Tax on Presumptive Basis- Section 44AD, 44ADA and 44AE
Meaning and intention
Section 44AD, 44ADA and 44AE of the Income Tax Act provides a presumptive taxation scheme, which is intended to reduce the compliance burden of small businessmen and relieve them from the requirement of maintaining books of account. Under the said scheme, the eligible assessee opting for the scheme shall declare income at a prescribed rate and, is in turn, relieved from the tedious job of maintaining books of account and getting the accounts audited.
The presumptive taxation scheme under section 44AD covers all small businesses (resident individuals, HUFs and partnership firm, not LLPs, except the business of plying, hiring and leasing goods carriages covered under section 44AE) with total turnover of upto Two Crore Rupees (the earlier limit was 1 Crore- upto A.Y. 16-17)
- Under this scheme, income is computed on presumptive basis. Till the A.Y. 16-17, the prescribed rate of income for all classes of assesses, opting for this scheme was 8%.However, in order to promote digitalization, w.e.f. A.Y. 17-18, an extra advantage has been provided to assessees receiving whole of their sale proceeds through account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account, wherein the deemed income of such assesses shall be at the rate of 6%, instead of the usual 8%.
- Further, the assesse opting for this scheme is relived from the provision of making advance tax payments within the prescribed time slots. However, he is liable to pay whole amount of advance tax (i.e. 100%) on or before 15thMarch of the previous year, on failure of which, he shall be liable to pay interest u/s. 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.
- However, 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.
- It is pertinent to note that, the presumptive income computed as per the prescribed rate is the final income and no further expenses will be allowed or disallowed. Moreover, 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, and thus, no separate deduction on account of depreciation shall be available.
- The noteworthy clause here is that, if a person opts for presumptive taxation scheme then he is also required to follow the same scheme for next 5 years. If he fails to do so, then he shall not be eligible to avail the presumptive taxation scheme for next 5 years.
The presumptive provisions of section 44AD shall not apply to the following:
- A person carrying on profession as specified u/s. 44AA(1)
- A person earning income in the nature of commission or brokerage, or
- A person carrying on any agency business
Not opting for the scheme
A person can declare income at lower rate (i.e., at less than 6% or 8%), however, if he does so, and his income exceeds the basis exemption limit, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.
- The presumptive taxation scheme of section 44ADA is designed to give relief to small taxpayers engaged in specified profession. Thus, person opting for this scheme is not liable to comply with section 44AA and 44AB. However, the same shall apply, where a person does not opt for the presumptive taxation scheme of section 44ADA, declares his income from profession at lower rate and his income exceeds the maximum amount which is not chargeable to tax.
- The income of a person opting for this scheme shall be deemed to be @ 50% of the total gross receipts from the profession (higher income can be declared)
- As under section 44AD, no further deduction is allowed, and the presumptive profit is final.
- The provisions as regards advance tax, are similar to that of section 44AD.
- A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA:- 1) Legal 2) Medical 3) Engineering or architectural 4) Accountancy 5) Technical consultancy 6) Interior decoration 7) Any other profession as notified by CBDT
- The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).
- This scheme can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods vehicles at any time during the year.
- The presumptive scheme u/s. 44AE is designed to give relief to small taxpayers, engaged in the business of plying, hiring or leasing of goods carriages.
- In respect of the assesse opting for this scheme, the income will be computed on an estimated basis, i.e., final income(all expenses deemed allowed) will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned(and not necessarily used) by the taxpayer during the year.
- If the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can be declared
- Unlike section 44AD, there is no concession as regards payment of advance tax in case of a person who adopts for presumptive taxation scheme of section 44AE and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.
Not opting for the scheme
Where a person does not opt for the presumptive taxation scheme of section 44AE and declares income at a lower rate, i.e., at less than Rs. 7,500 per goods vehicle per month, then the provisions of section 44AA and 44AB shall apply.