Presumptive Taxation Scheme : Detailed Analysis

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:

Particulars	Section 44AD	Section 44ADA	Section 44AE
Applicability	Small Businessmen	Professionals	Transporters
Eligible business	Any business is other than: – The business covered under Section 44AE of the Income-tax Act, 1961. The person carrying on profession. A person earning income in the nature of commission or brokerage. A person carrying on any agency business.	Professions which includes: Legal services, Technical consultancy, Interior decoration, Engineering and architectural, Medical or any other profession specified by CBDT	The business of plying, hiring or leasing of goods carriages
Threshold limit	Total Turnover / gross receipts up to Rs 2 Crore	Gross receipts up to Rs 50 Lakh	Owning not more than 10 goods vehicles during the year
Presumptive Income	6% of total turnover or gross receipts if the same is received by electronic mode during the relevant financial year. 8% of total turnover or gross receipts of all other cases. Or A higher sum.	50% of gross receipts of the relevant financial year. Or A higher sum.	Rs 7,500 per vehicle per month or part thereof based on the duration for which the vehicle was own by the person during the year. Or Amount claimed to be actually earned. Whichever is higher
Deductions or allowances	No further deductions and exemptions allowed.	No further deductions and allowances allowed.	No further deductions and allowances allowed. Exception: In the case of a partnership firm, where salary and interest paid to partners is allowed as a deduction from presumptive income.
Advance tax liability	The entire Advance tax is to be deposited in one installment on or before 15th March of the relevant financial year.	The entire Advance tax is to be deposited in one installment on or before 15th March of the relevant financial year.	No concession in payment of advance tax. Advance tax is to be paid in 4 quarterly installments.

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:

Particulars	Section 44B	Section 44BB	Section 44BBA	Section 44BBB
Applicability	Shipping Business	The business of Exploration etc. of Mineral Oils	Operation of Air-craft	Civil construction, etc., in certain turnkey power projects.
Eligible business	Any Non-resident	Any Non-resident	Any Non-resident	Foreign company
Presumptive Income	7.5% of the amount: – Paid / payable to a non-resident for shipping of goods etc. at any Indian port. And Received/deemed to be received in India for shipping of goods etc. at any port outside India.	10% of the amount: – Paid / payable to a non-resident for the supply of plant and machinery on hire used in extraction etc. mineral oils in India. And Received/deemed to be received in India for the supply of plant and machinery on hire used, for extraction, etc. of mineral oils outside India.	5% of the amount: – Paid / payable to a non-resident for the carriage of goods etc. at any place in India. And Received/deemed to be received in India for the carriage of goods etc. at any place outside India.	10% of the amount: – Paid or payable *(whether in or out of India)* to the foreign company or to any person on its behalf on account of civil construction, erection, testing, or commissioning in connection with a turnkey power project approved by the Central Government.
Provisions of section 44AB of the Income-tax Act, 1961	Not Applicable	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.	Not Applicable	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.
Deductions or allowances	No further deductions and exemptions allowed.	No further deductions and exemptions allowed.	No further deductions and exemptions allowed.	No further deductions and exemptions allowed.
Advance tax liability	No concession in payment of advance tax.	No concession in payment of advance tax.	No concession in payment of advance tax.	No concession in payment of advance tax.

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.