Section 44AD – Benefits of Presumptive Taxation Scheme

Introduction

Section 44AD of the Income Tax Act eases the tax burden on small taxpayers, especially small business owners, by allowing eligible taxpayers to pay taxes on a presumptive basis. This provision simplifies tax filing by removing the need to maintain detailed books of accounts and undergo audits.

What is Section 44AD in the Presumptive Taxation Scheme?

Section 44AD is a part of the presumptive taxation scheme introduced to reduce the compliance burden on small businesses. Under this scheme, eligible taxpayers can declare their income at a prescribed rate of 8% of gross turnover or gross receipts. This income is then taxed according to the applicable income tax slab rates.

Key Characteristics:

• Presumptive Income Rate: The tax system presumes income at 8% of the gross turnover or receipts of the business if gross sales do not exceed ₹2 crore (or ₹3 crore as per Budget 2023, subject to conditions).
• No Need for Books of Accounts: Taxpayers who opt for this scheme do not need to maintain regular books of accounts or have them audited.
• No Additional Deductions: Assesses opting for Section 44AD cannot claim any further expenses or depreciation, except for interest or remuneration paid to partners.
• Application: Applies to all businesses except those specified under Section 44AE.

Who is Eligible for Section 44AD?

Section 44AD of the Income Tax Act introduces a presumptive taxation scheme designed for small businesses to simplify tax filing. Under this scheme, eligible businesses can declare their income at a prescribed rate without maintaining detailed books of accounts.

Here are the key eligibility criteria:

1. Applicable to Individuals, Hindu Undivided Families (HUFs), and Partnership Firms:

Section 44AD is available to resident individuals, HUFs, and partnership firms (excluding Limited Liability Partnerships or LLPs) that run a small business. Companies and LLPs are not eligible under this section.

2. Turnover Limit:

The scheme applies to businesses whose total annual turnover or gross receipts do not exceed ₹2 crore in a financial year. Businesses earning above this limit cannot opt for presumptive taxation under Section 44AD.

3. Specified Businesses:

This section is intended for small businesses such as retail shops, traders, and small-scale manufacturers. However, professionals like doctors, lawyers, architects, and other specified service providers (covered under the Presumptive Taxation Scheme of Section 44ADA) cannot avail of this scheme.

Business of plying, hiring, or leasing goods carriages is also excluded, as these fall under Section 44AE.

4. Non-eligibility for Certain Income Types:

Businesses involved in agency services, commission or brokerage cannot use Section 44AD. This means businesses earning income as agents (e.g., real estate agents or insurance brokers) do not qualify.

5. Opting Out of the Scheme:

If a business opts for this scheme and later chooses to opt out, they must maintain regular books of accounts and cannot return to the presumptive taxation scheme under Section 44AD for the next five consecutive years.

You may also want to know Section 44ADA of Income Tax Act

Budget 2023 Updates on Section 44AD

The Budget 2023 introduced significant changes to Section 44AD:

• The government has increased the presumptive taxation limit for small businesses from ₹2 crore to ₹3 crore, provided 95% of the receipts are digital.
• The government has also increased the limit for professionals under Section 44ADA from ₹50 lakh to ₹75 lakh, subject to similar conditions.

Application of Section 44AD

The provisions of Section 44AD apply broadly but with some exclusions:

• Exclusion: Businesses involving leasing, plying, or hiring of goods, which are covered under Section 44AE, are excluded from Section 44AD.
• Audit Requirements: If a taxpayer’s income is below 8% of their turnover, they must maintain books of accounts and have them audited by a Chartered Accountant (CA).

Allowances and Disallowances under Section 44AD

Section 44AD simplifies tax compliance by fixing a presumptive income rate at 8% (6% for digital transactions) of gross receipts or turnover. However, there are specific allowances and disallowances to keep in mind:

1. Allowances Under Section 44AD:

• Fixed Income Declaration: Eligible businesses can declare 8% of their total turnover or gross receipts as income. If transactions are done digitally, the rate is 6%. For example, if a business earns ₹1 crore in a financial year, it can declare ₹8 lakh (or ₹6 lakh for digital) as taxable income without maintaining detailed accounts.
• Tax Filing Simplification: Under this scheme, businesses do not need to maintain detailed books of accounts or go through the process of audit. This reduces compliance burdens, especially for small traders and merchants.
• Deductions from Total Income: Although Section 44AD determines presumptive income, businesses can still claim deductions like Section 80C, 80D, and others for savings, health insurance, etc., from the total income.

2. Disallowances Under Section 44AD:

• No Further Expense Deductions: Once a business opts for the presumptive taxation scheme and declares income at 8% or 6%, it cannot claim additional deductions for expenses like rent, salaries, office supplies, etc. The presumptive income rate assumes all expenses are already deducted.
• Applicability Across All Business Income: If a business chooses to adopt Section 44AD, it must apply the scheme for all eligible business income and cannot selectively apply it to only parts of the business income.
• Restriction on Switching the Scheme: If a business opts out of Section 44AD, it cannot return to the scheme for the next five years. This ensures consistent tax behavior and prevents misuse of the scheme.

Section 44AD provides a simplified and easy way for small businesses to comply with tax regulations. However, businesses must carefully consider the allowances and disallowances before opting for this scheme to avoid potential tax issues and maintain compliance.

You may also want to know Depreciation Under Income Tax Act

Benefits of Presumptive Taxation Scheme: Section 44AD

The presumptive taxation scheme under Section 44AD is designed to simplify tax compliance for small businesses. Here are the key benefits:

1. Ease of Tax Filing:

Businesses that opt for Section 44AD avoid maintaining detailed books of accounts and undergoing audits, which significantly reduces the complexity of tax filing. This makes it easier for small businesses to comply with tax laws without needing extensive accounting knowledge.

2. Simplified Income Calculation:

Under this scheme, businesses can declare 8% (or 6% for digital transactions) of their gross receipts or turnover as their income. This means there’s no need to track every expense, as the scheme presumes that all business expenses have been accounted for within this fixed rate.

3. Cost Savings:

Since there is no requirement for maintaining detailed financial records or conducting audits, businesses can save on costs associated with hiring accountants or auditors. This benefit is especially advantageous for micro and small enterprises that have limited resources.

4. Promotes Digital Transactions:

Section 44AD encourages businesses to adopt digital payment methods by offering a lower presumptive income rate (6%) for receipts made through banking channels. This not only reduces the tax liability but also promotes transparency and digital transactions.

5. Consistent Tax Liability:

By fixing a percentage of turnover as taxable income, businesses can predict their tax liability, which aids in better financial planning. This consistency ensures that small businesses are not caught off-guard with unexpected tax demands.

6. No Audit Requirement:

Businesses with a turnover of up to ₹2 crore that opt for this scheme do not need to undergo an audit, saving them from the hassle and expense of audit procedures. This is especially useful for sole proprietorships and small partnership firms.

7. Encourages Small Business Growth:

The simplified process and reduced tax burden motivate small business owners to declare their income without the fear of heavy tax obligations. This helps in fostering a culture of compliance and supports the growth of small businesses.

8. Ease of Opting for the Scheme:

There is no complex paperwork or procedural requirement to opt for Section 44AD. Eligible businesses can declare their income under this scheme directly while filing their tax returns, making the process hassle-free.

Conclusion

Section 44AD of the Income Tax Act offers a simplified taxation mechanism for small businesses and professionals, reducing their compliance burden. By opting for this scheme, eligible taxpayers can benefit from easier tax filing processes, reduced tax liabilities, and significant savings on tax consultancy fees.

However, it is important to carefully consider the actual expenses incurred before opting for this scheme to ensure it aligns with one’s financial situation.