Presumptive Taxation is a simple scheme incorporated in Income Tax Laws to give relief to small taxpayers. There are two plans, viz., Section 44AD & Section 44AE. The taxpayer adopting Presumptive Taxation provisions is not required to maintain the regular account book and also exempt from accounts audited. The Presumptive scheme of section 44AD is designed to give relief to small assessees engaged in any business.
Applicability of Section 44AD
The provisions of section 44AD apply to such resident taxpayer who is an Individual, Hindu Undivided Family(HUF) and Partnership Firm but not Limited Liability Partnership Firm. Unlike section 44AE, in the case of Section 44AD, there is a restriction on which categories of assessees can opt for the scheme. Only specific categories of resident assessees as discussed above can opt for this scheme.
Eligible assessee for this purpose is a person resident in India who is an Individual, a Hindu undivided family or a partnership firm.
Total Turnover or gross receipt in the previous year of the business should not exceed Rs. 1 Crore. (Rs. 60,00,000/- for the assessment years 2011-12 & 2012-13). As per Union Budget 2016-17, small businesses with Turnover/Gross income up to Rs. 2 Crore can now use the Presumptive taxation scheme.
- Section 44AD applicable to all businesses except the business of hiring, paying or leasing goods. Section 44AD won’t apply in a case of hiring or leasing, plying, of goods as these have already been covered under Section 44AE.
- Section 44AD only applicable in a case of Individuals, Partnership & (HUF)-Hindu Undivided Family Resident in India. Section 44AD is not applied in a case of Limited Liability Partnerships as they have been specifically excluded.
- As Section 44AD specifically mentions the word business, therefore section cannot be applied in the case of professionals.
If the assessee chooses for filing his IT return under Presumptive Taxation Scheme, the taxpayer can opt for disclosing his IT Return at any percentage above 8%. The assessee may pick not to opt for the scheme and may declare an income lower than 8% of the gross receipts. However in such a case, the assessee shall have to keep and maintain books of accounts and get his accounts audited by a chartered accountant.
Computation of Income Tax -Section 44AD
In the case of the taxpayer who is willing to opt for these provisions, income will be computed on an estimated basis. The rate of computation of income on an estimated basis is 8% of turnover or gross receipts of the eligible business for the previous year.
The following would form a part of turnover and would be included in the computation of turnover for the purpose of section 44AD.
- VAT, Cess, Excise Duty, and other Levy.
- Service Charges charged for delivery.
- Sales of unusable empties and supplies.
However, the following are not form a part of the total turnover for the purpose of section 44AD.
- Advance or deposits received.
- Cash or other discounts.
- Consideration received from the sale of fixed assets.
Manner of computation of Depreciable assets
The taxpayer opting for the presumptive taxation scheme is not permitted to claim the deduction on account of various expenditures, including depreciation. Deduction on account of depreciation is not available. However, the WDV of any asset used in the business covered under the scheme of section 44AD shall be calculated as if depreciation as per section 32 is claimed and allowed. Thus, even though no reduction is available separately, yet for purpose of computation of the WDV of the asset, depreciation will be deducted.
Declaration of lower income
If the actual Income from the business covered under section 44AD is lower than the income prescribed under the presumptive taxation scheme, then the assessee can declare income from the firm above at a lower rate (i.e., at less than 8%). If the assessee does so, i.e., states lower income & actual income exceeds the maximum amount which is not chargeable to tax, then the relief from maintenance of books of account is not available.