The government adopted presumptive taxes in the assessment year 2017–18 to support microbusinesses. This initiative excluded small enterprises and freelancers from keeping books of accounts under presumptive taxation.
The initially assumed tax threshold for small firms was Rs. 2 crore which is now raised to Rs. 3 crore. In the budget for 2023, the assumed tax threshold is now Rs. 75 lakh which was Rs. 50 lakh. According to Anup Bansal, Scripbox's chief business officer, the new limit will be effective starting the next fiscal year.
Now, let us read about presumptive taxation for businesses and individuals.
Did you know?
Presumptive taxation provides a simplified tax calculation method for small businesses and professionals, allowing them to pay taxes based on presumed income rather than actual profits or receipts.
What Is Presumptive Taxation?
The Income Tax Act of 1961 established the presumptive taxation plan to relieve small taxpayers from the arduous task of keeping books of accounts and from having the accounts audited.
To comprehend the financial condition of their business or profession over the course of the financial year, a person who receives revenue from a business or profession typically keeps books of accounts and generates a balance sheet.
Anyone who utilises the presumptive taxation plan, including individuals, HUFs, and partnership firms, may declare income at a specific rate. As a result, they are spared the laborious process of keeping books of accounts and audits.
The presumptive taxation plans that are accessible to small taxpayers under the Income Tax Act are as follows:
- For small enterprises, Section 44AD
- For professionals, Section 44 ADA
- And Section 44AE for companies who operate, hire, or lease goods carriages
To change the presumptive taxation limits for FY 2023–24 (AY 2024–25), Budget 2023 revised Sections 44AD and Sec. 44ADA as follows.
|
Category |
Previous limits |
Revised limits |
|
Sec 44AD: For small businesses |
Rs. 2 crore |
Rs. 3 crores* |
|
Sec 44ADA: For professionals |
Rs. 50 lakh |
Rs. 75 lakh* |
*The limit increase is subject to a condition that 95% of the receipts must be through online modes.
Presumptive Scheme Features
Let's quickly review the presumptive income tax structure and the U/S 44AD for professionals/small enterprises portions that it covers. Professionals are also covered by Section 44ADA, and taxpayers engaged in the hiring, leasing, or operating of trucks are covered by Section 44AE.
According to this plan, the Net Income is assumed to be 8% of the Gross Business Revenues for Taxpayers with Income from Business and Profession. The presumptive tax rate for cash payments received is 8%; however, starting in the FY 2016–2017, if the gross receipts are digital payments, the Net Income can be subject to presumptive taxation at 6% of the gross digital receipts.
If you choose a presumptive taxation plan, the key changes from ordinary taxation are:
- Your business doesn't need to keep any books of accounts.
- By the 15th of March of the financial year, you must pay the full amount of the presumed advance tax.
- The quarterly instalments of June, September, and December on their respective due dates for advance tax will no longer be required.
- No further company costs may be subtracted from the income.
- You can select the plan for each of your enterprises if you operate more than one.
Who Can Apply for Presumptive Taxation?
Any person, Hindu Undivided Family (HUL), partnership firm, or company (aside from LLP) that is a tax resident in India may elect to be presumed to be subject to the presumptive taxation specified for business, as well as any person, partnership firm, or company (aside from LLP) that elects to be presumed to be subject to the presumptive taxation specified for a profession.
Presumptive Taxation Scheme for Business
This plan aims to relieve small taxpayers running any kind of business from having to keep any kind of books or accounts. It excludes, however, the plying, hiring, or leasing of goods carriages mentioned in section 44AE.
Additionally, Section 44AA and Section 44AB of the Income Tax Code's provisions for maintaining books of accounts and conducting audits will not be applicable. Presumptive taxes is available to the following assessees under section 44AD:
- Resident Individual
- HUF
- Partnership Firm (not Limited Liability Partnership Firm)
Tax Audit
Businesses with annual gross receipts of more than Rs 1 crore are subject to a tax audit. The tax audit report must be submitted by September 30 of the assessment year.
The electronic tax audit report must be submitted using Form 3CD. The deadline for submitting an income tax return for taxpayers under audit is also 30 September of the assessment year. In most cases, revising a tax audit report is impossible.
However, the tax audit report can be amended when the accounts have been changed.
Presumptive Taxation Scheme for Professionals
Professionals were previously excluded from the presumptive taxation structure. However, the government also included professionals in a presumptive taxation plan in the 2016 budget. Therefore, under section 44ADA, professionals may also choose to be presumed to be taxed. This benefit is available starting in the fiscal year 2016–17.
Under Section 44ADA, an assessee in a designated profession with gross receipts up to INR 50 lacs may elect to be presumed taxed. They are relieved of having to keep books of accounts and submit to a tax audit in accordance with Section 44AB.
Applicability of Tax Audit
You must conduct a tax audit if your professional gross income exceeds Rs 25 lakhs during any fiscal year. Failing to have your books audited could result in a fine of up to 0.5% of your gross income, or Rs 1.5 lakhs, whichever is smaller.
Presumptive Taxation Scheme Under Section 44AE
The purpose of Section 44AE is to provide small taxpayers who operate businesses that involve the renting, leasing, or plying of goods carriages with relief.
Section 44AD
Small businesses, residents, Hindu Undivided Families (HUF), and residents of partnership firms are all intended to benefit from the exemption provided by this clause. The whole amount of advance tax must be paid by March 15 of the preceding year for taxpayers who choose the presumptive taxation plan under section 44AD.
Also, your net income represents 8% of your turnover for purposes of presumptive taxation under Section 44AD, and you must pay tax on that amount. This is the presumption income under section 44AD.
It should be highlighted that a person who receives commission or brokerage income is ineligible to use the presumptive taxation system. Additionally, a person cannot choose the presumed taxation scheme of section 44AD if their annual gross receipts or turnover total more than Rs 3 crore.
This maximum was previously Rs 2 crore. However, it was increased to the new limit in the 2023 budget.
Section 44ADA
Section 44ADA relieves specific professions, including law, medicine, engineering, accounting, technical consulting, interior design, and any other professions CBDT identifies.
Professionals can profit from this area if their annual income is less than Rs 75 lakhs (formerly Rs 50 lakhs). No further expenses are allowed after computing the presumptive income at a rate of 50%, which is regarded as the ultimate income.
Taxpayers choosing section 44ADA must pay the advance tax by March 15 of the prior year.
Section 44AE
This part of the income tax act benefits small enterprises that operate goods carriage services, hire or lease carriages and do not possess more than 10 goods vehicles at any given moment during the year.
Eligible Business as per Section 44AE
A person who operates a goods carriage service, hires or leases carriages, or both, and owns no more than ten carriages at any given time. Include vehicles purchased with hire purchase or no monthly payments.
Everyone is subject to the provisions of section 44AE, including individuals, HUFs, businesses, and other entities.
Conclusion
We have just evaluated the presumptive income tax plan available to taxpayers who earn money from their profession, business, or the transportation of products under Section 44AD of the Income Tax Act of 1961. ITR filing usually requires careful planning and a thorough understanding of your eligibility for deductions, allowances, costs, etc.
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