With effect from April 1, 2017, special provision for computing profits and gains of profession on presumptive basis are applicable for various professionals with the aim of simplifying the tax compliance of professionals particularly small professionals so that it facilitates ease and efficiency in carrying out their professional obligations. My article today will focus on all that is needed to know about this provision.
Meaning of presumptive taxation scheme: As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of accounts and further, he/she has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA and 44AE.A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of accounts and also from getting the accounts audited.
Let’s understand what Sec 44ADA is all about: Under this Sec. professionals such as persons engaged in any of the following professions ie Legal, Medical, Engineering, Architecture, Accountancy, Technical consultancy, Interior decoration and other notified professionals such as Film artists and Company secretaries, whose total gross receipts from profession do not exceed fifty lakh rupees in a financial year, can offer 50% of the gross receipts from profession on presumptive basis OR actual income from profession whichever is higher.
Income at lower rate: A person can declare income at lower rate (ie less than 50%), however, if he/she does so, and his/her income exceeds the minimum threshold limit applicable for tax (i.e. Rs.250, 000 or Rs.300, 000 In case of senior citizens),then he/she is required to maintain the books of accounts as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.
Let me explain the same with the help of an example. If CA Peehu who is a practising Chartered Accountant earned Rs 40 lakh as gross professional fees in the Financial year 2017-18. Rs 40 lakh is a lot of money, but it also leads to a lot of tax. In the normal course of things, without using the benefit of presumptive tax, CA Peehu’s taxable income (the amount she would need to pay tax on) would be something like this.
Taxable income without using presumptive
taxation scheme
Total gross income for the year from
various assignments and projects Rs 40 Lakh
Work-related expenses that she plans to
claim as tax deductions. ie Salary, Travelling
Expenses, Office expenses. Rs 10 Lakh
Total Taxable income (gross income – expenses) Rs 30 Lakh
If there was no presumptive taxation scheme, CA Peehu would pay income tax on Rs 30 lakh. But by availing the benefit of presumptive taxation, she can show her taxable income to be half of her gross income ie Rs 20 lakh. The presumptive taxation scheme allows her to save tax on Rs 10 lakh. Let’s calculate how much tax she would actually save.
Without presumptive taxation With presumptive taxation
Taxable income – Rs 30 lakh Taxable income – Rs 20 lakh
Tax calculation as per slabs Tax calculation as per slabs
for FY17-18 for FY17-18
Income Tax Income Tax
Up to Rs 2.5 lakh 0 Up to Rs 2.5 lakh 0
From Rs 2.5 lakh to From Rs 2.5 lakh to
Rs 5 lakh (@5%) Rs 12,500 Rs 5 lakh (@5%) Rs 12,500
From Rs 5 lakh to From Rs 5 lakh to
Rs 10 lakh Rs 10 lakh (@10%)
(@20%) Rs 100,000 Rs 100,000
From Rs 10 lakh to From Rs 10 lakh to
Rs 30 lakh (@30%) Rs 600,000 Rs 20 lakh @30% Rs 300,000
Total Rs 712,500 Total Rs 412,500
As is apparent, by using the presumptive taxation scheme, CA Peehu will be able to save Rs 3 lakh in taxes. That is, she will have to pay Rs 3 lakh less as income tax. Do note that 3% cess would be added to the taxable income in both cases. Furthermore, all Section 80 tax-saving deductions and investments can also be claimed over and above the presumptive taxation scheme.
But what if she maintained proper books of accounts and her net taxable income is less than half of her gross total income? This would mean that her work-related expenses were higher and her taxable income came down to Rs 15 lakh. This is lesser than half of her total gross income. In such a case, she should not avail the presumptive taxation scheme and pay tax on the taxable income after getting her books of accounts audited.
In conclusion I would like to say that the decision as to whether this provision is to be adopted or not varies from case to case and the decision depends on quantum of actual expenditure and quality of accounting systems. So if you are professional filing Income Tax returns for the previous year, make sure to weigh the benefits of presumptive taxation scheme before filing.
