Presumptive Taxation for Business and Profession

Taxation for businesses and professionals has often been a complex process, requiring the maintenance of detailed accounts, conducting audits, and adhering to various regulatory requirements. These tasks can burden small businesses and independent professionals. To simplify tax compliance and support small enterprises, the concept of Presumptive Taxation was introduced.

Presumptive Taxation allows eligible businesses and professionals to calculate their profits as a percentage of turnover. This system eliminates the need for maintaining detailed accounts, thereby saving time and resources while ensuring compliance. Let’s delve deeper into the concept, its applicability, and its workings.

What Are Books of Accounts?

Books of accounts are records that track a business’s income, expenses, assets, and liabilities. These financial records are essential for assessing business performance. Under Section 44AA of the Income Tax Act, maintaining books of accounts becomes mandatory if certain thresholds are met.

Limits for Maintaining Books of Accounts:

• For Businesses:
  • Turnover exceeds Rs. 10,00,000
  • Income exceeds Rs. 1,20,000
• For Professions:
  • Gross receipts exceed Rs. 25,00,000
  • Income exceeds Rs. 2,50,000

Required Records Under Rule 6F:

1. Cash Book: Records all cash receipts and payments.
2. Journal: Logs all day-to-day transactions, including debits and credits (in the mercantile system).
3. Ledger: Consolidates journal entries for financial statement preparation.
4. Bills/Receipts:
   • Photocopies for values over Rs. 25
   • Originals for values over Rs. 50
5. Medical Professionals: Additional records such as daily case registers and stock details for consumables.

Penalty for Non-Maintenance: Failure to maintain books of accounts can result in a penalty of up to Rs. 25,000 under Section 271A.

Tax Audit Requirements

A tax audit verifies transactions associated with income, expenses, and taxes. The need for a tax audit arises if turnover exceeds certain thresholds:

Thresholds for Tax Audit:

• For Businesses:
  • Turnover exceeds Rs. 1 crore (cash receipts > 5%)
  • Turnover exceeds Rs. 10 crores (cash receipts ≤ 5%)
• For Professions:
  • Turnover exceeds Rs. 50 lakhs (cash receipts > 5%)
  • Turnover exceeds Rs. 75 lakhs (cash receipts ≤ 5%)

Presumptive Taxation for Businesses (Section 44AD)

Eligible businesses can opt for Presumptive Taxation under Section 44AD if turnover does not exceed:

• Rs. 2 crores (cash receipts > 5%)
• Rs. 3 crores (cash receipts ≤ 5%)

Profit Calculation:

• 8% of turnover for non-digital transactions.
• 6% of turnover for digital transactions.

Ineligible Businesses:

• Life insurance agents.
• Commission-based businesses.
• Goods carriage businesses (covered under Section 44AE).

Example: Lalit Traders has a turnover of Rs. 1.5 crores, with Rs. 70 lakhs from cash payments and Rs. 80 lakhs from digital transactions. Using Presumptive Taxation:

• Income from cash transactions = Rs. 70,00,000 × 8% = Rs. 5,60,000
• Income from digital transactions = Rs. 80,00,000 × 6% = Rs. 4,80,000
• Total income = Rs. 10,40,000

Presumptive Taxation for Professionals (Section 44ADA)

Professionals in specified fields can opt for Presumptive Taxation under Section 44ADA if turnover does not exceed:

• Rs. 50 lakhs (cash receipts > 5%)
• Rs. 75 lakhs (cash receipts ≤ 5%)

Applicable Professions:

• Engineering, Legal, Medical, Chartered Accountancy, Technical Consulting, Interior Decoration, etc.

Example: Rakesh, a doctor, earns Rs. 30 lakhs annually with Rs. 3 lakhs in expenses. Under Presumptive Taxation, 50% of income (Rs. 15 lakhs) is taxable, saving Rs. 3.6 lakhs compared to regular taxation.

Important Points to Remember

1. Commitment: Opting for Presumptive Taxation mandates adherence for five consecutive years. Opting out disqualifies re-entry for the next five years.
2. Advance Tax: Taxpayers must pay the entire advance tax by 15th March of the financial year.

Benefits of Presumptive Taxation

• Simplified income calculation.
• No requirement to maintain detailed accounting records.
• Exemption from audits.
• Simplified advance tax payments.

By leveraging Presumptive Taxation, small businesses and professionals can streamline their tax compliance processes, saving time and reducing administrative burdens. However, careful adherence to conditions and thresholds is essential to enjoy its benefits fully.