Jigar M. Patel
International Tax Attorney
With a view to encourage small business proprietorships and firms to file their tax returns and pay taxes, without feeling the burden of maintenance of books of accounts and audit, the presumptive taxation scheme was introduced in FY 2010-11 under Section 44AD of the Income-tax Act.
Eligibility under the Scheme
Resident Individuals, HUFs and Partnership Firms (other than LLPs) are eligible to opt for the presumptive taxation scheme. The benefits under the presumptive scheme are not available to taxpayers having income from commission, agency or brokerage.
Turnover Limit and Estimated Profit Criteria under the Scheme
To be covered under the scheme, the gross turnover or receipts of the eligible taxpayer during the financial year should not exceed Rs. 2 crores (Rs. 3 crores, if receipts of the business in cash or other than account payee cheque or draft do not exceed 5%).
8% of such turnover or receipts (6% in case of turnover or receipts credited digitally or through bank) or as the case may be, a higher sum as claimed to be earned by the taxpayer, shall be deemed to be his taxable business income.
Star Attractions of the Scheme
Eligible taxpayers opting for the scheme can enjoy freedom from maintenance of books of accounts without any anxiety as regards tax scrutiny in respect of profits declared in accordance with the scheme. Another special privilege under the scheme is that the advance tax payable on the presumptive income is required to be paid only in one instalment, on 15th March before the end of the financial year.
However, a taxpayer who prefers to declare profits lower than the prescribed amounts under the presumptive income scheme will be required to maintain books of accounts under Section 44AA and have the same duly audited under the provisions of Section 44AB. In such a case he may also be required to face tax scrutiny to explain and justify the lower profits so declared.
Five Year Lock-In Rule
It needs to be noted that once a taxpayer opts for the presumptive income scheme u/s. 44AD and if he does not continue to declare profits in accordance with the scheme for the succeeding five years, then he shall not be eligible to avail any benefits under the scheme, for five years immediately following the year in which such scheme was not adhered to.
Dispelling the Myth on Profits to be Declared
And finally a word of caution for taxpayers who may be tempted to indulge in a mischievous interpretation of the benefits enjoyed under the scheme. Such taxpayers are under the illusion that if they have declared taxable income at 6% or 8% of their turnover or receipts, they can get away by capitalizing even higher amounts of profits or making investments or expenditure therefrom. What could be the consequences for a truant taxpayer can well be appreciated from the illustration below.
Out of Gupta’s business receipts of Rs.1.5 crores, deducting his withdrawals of Rs.1.30 crores, the net surplus in his account is Rs.20 lakhs. He, however, declares his profits at only Rs.9 lakhs, @6% of his gross receipts. The difference of Rs.11 lakhs can be added by the assessing officer as Gupta’s unexplained income, the same not having been offered to tax. Unexplained income / investment being liable to tax at a flat rate of 78% and further attracting penalty of 6%, Gupta maybe required to pay Rs.9.24 lakhs for the Rs.11 lakhs camouflaged by him.
