PRESUMPTIVE TAXATION [SECTION 44ADA] INCOME TAX ACT 1961

PRESUMPTIVE TAXATION [SECTION 44ADA] INCOME TAX ACT 1961

Scheme for presumptive taxation was introduced under section 44ADA in the financial year 2016-17.


Introduction

Scheme for presumptive taxation was introduced under section 44ADA in the financial year 2016-17. This section provides a simplified method of taxation to specified professionals. 

Earlier, only the small business are eligible for this scheme and later on, the benefit of the same has been extended to the specified professionals. This scheme was introduced to reduce the compliance burden of professionals and also helps in ease of doing business. Under this scheme, profits are presumed at 50% of the gross receipts.
 

Analysis of Presumptive Taxation
 

Why this section 44ADA was introduced?

This section 44ADA was introduced in order to achieve the following objective-

  • To bring uniformity between small businessmen who are eligible for presumptive taxation under section 44AD and small professionals 
  • To reduce the burden of tax compliance of small professionals
  • To help the professionals in the process of doing business.
     
Who is the eligible assesses?

The following are the assesses being the resident of India-

  1. Individual 
  2. Hindu undivided family 
  3. Partnership firm (excluding limited liability partnership)
     


 

Who are the Eligible Professionals?

Any person who is engaged in the profession as mentioned in section 44AA(1) of the Income Tax Act and whose total gross receipts from the profession is not more than Rs. 50 lakhs in the previous year are eligible for this scheme. The eligible professionals are as follows-

  1. legal,
  2. medical, 
  3. engineering 
  4. architectural profession 
  5. Profession of accountancy 
  6. technical consultancy 
  7. interior decoration
  8. any other profession as notified by the Board in the Official Gazette
     
What is Presumptive Income?

Presumptive income means a sum equal to 50% of the total gross receipts, or, in any case, a sum higher than the aforesaid sum claimed to have been earned by the assessee.
 

What benefit can be availed if any person opts for the Presumptive Taxation Scheme?

The following benefit can be availed if any person opts for the Presumptive Taxation Scheme:

  • The assessee is not required to maintain books of accounts as per section 44AA
  • Assessee is not required to get the accounts audited under section 44AB related of such income
     
When will the assessee be required to maintain books of account and get the accounts audited?

The assessee is required to maintain books of account and get the accounts audited, in case they meet the following criteria:

  • Income from the profession is offered at a lower rate than 50% of the gross receipts
  • Assesses total income is more than the basic exemption
     
What are the implications of Presumptive Taxation?

The implications of Presumptive Taxation are as follows:

(i)  All the deductions related to business expenses are deemed to have been allowed. After the profit is taxed at 50% of the gross receipts, then the remaining balance is deemed to have been allowed towards all the business expenses of the said assessee. 

Note: Business expenses include:

  • consumables, 
  • cost of services taken from another professional, 
  • daily expenses, 
  • stationery, 
  • telephone charges, 
  • depreciation on assets and 
  • any other expense incurred to carry on the profession.
     

(ii)  The written down value of any asset used for the professional purposes shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
 

When to pay the advance tax if the person opts for the Presumptive Taxation scheme?

The person who opts for the Presumptive Taxation scheme is required to pay the advance tax by 15th March of the financial year.
 

Option to ‘Opt-in’ and ‘Opt-out’

Any person can opt-in and opt-out of Sec. 44ADA at any time without any restriction. 

A professional can opt-in and opt-out at any time without a 5-year restriction unlike the business covered under Sec. 44AD.
 

Conclusion

It is advisable to all the professionals, who do not exceed the limit of total gross receipt, to opt for Presumptive Taxation scheme as only the 50% of their total gross receipts will become taxable and which in turn will help them to save some money which they can utilize in their professional activities.
 

Edited by Minu Mishra

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