What is presumptive taxation under Section 44ADA?

Let us understand the concept of presumptive taxation and learn about Section 44ADA of Income Tax Act.

November 28, 2019 12:18 IST | India Infoline News Service
Income Tax
Small businesses and professionals normally find the process of maintaining accounts, getting them audited and meeting other compliance formalities quite time consuming and expensive. It also takes away too much of their business bandwidth into routine administrative matters which they may be better off spending time developing clients or monitoring their business. It is for these professionals that the Government of India introduced Section 44ADA of the Income Tax Act in fiscal year 2016-17, which deals with taxation based on presumptive income. Let us first look at the concept of presumptive taxation.

What is presumptive taxation all about?
In any business or profession, there are revenue inflows and there are outflows in the form of office expenses, vendor charges, service fees, etc. Under the presumptive income model as defined under Section 44ADA of Income Tax Act, the profits of the business are presumed at a flat rate of the total revenues. Here the professional is saved the hassles of detailed accounting and audit requirements and whatever is the reported income, the taxable profit on the income is straight assumed at a percentage (currently 50% under 44ADA). Currently, this benefit of presumptive taxation can only be claimed by professionals having annual gross receipts of less than Rs50 lakhs.

Scope and eligibility for coverage under Section 44ADA
Section 44ADA is a special provision inserted in FY 2016-17 for calculating profits and gains of small professionals in certain circumstances (in this case where the gross receipts are less than Rs50 lakhs). Hence if your total receipts are Rs45 lakhs and you charge 18% GST on these services, then your gross receipts will be Rs53.1 lakhs and you will not be eligible for the presumptive tax model. This needs to be understood in advance. In case of assessees eligible for the presumptive tax model under Section 44ADA, the profits of the profession will be assumed at 50% of the gross receipts.

Let us now look at what are the types of assessees who are eligible for 44ADA. Currently, as per the Income Tax Act, Individuals, Hindu undivided families (HUFs) and Partnership firms formed under the Indian Partnership Act 1932 are eligible. However, limited liability partnerships (LLP), private limited companies and public limited companies are not eligible to claim benefits under 44ADA.

Specific professions that is eligible for presumptive tax under Section 44ADA
Apart from the condition that gross receipts of the profession should be less than Rs50 lakhs, the Income Tax Act has also defined the list of professions that are eligible to participate in presumptive taxation formula.

The following are the specific professions eligible for Section 44ADA
  • Interior decorations
  • Technical consulting
  • Engineering
  • Accounting
  • Legal
  • Medical
  • Architecture
Apart from the above, the following professions shall also be eligible
  • Movie artists including producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designers.
  • Authorised representative represents another person for a fee before a tribunal or any authority constituted under any law. It does not include employee of the person so represented or a person who is carrying on the profession of accountancy.
  • Any other notified professionals
Finer points of the presumptive income facility offered under 44ADA
The following points should clarify the gist of the Section 44ADA of Income Tax Act.
  • Presumptive income for the purpose will be higher of the two viz. (1) 50% of the total receipts from the profession and (2) Income offered by assessee from the profession.
  • There is no need of maintaining books required under Section 44AA of the Income Tax Act in this case.
  • There is also no requirement of having the accounts audited under Section 44AB of the Income Tax Act.
  • The assessee will be deemed to not meet the presumptive income criteria if the gross receipts are more than Rs50 lakhs or if the assessee wants to show profit at less than 50% of gross receipts.
  • In such cases, the assessee must mandatorily maintain books of accounts and also get these accounts audited under section 44AB of the Income Tax Act.
When should you opt for Section 44ADA?
Once you opt for Section 44ADA, all business expenses are deemed to have been allowed. So if your business expenses are much lower than 50% of gross receipts, the presumptive income scheme makes sense to you. Otherwise, you would be better off maintaining accounts and getting it audited. But this is certainly a good step towards ease of doing business for the small professionals.

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