Section 44AD: All About Presumptive Scheme for Businesses: There are a lot of tax compliances which are to be done by every business. The businesses which are having high turnover have to do all these compliances but the small business can opt for the presumptive schemes. In this article, we will discuss one of the presumptive schemes i.e. Sales for businesses with a turnover of less than Rs.2 crore p.a. This scheme is provided by the government to reduce the burden of compliance for the small business. The main advantage of the presumptive scheme is that the business does not need to maintain the books of accounts. Under these schemes profit is assumed is to be a certain percentage of the turnover. This scheme is very useful for small businesses. Under Section 44AD profit is assumed to be 8% of the turnover where the turnover is less than Rs.2 crore. If the turnover is more than Rs.2 crore then the business has to calculate the profit with the normal provisions of the act.
Table of contents
- Benefits of Section 44AD
- Eligible Assessee for Section 44AD
- Assumption of Profit to Avail Section 44AD
- Can Expenses be Allowed u/s 44AD?
- No Need to Maintain Books of Account
- Advance Tax Treatment Business u/s 44AD
- Consequences if a Person Opt Out from Presumptive Taxation Scheme
- ITR Form for Busines u/s 44AD
Benefits of Section 44AD
As detailed below, section 44AD offers several benefits to small business owners.
- In accordance with section 44AD, income earned through the business mentioned under section 44AD is not subject to any kind of advance tax instalment. They can pay all taxes in advance up to the 15th march of that particular financial year.
- The business mentioned under section 44AD is not required to maintain any books of accounts.
- They are not required to get their books of accounts audited.
- Section 44AD reduces lots of tax burden on small business owners.
Eligible Assessee for Section 44AD
Who is eligible to get the benefit of section 44AD: Section 44AD is applicable to all
- Resident Individual
- Resident HUF
- Resident Firm (Excluding LLP)
and who has not claimed deduction under section 10AA or 80IA to 80RRB.
Please keep in mind that section 44AD is applicable for any business except
- Section 44AE Business
- Agency Business
- Commission & Brokerage Business
- Turnover/Gross Receipts is up to Rs. 2 crores.
In simple business, the business which has a turnover above Rs.2 crore can not avail of the benefit of section 44AD.
Assumption of Profit to Avail Section 44AD
- According to section 44AD, income is computed on a presumptive basis at 8% of the annual turnover or gross receipts of the eligible business.
- Moreover, after demonetization, the government is trying to encourage businesses for going digitally i.e. if a business does all the transactions digitally profits are assumed to be the 6% of the turnover which is received digitally. But the turnover which is received in cash, the profits are assumed to be 8%.
- The business has to pay tax on the profit as calculated under section 44AD. But in case the business thinks the actual profits are less than the presumptive profit, the business can opt for that profit i.e. Profit= Income less Expense. But in this case, the business is required to maintain all of the books of accounts and also has to get the books audited under section 44AB.
Can Expenses be Allowed u/s 44AD?
- Those who opt for the presumptive taxation scheme of section 44AD are not subject to the provisions of allowances provided by the Income-tax Act, and income computed at the presumptive rate of 6% or 8% will be the final taxable income of the business.
No Need to Maintain Books of Account
- For businesses covered by the presumptive taxation scheme of section 44AD that have a 6% or 8% tax rate (as the case may be), a person is not required to maintain books of accounts as required under section 44AA.
Advance Tax Treatment Business u/s 44AD
- Presumptive taxation under section 44AD requires the full amount of advance tax to be paid by 15th March of the previous year.
- According to section 234C, he shall be liable for interest if he fails to pay the advance tax by 15th March of the previous year.
- During the financial year ending on or before the 31st of March, advance tax payments made by way of advance tax are also considered advance tax payments.
Consequences if a Person Opt Out from Presumptive Taxation Scheme
- In the event that a person opts for a presumptive taxation scheme, the same scheme must also be followed for a period of 5 years in the future.
- He would not be able to take advantage of a presumptive taxation scheme if he failed to do so for the next 5 years.
[For example, an assessee claims to be taxed on a presumptive basis under Section 44AD for 2021-22. However, for AY 2022-23, if he did not opt for the presumptive taxation Scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2023-24 to 2027-28.
ITR Form for Busines u/s 44AD
- The ITR-4 Form is used by taxpayers who opt for the presumptive income scheme under Section 44AD, Section 44ADA, and Section 44AE.
- ITR-3 must be filed if the turnover of the business mentioned above exceeds Rs 2 crores.
Important Points to be noted:
- The incentive of 6% to be deemed to be profitable is only given to businesses, not to professionals.
- This scheme can only be opted for by businesses having the turnover of less than Rs.2 crore.
- The businesses opting for presumptive income are not allowed any expense (of sections 30 to 38) or depreciation to be claimed from the profit as these are to be deemed to be provided.
- In case the business pays salary/ interest to the partners, these would not be allowed to be claimed by the business as a deduction from the profit.
- The business is required to comply with the Advance tax provisions but the business is required to pay 100% of the tax by the 15th This is also done to reduce the burden of compliances.
- If the taxpayer has more than 1 business, then the aggregate turnover of all the businesses should be considered.
- The taxpayer can avail of the deduction under section 80C- 80U from the presumptive income.
- If a taxpayer has a business as well as a profession, section 44AD can be applied to business and the professional income can be calculated as per the normal provisions of the act.