less than 8% of his turnover,the provisions of 44AA and 44AB will applicable to the assessee for the 5 subsequent assessment years as well (starting from the assessment year in which the assessee declared his income at a lower rate).

For example, Shruthi (an eligible assessee) claims to be taxed under 44AD for the assessment year 2019-2020. She declares her income from business at Rs.8 Lakhs on the turnover of Rs.1 Crore for that assessment year. She complies with the provisions of 44AD for the next 2 assessment years(AY 2020-2021 and 2021-2022) as well, by declaring income from business at 8% of her turnover. But for the assessment year after that, for AY 2022-2023, she declares her income of Rs.4 Lakhs( less than 8%) on a turnover of Rs.1 Crore. Meaning, she has not complied with the provisions of 44AD which requires assesses to comply with the provisions of this scheme for 5 assessment years. So, what are the consequences she will face?

  1. She will not be eligible to declare her income under 44AD for the next 5 assessment years, i.e AY 2023-2024 to 2027-2028.

  2. Starting from the assessment year she declared her income at the lower rate, i.e AY 2022-2023 till AY 2027-2028, she will have to: A) Maintain books of accounts as per section 44AA (irrespective of her income or turnover) if her total income exceeds the basic exemption limit. B) Get her books of accounts audited under section 44AB (irrespective of her income or turnover) if her total income exceeds the basic exemption limit.

These consequences will be applicable to her, even if she declares her income/profit at 8% or more of her turnover, for the next 5 assessment years (AY 2023-2024 to 2027-2028).


Section 44ADA- Presumptive Taxation Scheme For Professionals

Section 44ADA is a scheme/option that is available for professionals. It is important to note that not all professionals can utilise this option, only certain professions (included under section 44AA(1)) are covered under section 44ADA. Let’s quickly take a look at what professions are included under this section.


Professions referred to in Section 44AA(1) are:

  • Legal

  • Medical

  • Engineering

  • Architectural

  • Accountancy

  • Technical consultancy

  • Interior decoration

The second condition to keep in mind, for being eligible to utilise this section, is that the total gross receipts of the assessee do not exceed Rs.50 Lakhs.


If the above two conditions are satisfied, the income of the assessee shall be calculated on an estimated basis at a sum equivalent to 50% of his total gross receipts.


Higher than the limit? No problemo! But lesser? You'll need a CA!

Just like in section 44AD, The following items are assumed while calculating income under this provision :

  • All deductions under sections 30 to 38, which cover the different expenses a business incurs, are deemed to have been already allowed (in the 50% of gross receipts that is considered) so no further deductions shall be allowed.

  • Depreciation on fixed assets, covered under section 32, is also deemed to have been already allowed. So, accordingly, the written down value of the fixed assets is calculated as if depreciation has been allowed.

  • It is also assumed that disallowances, if any, under section 40,40A and 43B have been considered ( while estimating the income at 50% of the gross receipts).

  • An assessee who opts for this scheme is liable to pay advance tax as well (only if the advance tax provisions are applicable to the assessee). Earlier taxpayers who opted for this scheme were exempted from the advance tax provisions, but that is not the case anymore). However, unlike others, assessees opting for this scheme need not pay advance tax in installments every quarter, they can pay it all at once on or before 15th of March.

As we have seen in section 44AD, the assessee under section 44ADA too can declare income at a lower rate (lower than 50% of Gross receipts) subject to the following conditions :

  1. The assessee will be required to maintain the books of accounts under section 44AA, if his total income exceeds the basic exemption limit; and

  2. The assessee will have to get his books of accounts audited (by a Chartered Accountant) under section 44AB if his total income exceeds the basic exemption limit.


There's not much of a choice here...
Unlike in section 44AD, where once an assessee opts for this scheme he/she becomes obligated to continue declaring his income in the same method for 5 consecutive assessment years, in this section (44ADA) no such obligation arises.

Section 44AE- Presumptive Taxation Scheme For Assessees in the business of plying, leasing or hiring goods carriages

Let’s start with eligibility like we have done in the previous sections, To avail this option under 44AE:

  • The assessee shall not own more than 10 goods carriages at any time during the previous year.

Note: An assessee who is in possession of a goods carriage, whether taken on hire or installments basis, for which the whole or part of the amount payable is still due shall be deemed to be the owner of such good carriage.


Its exclusively for these assesses only!

The assessees opting for this scheme under section 44AE are exempted from :

  • Maintaining books of accounts under section 44AA; and

  • Section 44AB which covers audit of the books of accounts will not be applicable here.

How is an assessee’s income estimated under this section?

Goods carriages are categorised into two types for this purpose:

  1. Heavy goods vehicle

  2. Other than heavy goods vehicle

For heavy goods vehicles ( having more than 12,000 kg gross vehicle weight) the higher of the following is to be considered as the profits and gains from business:

  1. An amount equivalent to Rs.1,000 per ton of gross vehicle weight, for every month (or part thereof) during which the vehicle is owned by the assessee in the previous year; or

  2. An amount claimed to have been actually earned from such vehicle.

For other than heavy goods vehicles (other than those covered above) the higher of the two is to be considered as the profits and gains from business:

  • An amount equivalent to Rs.7,500 for every month (or part thereof) during which the vehicle is owned by the assessee in the previous year; or

  • An amount claimed to have been actually earned from such vehicle.

Just like we have seen in sections 44AD and 44ADA, The following items are assumed while calculating income under this provision as well:

  1. All deductions under sections 30 to 38, which cover the different expenses a business incurs, are deemed to have been already allowed so no further deductions shall be allowed.

  2. Depreciation on fixed assets, covered under section 32, is also deemed to have been already allowed. So, accordingly, the written down value of the fixed assets is calculated as if depreciation has been allowed.

  3. It is also assumed that disallowances, if any, under sections 40,40A and 43B have been considered. No disallowances are further allowed.

  4. An assessee who opts for this scheme is liable to pay advance tax as well, No exemption in this regard is available.

Unlike taxpayers under sections 44AD and 44ADA, who have the option of paying the advance tax all at once and not in installments (on or before the 15th of March), Assessees who opt for 44AE must pay advance tax like everyone else. The advance tax provisions will apply to these assessees just like they do for every person.

Can income from business be declared at a lower rate? Yes, the assessee can do but the following conditions are to be satisfied (just like in sections 44AD and 44ADA) :

  • The assessee will be required to maintain the books of accounts under section 44AA, if his total income exceeds the basic exemption limit; and

  • The assessee will have to get his books of accounts audited (by a Chartered Accountant) under section 44AB if his total income exceeds the basic exemption limit.

In the case Gaylord Construction v ITO [2008] the assessee computed his income under section 44AE. The issue here was that, the income was from JCBs, which are earth moving machinery used for excavation of earth, lifting heavy materials, etc in the process of construction. It was decreed that it cannot be termed as a goods carriage and income from hiring of JCBs cannot be computed using the provisions of section 44AE.

Income from JCBs? 44AE is a NO!

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