
Presumptive Taxation Scheme is one of the major taxation Schemes under the Income Tax Act, 1961. Usually, a person carrying on business or profession maintains books of accounts to know the financial statements of his business or profession for a financial year. Moreover, they can assess profit or loss from such financial statements. Thus, a person will ultimately would get to know about his taxable profits.
Besides above, when an assessee is engaged in business or profession, he is mandatorily required to maintain books of account as per section 44AA of the Income-tax Act, 1961, and get them audited as per section 44AB of the Income-tax Act, 1961.
Books of accounts enable both internal and external stakeholders to analyze the financial position and stability of such business or profession. The second major objective of the maintenance of books of accounts and tax audit is to check whether the person has paid tax liability as per the Income Tax Act, 1961.
But it became a burden for small taxpayers as they do not earn much profits and maintenance of books of accounts and tax audit ultimately add to their cost. Thus, their profits get reduced.
Therefore, in order to reduce the burden and to provide relief to small tax assessee, the government of India has introduced a presumptive taxation scheme. This scheme aids small businesses by discharging them from the liability of maintaining books of accounts and get them audited.
Thus, this article will help you to understand the concept of the Presumptive Taxation Scheme.
Topics Covered under this Article: –
What is a Presumptive Taxation Scheme?
Relevant sections under the Income-tax Act, 1961, which provides the Presumptive Taxation Scheme.
Presumptive Taxation Scheme for Resident Assessee
Applicability
Eligible Business
Threshold limit
Presumptive Income
Deductions or allowances
Advance tax liability
What happens if the taxpayer wants to claim profit lower than the prescribed rate?
Consequences if a person opts out from the above presumptive taxation scheme in any year.
Presumptive Taxation Scheme for Non-Resident Assessee
Applicability
Eligible business
Presumptive Income
Applicability of provisions of section 44AB of the Income-tax Act, 1961
Deductions or allowances
Advance tax liability
What is a Presumptive Taxation Scheme?
The first point to discuss is the meaning and core objectives of the scheme. The Presumptive Taxation Scheme is formulated by the government of India, which exempts small businessmen / professionals (Carrying Eligible Business) from maintaining the proper books of accounts and from tax audit of the same as per the Income Tax Act.
Assessee adopting such Presumptive Taxation Scheme need to declare a certain percentage (at prescribed rate) of their turnover / sale / gross total receipts as their profit.
However, if such assessee wants to declare income less than the prescribed rate then he is required to maintain books of accounts as per the provisions of section 44AA of the Income tax Act, 1961 and get them audited in accordance with the provisions of section 44AB of the Income-tax Act, 1961.
What are the relevant sections under the Income-tax Act, 1961, which provides the Presumptive Taxation Scheme?
There are different sections under the Income-tax Act, 1961, which provides Presumptive Taxation Scheme for different category of eligible businesses/professions.
Sections 44AE, 44B, 44BB, 44BBA, 44BBB, 44ADA and 44AD of the Income-tax Act, 1961 provides special provision for computing profits and gains of eligible businesses / professions as per provisions of respective sections.
The major categorization of the abovementioned sections for availing the Presumptive Taxation Scheme is based on the residential status of assessee. The same is discussed as under:
If the assessee is Resident |
Section 44AD, Section 44AE, Section 44ADA |
If the assessee is Non-Resident |
Section 44B, Section 44BB, Section 44BBA, Section 44BBB, and Section 44AE |
Important Note: – Section 44AE of the Income-tax Act, 1961 is applicable in the case of both residents as well as a non-resident.
An Assessee falling under the Presumptive Taxation Scheme is required to file ITR-4 Form.
Presumptive Taxation Scheme for Resident Assessee
The Presumptive Taxation scheme for residents comprise Section 44AD, 44AE, and 44ADA of the Income-tax Act, 1961, which is discussed as under:
What happens if the taxpayer wants to claim profit lower than the prescribed rate?
The next frequently asked question in the Presumptive taxation scheme is what if the taxpayer wants to claim profit lower than the prescribed rate. Then, yes an assessee can claim less profit.
Thus, an assessee can declare income at a lower rate than the prescribed rate, however, in this case, he is require to maintain the books of account as per the provisions of section 44AA of the Income Tax Act, 1961 and has to get his accounts audited as per section 44AB of the Income Tax Act, 1961.
Consequences if a person opts out from the presumptive taxation scheme in any year.
Every legal provision comes with its consequences. Similarly, there are certain consequences prescribed under the following provisions in the case when a person chooses a presumptive taxation scheme in any year –
Section 44AD: – If an assessee opts for a presumptive taxation scheme then he is required to follow the same scheme for the next 5 years.
If he fails to do so, then the presumptive taxation scheme will not be available for him for the next 5 years.
Consequently, he is required to keep and maintain books of account as per the provisions of section 44AA of the Income-tax Act, 1961 and he is also liable for tax audit as per section 44AB of the Income-tax Act, 1961 from the assessment year in which he opts out from the presumptive taxation scheme, provided his total income exceeds the maximum amount not chargeable to tax.
Section 44AE and Section 44ADA: – No such conditions.
Presumptive Taxation Scheme for Non-Resident Assessee
There are separate provisions for Non- Resident assessee under the Income Tax Act, 1961. The Presumptive Taxation Scheme for Non- Residents comprises Section 44B, Section 44BB, Section 44BBA, Section 44BBB, and Section 44AE of the Income Tax Act, 1961, which are discussed as under:
Important Note: – Section 44AE of the Income-tax Act, 1961 is applicable in the case of the resident assessee and the same has been explained above.
Conclusion
Presumptive Taxation scheme is one of the important schemes for small businesses as it reduces their burden of maintaining the books of account and of tax audit thereof. Thus, every taxpayer must be well versed with this scheme in order to avail of the benefits of this scheme.
We hope this article would have cleared the Tax Presumptive Scheme and in case you are still struggling with it then you can contact our expert panel at any time for an immediate guide.
Knowledge Source:
Tax Audit: Section 44AB of the Income Tax Act, 1961