Presumptive Taxation for Business

Entering into a business world and the burden of maintaining legal implications and accounting compliances often leads to many chaos for the businessperson. Considering the said difficulties, specific provisions have been added to the Indian statute of Income Tax Act, 1961 (Act), i.e., Section 44AD, 44ADA & 44AE; which enumerates optional easy gateway to the Assessee could be either Businessmen or Professionals.

As the present topic pertains to Presumptive Taxation for Business, therefore, discarding other presumptive schemes; this article shall focus on presumptive taxation schemes given to business entities only (u/s 44AD of the Act). Talking about the subject matter, the writer shall brief the mechanism behind presumptive taxation. Elaborating on the eligibility criteria for taking benefit of this Presumptive Taxation Scheme (PTS), this simple illustration will also be provided to understand the computation of tax. Finally, this article will end with important factors that the Assessee should understand before opting for the PTS.

Presumptive Taxation Scheme (PTS): Way-out from Compliances

Understanding the issues faced by the businessmen in maintaining books of accounts and regularly filing Income Tax Returns (ITRs). The government has come with a way out wherein any business person is not required to go into technical accounting and prompt filing returns. A businessman can pay a standard advance tax and be free from the tax liabilities or any legal implications. This exemption from daily compliance will diminish the accounting cost without fear of the Income Tax Department’s sword of non-compliance.

Which Business Entity can opt for PTS?

Intending to open this opportunity for everyone; all kinds of business entities having turnover up to Rs. 2 cr. can go for PTS. Thus, PTS can be adopted by anyone undertaking its business as an Individual, Hindu Undivided Family or Partnership Firm but not Limited Liability Partnership Firm (LLP). However, some of the businesses not eligible for opting PTS, namely;

1. Life Insurance Agent;
2. Commission based Services, and
3. Business-related to hiring/plying or leasing of goods, as section 44AE of the Act, talks about it separately.

Discharging Tax liability in Advance with ITR Form 4S

Any business entity fulfilling the abovesaid eligibility criteria must file ITR 4S and deposit its tax liability by declaring its business income with 8% for a non-digital transaction or 6% for digital dealings, whichever is applicable jointly or individually. Using this standard, computation of income can be understood with the following example:

Facts: XYZ manufacturing company has gross receipts of Rs. 1 cr. wherein it has done digital transactions of Rs. 40 Lacs and non-digital dealings of Rs. 60 Lacs

Solution: XYZ can submit tax on Rs. 4,80,000/- [40 Lacs * 8% and 60 Lacs * 6%]

A loophole in PTS:

Though PTS is giving easy way-out to Assessee to finish its liability without any accounting compliances, however, at the same time, it disqualifies the PTS Assessee to claim any other benefits enumerated in the Act;

Excluding income which does not form part of total income in terms of section 10A to 10BA;
Deductions to be made in computing total income u/s 80HH to 80RRB.
Concluding Thoughts

Considering the government's intention, this option of PTS is good, without a doubt. However, conditions of advance payment make PTS; little stringent, which is the actual catch in this mechanism whereby, Assessee pay tax in one installment in advance on or before 15th March of the previous financial year. Failure to pay said the advance tax will attract interest liability in section 234C of the Act. Hence, leaving benefits of several deductions /exclusions and paying advance tax maybe not be advisable for an Assessee who can’t predict the income of their business.