Presumptive tax scheme

Presumptive tax scheme

Under section 44AD, every person engaged in business having turnover of upto 2 crores can opt for this scheme and under section 44ADA, every person engaged in profession of upto 50 lakhs can opt for this scheme. The following persons cannot opt for this scheme:

•  A person carrying on a notified profession u/s 44AA i.e legal, medical, engineering or architectural profession or accountancy or interior designing profession, film artists or any other profession as notified.
• A person carrying on an agency business.
• A person carrying on a business in the nature of commission or brokerage.

This scheme is designed for the small taxpayers who do not want to fall under the purview of tax audit. But the businesses having turnover of more than 2 crores cannot opt for this kind of taxation. Similarly the notified professions having gross receipts of more than 50 lakhs cannot opt for this scheme.

According to this scheme, the rate of tax called presumptive tax rate would be 8 percent of the turnover in case of businesses as per sec 44AD

The reduced rate of 6 % would be applicable when the receipts are received

• By account payee cheque.
• By account payee bank draft
• By use of ECS. (Electronic Clearing System)

In case of professions, 50 percent of the total gross receipts would be the presumptive rate as per sec 44ADA.

In both the cases no allowable deductions from sec 30 to 38 would be allowed on the presumptive income.

One must keep in mind that the business of plying, hiring and leasing goods carriages covered in another section 44AE and not in 44AD and 44ADA.

44AE is a presumptive tax scheme for those who are engaged in plying, hiring and leasing good carriages and owns not more than 10 goods vehicles at any point of time during the whole year subjected to tax. The scheme states that

• For a heavy goods vehicle, the presumptive income would be Rs 1000 per ton of gross vehicle weight for every month or part of a month.
• For other than heavy goods vehicle, the presumptive income would be Rs 7500 for every month or part of a month.

Also in this section, no allowable deductions from sec 30 to 38 are allowed.

A point to be noted

A point to be observed is that even though the turnover exceeds 1 crore or the gross receipts exceed 50 lakhs, as long as they are within the prescribed limits to be eligible to opt for presumptive tax scheme (2 crores for business and 50 lakhs for gross receipts), the tax audit does not remain mandatory. For those who do not want to opt for presumptive tax, for them the limits of 1 crore and 50 lakhs will apply for businesses and professions respectively.

Opting out of this scheme

If you are an assessee who has opted for presumptive taxation scheme in the previous year, you must keep in mind that if you opt out of the scheme while computing your tax for the next Assessment year, you will not be able to opt for this scheme for a consecutive 5 Assessment years following the Assessment year where you have not opted for this scheme.

You can understand better with the help of the following example

Lets say Mr Ram being an eligible assessee used to get his tax computed on presumptive basis. This financial year 2019-20, his business has a turnover of INR 2 crores. He has earned an actual profit of INR 10 lakhs which is only 5 percent of the taxable turnover.

Now since his turnover has crossed INR 1 crore. he is liable for tax audit u/s 44AB. (Assuming Mr Ram is a businessman)

It is obvious to state that Ram does not want to declare income as per this scheme as it is below 8 percent. Hence Mr Ram opts out of this scheme while getting his tax computed for the AY 2020-21.

As per the section 44AD provisions, Mr Ram is not allowed to opt for Presumptive taxation scheme for the next 5 years succeeding the AY 20-21 i.e. AY 21-22 till AY 25-26. If he wants, he may opt for this scheme for the AY 26-27.