Who is Eligible for Presumptive Taxation Scheme?

More than four decades old, Income Tax Act 1961 is the basis for direct taxation of India; assessment, collection and management of income tax in India are conducted under the comprehensive legislation brought into effect by the Parliament of India on April 1, 1962, which has been amended time and again since then as per the changing economic and fiscal conditions. This Act applies to individuals, Hindu Undivided Families, partnerships, corporations, and other such entities. It also deals with the taxation of income sourced within India and, in certain cases, foreign sources. Sections and schedules are present in the Act stating prescribed methodologies for the calculation of taxable income, exemptions, deductions and tax rates, along with different taxpayer categories.

Income under five heads: salary, income from property-revenue, profits and gains under head business or profession, capital gains and income from other sources. This Act provides an exemption to agricultural income and permits deduction in respect of investments made in the specified financial instruments or on account of medical and educational needs so that the habit of saving improves the socioeconomic status of the nation. Even provisions for advance tax, TDS and penalties for non-compliance.

The Central Board of Direct Taxes (CBDT) enforces this Act. Fair collection of tax along with an increase in the generation of revenue is its objective, as well as government facilitation. It indeed happens to be a lifeline for citizens who require public services, infrastructural development and welfare schemes. It helps in maintaining economic stability. The Act has been enlarged over the decades, incorporating innovations in digital technology, reformation such as Goods and Services Tax and faceless assessments, which gives a message that India is advancing towards a more modern and transparent tax administration.

What is Presumptive Taxation Scheme Under The Income Tax ACT, 1961?

On the taxation front, the Presumptive Taxation Scheme, as afforded by the Income Tax Act of 1961, offers a simplified approach to taxation aimed at reducing compliance for small taxpayers. However, regarding the eligible taxpayers, the scheme contemplates that their income can be brought out based on a fixed percentage applicable to their turnover or gross receipts and not in terms of maintaining detailed accounting and extensive tax audits. This scheme is of considerable benefit to small businesses, professionals, and freelancers, where compliance would be easier and transactions would be quite transparent.

A few important features of this scheme include the following.

1. Section 44AD is for resident individuals, Hindu Undivided Families (HUFs) and non-LLP partnerships that are into any business (except as may be mentioned in Section 44AE and professions under Section 44ADA). Along with eight percent, income would also be calculated as six percent of turnover or gross receipts (for digital transactions). The gross turnover for FY 2023-24 should be capped at Rupees Three Crore.
2. Section 44ADA includes all other resident professionals involved in professional services related to law, medicine, engineering, architecture, accounts, consultancy, interior decoration, film professionals and technical services. As defined, the income is “deemed at fifty percent of the gross receipts.” Gross receipts shall not exceed Rupees Seventy-Five Lakhs in any year. Taxpayers must maintain books of accounts if their total professional income exceeds the basic exemption limit.
3. Section 44AE deals with the taxpayers who own goods carriages not exceeding 10 vehicles and no goods carriage. The income will be computed based on the monthly rate of Rupees One Thousand per ton of gross vehicle weight or unladen weight in case of light goods vehicles.
4. Section 44AA provides an exemption of keeping books of accounts with the taxpayers. There is no need for any tax audit under section 44AB.

Eligibility for Presumptive Taxation Scheme

The eligibility criteria has been added for certain classes of taxpayers. Criteria and ceilings for eligibility depend on certain sections, such as Sections 44AD, 44ADA and 44AE.

• Section 44AD (Applicable to Small Businesses)

The eligibility criterion is that they can be resident individuals, Hindu Undivided Families and Partnership Firms, but not Limited Liability Partnerships.

Business would not cover those specified as under transport business under Section 44AE and Section 44AA regarding legal, medical, accounting, etc.

The updated threshold for turnover is Rupees Three Crore, effective from the financial year 2023-24.

Income Declaration shall be six percent for transactions performed through digital payments and eight percent for cash transactions.

• Section 44ADA (Applicable to Professionals)

The relevant business entities under this section include resident individuals or firms in partnership that are not LLPs and are carrying on any profession that involves law, medicine, engineering, architecture, accountancy, interior designing, consultancy, etc.

The gross receipts limit for every financial year is fixed at Rupees Seventy-Five Lakhs and at least fifty percent of the gross receipts should be given as income.

• Section 44AE (For Transporters)

The entities eligible under this section include any resident individual, Hindu Undivided Family (HUF), firm or company that operates not more than ten goods carriages at any time during the year. The nature of business can be operation, hiring and letting or plying of goods carriages.

The income computed shall be Rupees One Thousand for every ton of gross vehicle weight (or unladen weight for lighter vehicles) per month for each vehicle.

Restrictions on all sections:

1. Non-Eligible Entities – No non-resident can exercise presumptive taxation. LLPs and specific enterprises shall also be ineligible.
2. Taxpayers who earn foreign revenue will not be qualified to opt for this scheme under any of the above sections.
3. Voluntary Exit and Re-Entry Conditions: Further, as provided under Section 44AD, exiters from the scheme cannot enter the same for five years.

Specific restrictions:

1. Section 44AD bars professionals, commission agents and businesses earning income from agency work from availing themselves with the provisions of this section. In other words, such taxpayers will have to maintain accounts and get taxed under audit provisions of Section 44AB in cases where the actual income is less than the presumed rate but total income exceeds the basic exemption limit.
2. Section 44ADA The professionals whose gross receipts exceed Rupees Seventy-Five Lakh are mandatorily required to maintain books of accounts as well as subject themselves to tax audits.
3. Section 44AE applies to taxpayers who own goods carriages and thus does not apply to those who use other people’s vehicles. This system has tax compliance support but with certain restrictions and is mainly suited to small businesses and other professionals. The taxpayer must qualify and operate within the said stipulations to avoid any penal imposition.

Illustrations

• Presumptive Taxation under Section 44AD (Small Business):

Given –

Mr. Arjun, resident of this locality, is a small time trader. His annual turnover will be in the limits of ₹50000000 during the year 2023-24. He opted for a presumptive taxation scheme under Section 44AD.

Calculation –

Presumptive income: In the case of cash transactions: 8% of the turnover and in the case of digital transactions, presumptively 6% income would be received.

Income presumed for Mr. Arjun: For all transactions in cash – 8% of 50,000 = ₹4,000,000. If all were digital – 6% of 50,000 = ₹3,000,000.

Tax Computation –

NO TAX, provided the total income of Mr. Arjun is less than the limit of basic exemption (₹3,00,000 for people below 60 years). If his total income crosses the exemption limit, there would come the tax rate into play.

Compliance –

There will be no big books of accounts and tax audits.

• Presumptive Taxation under Section 44ADA (Professionals):

Given –

Dr. Kavita, an employee practitioner with gross income Rs. 30,00,000 has made a choice to opt for presumptive income tax under section 44ADA.

Calculation –

Presumptive income will be calculated at 50% of the gross receipts, here Rs. 30,00,000 comes to Rs. 15,00,000 at 50%.

Tax liability; assuming no adjustment or other income, would give her a taxable income of Rs. 15,00,000, which would be taxed at slab rates.

Compliance – No maintenance of books of accounts and no applicability of tax audits.

• Presumptive Taxation under Section 44AE (Transporters):

Given –

Mr. Raj owns five heavy goods vehicles by which he is engaged in the transport business who hired out his vehicles. Employed the aforesaid vehicles for 12 months in the year 2023-24.

Calculation –

Income presumed will be Rs. 1000 for every ton of gross vehicle weight (GVW) per month for every vehicle. It is presumed that every automobile will be of GVW ten tons. So, the income per automobile will be Rs.1,20,000 (1,000 x 10 x 12) and the total income will be Rs.1,20,000 times 5, repeat: Rs.6,00,000.

Tax calculation –

Taxable Income of Mr. Raj was Rs.6,00,000.

Compliances:

Mr. Raj does not require to hold any dealing records or undergo tax audits.

Benefits of Presumptive Tax Scheme

Indeed, the scheme is specifically beneficial for small taxpayers, allowing them to be more focused on the core business activities in spite of reduction of hassle of compliance.

1. Eradication of the requirement for detailed accounting records provides taxpayers with ease of compliance.
2. Tax audits are not required under Section 44AB, which gives an exemption for audit compliances.
3. There is a lesser administrative burden by facilitating the calculation of taxes by charging a percentage on sales or receipts.
4. Digital or electronic Transactions are engaged as the rate for incomes for such transactions that fall under Section 44AD is reduced by 6%.
5. This scheme is cost-effective as it reduces cost expenses in bookkeeping, accounting and auditing.
6. A tax-compliant environment is boosted and fostered amongst small businesses and professionals.
7. There is tax certainty because fixed income percentages eliminate the ambiguity in tax appraisals.

Conclusion

Presumptive taxation is a general tax scheme intended to take the superstructure from the Income Tax Act of 1961, attempting to simplify compliance with taxation matters among small businesses or small professionals, including transporters in India. It states that an eligible taxpayer can declare income based on some fixed percentage of his turnover or receipts without requiring or maintaining complex accounting records and without tax audits. This reduces compliance costs and predictability regarding tax obligations, making the system more taxpayer-friendly. Such systems are critically important in India, where a huge part of India’s economy comprises small businesses and individual professionals who may not have the resources to maintain sophisticated accounting or hire professional accountants.

It also associates low presumptive income rates with e-banking that encourages electronic transactions, as part of the overall government strategy encouraging e-stuff and financial transparency. Several limitations and safeguards are incorporated in it in terms of turnover ceilings and options to opt-out, thereby ensuring that its benefits accrue to disqualified small taxpayers.

In short, it strikes an appropriate balance between the ease of operations and accountability in discharging the tax obligation of eligible taxpayers while fostering voluntary compliance with tax laws. It is quite essential for the expansion of a tax base, improvement in compliance rates, and development of a culture of tax awareness among small taxpayers in India, important to the economic growth of the country.