Section 44 AD of Income Tax Act, 1961 A Complete Analysis to Presumptive Taxation Scheme

Every Taxpayer wants a simplified and hassle-free method to comply with tax regulations. Presumptive taxation is a simplified method of taxation designed to ease the compliance burden for small taxpayers, particularly small businesses, professionals, and certain sectors. Under this scheme, taxpayers are allowed to declare their income at a prescribed rate of turnover or gross receipts, instead of maintaining detailed books of accounts and undergoing audits. The income is “presumed” to be a certain percentage of the gross receipts or turnover, hence the term “presumptive taxation.”

It helps to reduces the complexity of tax compliance for small taxpayers by eliminating the need for maintaining detailed books of accounts and getting accounts audited. The income is calculated as a fixed percentage of the total turnover or gross receipts, which simplifies the process of income declaration.

Key Features

• Simplified Tax Calculation: Simplified tax reporting and compliance.
• Turnover Limit: Various Turn over limits on circumstance
• Exemptions from Maintaining Books of Accounts: Businesses and professionals opting for presumptive taxation are not required to maintain detailed books of accounts as per Section 44AA.
• Exemption from Audit: Taxpayers opting for the presumptive taxation scheme under Sections 44AD, 44ADA, and 44AE are exempt from the audit requirements of Section 44AB, provided they declare income as per the presumptive scheme.
• Consistency Requirement: If a taxpayer opts for the presumptive taxation scheme under Section 44AD, they must continue to do so for the next five consecutive years.
• Advance Tax Payment: Taxpayers opting for presumptive taxation are required to pay the entire amount of advance tax by 15th March of the financial year.

Eligibility Criteria:

Only specific categories of taxpayers and businesses can opt for presumptive taxation, subject to certain conditions regarding turnover limits and types of business activities. If a taxpayer opts out of the presumptive taxation scheme after having used it, they must maintain books of accounts and get them audited for the next five years. Under the presumptive scheme, no additional deductions for business expenses (such as depreciation) are allowed. The prescribed percentage of turnover is deemed to cover all expenses.

Sections Governing Presumptive Taxation in India

Section 44AD of Income Tax: Resident individuals, Hindu Undivided Families ( HUFs ), and partnership firms ( other than LLPs ) engaged in any business except plying, hiring, or leasing goods carriages are eligible under section 44 D of the act.As per the section, the gross receipts or turnover should not exceed ₹2 crore in a financial year.The presumptive Income will be8% of turnover ( or 6% for digital transactions ).

Section 44ADA: This section is applicable onResident individuals and partnership firms ( other than LLPs ) engaged in specified professions such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, etc.

The Turnover Limit as per the section state that Gross receipts should not exceed ₹50 lakh in a financial year. Then the presumptive Income would be 50% of gross receipts.

Section 44AE: This section is applicable to any taxpayer engaged in the business of plying, hiring, or leasing goods carriages. Turnover Limit is not specified, but the taxpayer should not own more than 10 goods vehicles at any time during the year. The presumptive Income will be ₹7,500 per month or part of a month for each goods vehicle.

Benefits of Presumptive Taxation

• Reduced Compliance Burden: Taxpayers are not required to maintain detailed books of accounts. No need for audits under Section 44AB if opting for presumptive taxation.
• Ease of Tax Calculation: Income is calculated as a fixed percentage of turnover or gross receipts, simplifying the process of tax calculation.
• Timely Tax Payment: Simplified advance tax payment rules, with most taxpayers

Businesses and Professions Not Eligible for Section 44AD

1. Professionals Covered Under Section 44AA(1):
2. Legal professionals ( advocates, lawyers )
3. Medical professionals ( doctors, dentists )
4. Engineering professionals
5. Architectural professionals
6. Accountants ( chartered accountants, cost accountants )
7. Technical consultants
8. Interior decorators
9. Any other profession as notified by the Board

• Agency Businesses: Businesses engaged in the business of an agency ( e.g., advertising agencies, travel agencies )
• Businesses Earning Commission or Brokerage: Businesses where income is in the nature of commission or brokerage ( e.g., insurance agents, real estate brokers )
• Businesses of Plying, Hiring, or Leasing Goods Carriages: Businesses involved in the operation of goods vehicles for transportation purposes are covered under Section 44AE, not Section 44AD.

Specific Codes Not Eligible for Section 44AD

While the Income Tax Act does not provide a detailed list of codes, the ineligible categories can be identified based on the nature of the business or profession.

Specified Businesses under Section 44AE, 44BB, and 44BBB:

• Businesses that fall under the presumptive taxation schemes of Sections 44AE, 44BB, and 44BBB are also not eligible for Section 44AD
• Section 44AE: Business of plying, hiring, or leasing goods carriages.
• Section 44BB: Services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils.
• Section 44BBB: Business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project.

Conclusion

Section 44AD aims to simplify the tax process for small businesses, but it excludes professionals, agency businesses, and businesses earning commission or brokerage. Those involved in these excluded categories must comply with the regular provisions of the Income Tax Act, which involve maintaining detailed books of accounts and possibly undergoing audits.

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