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  • Presumptive Taxation Scheme Under Section 44AD and Section 44AE

    Overview and Description:

    The presumptive taxation scheme was introduced by the Income Tax Act as a means through which small taxpayers who perform tasks such as the auditing of accounts as well as maintaining account ledgers would receive some form of relief.

    This means that any individual looking to avail of this scheme will be able to declare his or her total taxable income at a predefined rate, while obtaining relief from the cumbersome task of account maintenance and audit. For this purpose, the Income Tax Act has introduced two types of presumptive taxation schemes:

    • The presumptive taxation scheme under Section 44AD
    • The presumptive taxation scheme under Section 44AE

    Presumptive Taxation Scheme Under Section 44AD:

    The presumptive taxation scheme under section 44AD was framed and introduced by the Income Tax Act to ease the tax burden on small taxpayers who are involved in the carrying out of any kind of business, with the exception of those businesses mentioned under section 44AE

    Eligibility Criteria for the Presumptive Taxation Scheme Under Section 44AD:

    The following persons or individuals are eligible to avail of the presumptive taxation scheme under section 44AD

    • Any individual who is a resident of India
    • Hindu Undivided Families (HUFs) who are residents of India
    • A partnership firm that is resident to India

    Any of the entities mentioned above can adopt this scheme provided that they have claimed tax deductions for the relevant assessment year under the following sections

    • 10A
    • 10AA
    • 10B
    • 10BA
    • 80HH
    • 80RRB

    The following persons or individuals are ineligible to avail of the presumptive taxation scheme under section 44AD

    • Any Limited Liability Partnership Firm (LLP)
    • Non residents
    • Any person who is not an individual, Hindu Undivided Family or a partnership firm

    Businesses that do not come under the Presumptive Taxation Scheme under Section 44AD:

    While the presumptive taxation scheme under Section 44AD is framed to relieve small taxpayers who carry out business, there are a few exceptions regarding the type of business the taxpayer may be engaged in that cannot take advantage of the provisions outlined under section 44AD. These are:

    • Any business under section 44AE that involves the renting, hire or plying of goods carriages
    • Any business related to agencies
    • Individuals who receive commission or income related to brokerage
    • Any individual who is involved in any profession mentioned under section 44AA(1)
    • Insurance agents, since any income they receive is via commission
    • Any individual who earns gross income of more than Rs 1 lakh per year. However, an exception to this rule arises if the gross income is not more more than the audit limit of Rs 1 lakh as outlined in section 44AB

    Calculation Of Taxable Income For Persons Availing Of The Presumptive Taxation Scheme Of Section 44AD:

    Should any person or individual look to avail of the provisions outlined under section 44AD, his or her taxable income will be calculated based on presumption. This means that the individual’s presumptive income will be calculated at 8 per cent of his or her yearly turnover or gross income. This income calculated at the rate of 8 per cent will be considered the final absolute income of the individual and no additional expenditure will be considered.

    Difference Between Calculation of Taxable Business Income Under Normal Circumstances Versus Calculation of Taxable Business Income Based On The Presumptive Taxation Scheme Under Section 44AD:

    As per the regular provisions outlined by the Income Tax Act, any taxable income received from business is calculated following the deduction of any expenditure that has been deemed to be deductible according to the guidelines of the Income Tax Act, as well as the disallowance of any expenditure that has been deemed unfit to be deductible according to the guidelines of the Income Tax Act.

    However, for those individuals who have adopted the presumptive taxation scheme of section 44AD, taxable income received from business is calculated at an 8 per cent rate of presumption, wherein deductible and non-deductible expenses outlined by the Income Tax Act are not applicable. This will be considered to be the business’ final and absolute taxable income, and no additional expenditure will be considered.

    Calculation of Taxable Business Income Based on the Presumptive Taxation Scheme Under Section 44AD in case of Partnership Firm:

    If the taxpayer in question is a partnership firm then the following conditions apply when adopting the presumptive taxation scheme under section 44AD

    • Following the taxable income calculated at 8 percent as mentioned previously, additional deductions will be allowed to be claimed on the following
    • Remuneration paid to partners of the firm
    • Interest received by the partners of the firm
    • Deductions cannot be claimed in the event of depreciation, although the value of assets owned by the business will be calculated on the basis of assumed depreciation under section 32

    Non Requirements of the Taxpayer under the Presumptive Taxation Scheme of Section 44AD:

    For those taxpayers who have availed of the presumptive taxation scheme of section 44AD, the following responsibilities are not required to be carried out:

    • For persons carrying on any business or profession and who have availed of the presumptive taxation scheme of section 44AD, the maintenance of account ledgers or books will not be applicable. Should the individual in question make a declaration of his or her income calculated at 8 per cent of the total yearly turnover, then no account maintenance is required as per the provisions outlined under the presumptive taxation scheme of section 44AD.
    • Individuals availing of the presumptive taxation scheme of Section 44AD are not required to pay any tax in advance with regards to the income they receive from the business they are engaged in, as mentioned in the provisions of section 44AD

    Non Adoption of Presumptive Taxation Scheme of Section 44AD and Income Declaration at a Rate Lower than 8%:

    Should an individual declare taxable business income at a rate that is lower than 8 per cent but his total turnover or gross income is more than the limit that is deemed non-taxable, then the individual will be required to adhere to the following:

    • Maintenance of books of accounts according to guidelines of section 44AA
    • Auditing of accounts according to the guidelines of section 44AB

    Provisions Outlined under Section 44AD and their Amendments by the Finance Bill 2016:

    Section 44AD is divided into five different subsections namely:

    • Section 44AD(1)
    • Section 44AD(2)
    • Section 44AD(3)
    • Section 44AD(4)
    • Section 44AD(5)

    Section 44AD(1):

    The provisions of this section state that an amount equivalent to or more than 8% of the gross income of the taxpayer, which has been earned through a legitimate business as prescribed under Section 44AD, shall be considered as profits earned from the business in question and shall be taxable as per the ‘Profits and Gains of Business or Profession’ heading. There has been no change to this section under the Finance Bill 2016.

    Section 44AD(2):

    The provisions of this section state that any deductions that have been permissible as per the guidelines set under sections 30 - 38, will be considered to be fully applied with no possibility of additional deductions permitted. There has been no change to this section under the Finance Bill 2016.

    Section 44AD(3):

    The provisions of this section state that the assets of any legitimate business prescribed under Section 44AD shall portray a value that has been ascertained as if deductions relating to depreciation of the asset or assets in question has already taken place for each tax assessment year. There has been no change to this section under the Finance Bill 2016.

    Section 44AD(4):

    While the previous version of this section stated that provisions outlined under Chapter XVII-C will not be applicable to an eligible taxpayer who is engaged in a legitimate business as prescribed under Section 44AD, the Finance Bill 2016 has amended this section to state that if a taxpayer who meets the eligibility criteria makes profit declarations for any year among the five years preceding the relevant assessment year, he or she will not be permitted to avail of any of the benefits outlined as per the provisions detailed under section 44AD(4)

    Section 44AD(5):

    The previous version of this section states that an individual will be required to undergo maintenance of accounts, submit any other document prescribed under section 44AA(2), conduct an audit of said books of accounts and documents, and provide an audit report in accordance with section 44AB under the following conditions:

    • If the individual in question declares that profits earned from his or her business are less than the amount specified in section 44AA(1)
    • If the individual in question earns a total turnover that is more than the maximum limit that is not considered taxable

    Presumptive Taxation Scheme under Section 44AE:

    The presumptive taxation scheme under section 44AE was framed and introduced by the Income Tax Act to ease the tax burden on small taxpayers who are involved in the carrying out of any kind of business that involves the leasing, renting out or plying of goods carriages.

    Eligibility Criteria for the Presumptive Taxation Scheme under Section 44AE:

    The following persons or individuals are eligible to avail of the presumptive taxation scheme under section 44AE

    • Any individual
    • A Hindu Undivided Family (HUF)
    • A firm
    • A company

    However, the entities mentioned above can only avail of the provisions under the scheme under the following conditions:

    • The individuals in question must be carrying on a business that involves the leasing, renting out or plying of goods carriages
    • The individuals in question must not own or possess goods vehicles that exceed 10 in number at any point over the duration of the year.

    Calculation Of Taxable Income for Persons Availing of the Presumptive Taxation Scheme of Section 44AE:

    Should an individual or person adopt the presumptive taxation scheme of section 44AE, his or her taxable income will be calculated as follows:

    • The individual’s taxable income will be calculated on the basis of estimation
    • The taxable income will be calculated at an estimation of Rs 7,500 on a monthly basis or partially on this amount, depending on the duration the goods vehicle is under the ownership of the individual during the year.

    However, if the actual turnover of the individual is more than the estimation of Rs 7,500 then he or she can declare the higher amount.

    Non Requirements of the Taxpayer under the Presumptive Taxation Scheme of Section 44AE:

    For those taxpayers who have availed of the presumptive taxation scheme of section 44AE, the following responsibilities are not required to be carried out:

    • Should an individual who avails of the presumptive taxation scheme of Section 44AE and at the same time makes a declaration of income of Rs 7,500 on a monthly basis with respect to each goods vehicle, then that individual will not be required to undergo maintenance of accounts as outlined under section 44AA in lieu of any business he or she is engaged in that is prescribed under the presumptive taxation scheme of section 44AE. However, should an individual make an income declaration at a rate that is lower than the minimum limit of Rs 7,500 on a monthly basis, then that individual will be required to undergo maintenance of accounts as outlined under section 44AA in lieu of any business he or she is engaged in that is prescribed under the presumptive taxation scheme of section 44AE

    Payment of Advance Tax with Regards to the Presumptive Taxation Scheme of Section 44AE:

    Unlike the provisions outlined under section 44AD, an individual will have to mandatorily make the advance tax payment even if he decides to avail of the presumptive taxation scheme of section 44AE. There shall be no compromise regarding this provision.

    Non Adoption Of Presumptive Taxation Scheme Of Section 44AE And Income Declaration At A Rate Lower Than Rs 7,500 For Each Goods Vehicle On A Monthly Basis:

    While an individual can make his or her income declaration at a lower rate that Rs 7,500 for each goods vehicle on a monthly basis, he will be liable to then adhere to the following:

    • Maintenance of books of accounts according to guidelines of section 44AA
    • Auditing of accounts according to the guidelines of section 44AB
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