Section 44AD: Presumptive Scheme to be opted

Section 44AD – Presumptive Scheme to be opted for atleast 5 years

The government has introduced the presumptive taxation scheme under section 44AD to give relief to the small taxpayers. Taxpayers engaged in any business other than plying, hiring and leasing referred in section 44AE of the Act. Budget 2021 update: Section 44ADA applied to all the assesses being residents in India. Now onwards, it applies only to the resident individual, Hindu Undivided Family (HUF) or a partnership firm, other than LLP

In an interesting move, a new condition was  taxpayers opting for presumptive income , i.e. –

You stand to loose presumptive tax benefits, if you do not continue them for at least 5 years.


Details of the additional condition

This additional condition has been added by substituting sub section (4) of 44AD which is – If you are opting for the presumptive scheme, you must-

a. Declare your profits as per presumptive scheme for at least 5 years in continuation.

b. If you decide to show and file profits as per regular business (ITR-3) before the end of these 5 years, you will lose presumptive benefits and be disallowed from presumptive taxation for the subsequent 5 years.

Please note that 5 years shall be counted starting the year in which you first file usual taxes (ITR-3) for such business. The government is discouraging the taxpayers who misuse the scheme and constantly change their options often.

So if you opt for presumptive scheme, continue for 5 years and if you want to opt out, you’ll be barred from resuming with the presumptive scheme for a period of 5 years. As per the changes in the Budget of 2016, businesses with turnover up to Rs 2 crores can opt for presumptive taxation scheme. Earlier this limit was Rs 1 crore.


Features of presumptive scheme 

  1.  Your turnover must be less than Rs 2 crores.
  1. Your minimum net income should be 8% of your turnover (the minimum net income should be considered 6% in case of digital receipts).
  1. You don’t have to maintain accounting records.
  1. Assesse opting for presumptive taxation has to pay 100% advance tax by 15th March of that particular financial year with Prior to FY 2016-17 you don’t have to pay advance tax.
  1.  You don’t have to get your accounting records audited.
  1. You can file your tax return in ITR-4 in a much shorter and simpler form than ITR-3.

Professionals have also been added in the ambit of presumptive taxation. However, the time limit of 5 years condition applies only to businesses.


New condition (section 44AD(4)) analysis

The restrictions that taxpayer couldn’t opt for the presumptive income scheme for the five years will be applicable only when he declares the profits lower than the 8 per cent or 6 per cent. If, because of any other reasons, he cannot opt for a presumptive income scheme, then restrictions of Section 44AD(4) do not apply.


Maintenance of books of accounts and tax audit

If the taxpayer cannot opt for a presumptive income scheme for the five years, i.e. he has not complied with section 44AD(4), and his total income exceeds the amount not chargeable to tax, he is liable to maintain books of accounts.

For better understanding, let us take an example of Mr P. 

Mr P runs a sole proprietorship firm, and his gross turnover is Rs 1.5 crore during the FY 2019-20. He opts for presumptive income first time during the FY 2019-20 by declaring profits above 8 per cent. In FY 2020-21, his turnover is Rs 1.7 crore, but he decides to declare profits below 8 per cent and compute income as per regular provisions of business (i.e. claiming all the expenditures). After computation, his taxable income is Rs 8 lakhs, i.e. above the basic exemption limit. Is he liable to maintain books of accounts and tax audits?

Since Mr. P declares income less than that defined in the presumptive income scheme during the FY 2020-21, he opts to report his income as per regular computation. Hence, he is not eligible to opt for a presumptive scheme for five years. In any of these five years, if his taxable income exceeds the basic exemption limit, he is liable to maintain books of accounts and do a tax audit for the relevant financial year.

Hence, during the financial year 2020-21, he did not comply with section 44AD(4), and his taxable income is above the basic exemption limit. He must maintain books of accounts of his business and will be liable for a tax audit.

Note: 

The liability of tax audit is required in two types of cases (for business income other than 44AE,44BB and 44BBB)-

In normal cases (regular business income computation), if the total turnover of the taxpayer exceeds Rs 1 crore, irrespective of profits percentage.

When section 44AD(4) applies, and in addition, the total income exceeds the basic exemption limit.

The basic exemption limit for individuals is Rs 2.5 lakhs, whereas it is nil income for firms and companies.




For more information on this visit www.taxaj.com.

Posted by Twinkle
Team Taxaj

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