Quick Mail

Please enter your name

Please type your message

Your captcha code looks wrong

Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

Fax : (+91 22) 2351 5275.

Email : [email protected]

Home Articles Taxation         Share :

Budget 2016Chapter I

Chapter I. Presumptive tax for small business/ profession:

19. Presumptive Taxation:

19.1 The government wants to remove the difficulties and reduce burden on small taxpayers.

Under the current laws of presumptive taxation, if the tax payer discloses at least 8% of the total turnover as net profit, it is accepted without further enquiry. This scheme is only available for persons carrying on business activities with a turnover up to Rs. 1 crore. Further it is available only to individuals, HUFs and firms who are residents of India. LLPs, companies and others are not eligible. The scheme has been well-accepted by taxpayers as it removes the necessity of maintaining books of accounts. The department’s burden is also reduced.

Suggestions were given by Justice Easwar committee (which was set up for simplifying taxation norms) for expanding this scheme. The suggestions have been accepted in the Budget to a certain extent.

This scheme is now available for both – income from business and income from profession. More details are given below.

19.2 Persons having Business Income: [S. 44AD]

19.2.1 The presumptive income relief is available to those whose turnover is upto Rs. 1 cr. It is proposed increase the limit to Rs. 2 Crores.

Previously no expenditure was allowed against such presumptive income except remuneration paid to partners and interest on capital paid to partners (subject to limits stated in the Act). It is now proposed to remove the benefit of claiming the deduction of remuneration and interest on capital. Thus now no expenditure can be claimed against such presumptive income. As no deduction will be allowed for partner’s remuneration and interest, the partners will not be taxed on remuneration. They will not have to file the return (provided that they do not have any other taxable income and they do not have any foreign assets).

This will increase some tax liability as now tax will have to paid by the firm @ 30%. If remuneration is paid to partners, the firm saves 30% tax on the remuneration. This remuneration is taxable in partners’ hands. The individual partners get an exemption of Rs. 2,50,000. Hence tax liability is lower in the hands of the partners. This will now not be possible.

19.2.2 Under the present law, if the person declares net profit of less than 8%, he is required to keep books of accounts and get the same audited. There is a change proposed in these provisions.

If a person has declared a profit of at least 8% under this section, and in any of the subsequent 5 years, he declares a profit of less than 8%, then for the next 5 years, he cannot be governed by this presumptive tax provision. In other words, such person’s return may be scrutinised like any other return – whether he declares a profit in excess of 8% or not.

The Memorandum to the Finance Bill provides an example: A person declares a profit of 8% for AY 2017-18 and continues to do so till AY 2019-20. However, in AY 2020-21 he submits income to tax lower than 8%. Then he cannot get any relief of his income being accepted under this scheme from AY 2021-22 to AY 2025-26. He will have to maintain books of accounts and get the same audited.

Some assessees who have earned profit of lesser than 8% of the turnover, have taken the benefit of this provision by declaring profit of 8%. Then they do not maintain detailed books nor get the same audited. They compare the additional tax burden under this provision with the cost of maintaining books of accounts and getting them audited. They would take advantage of this provision selectively. If the tax burden is high, they would maintain the accounts and get the same audited. The Government would like the assessees to opt for this scheme on a long term basis and not selectively. Hence a period of 5 years has been brought.

19.2.3 Currently, advance tax is not required to be paid under this scheme. In the finance bill it is proposed that advance tax will be required to be paid only in 1 instalment by 15th March of the respective year.

19.2.4 There appears to be an anomaly in the new provisions. If persons have a turnover of more than Rs. 1 crore but upto Rs. 2 cr., they may still need to obtain a tax audit report. This is because the limits have not been increased under tax audit provision (S. 44AB). Hopefully this should be corrected before passage of the Finance Bill in to an Act.

19.3 Persons having Income from profession: [S. 44ADA]

The scheme of Presumptive Taxation for persons having income from profession has been introduced for the first time in this Budget.

Under the proposed scheme, persons having gross receipts from profession of up to Rs. 50 lakhs are eligible to avail the benefits of the scheme. If the person discloses at least 50% of the amount of the gross receipts as net profit, the return will be accepted without scrutiny. No expenditure can be claimed against this income, including remuneration and interest paid to a partner by a firm.

If the person declares a profit of less than 50%, then he is required to keep his accounts and get the same audited.

This relief is applicable to residents of India. There is no restriction on the kind of persons who are eligible. Thus LLP and company are also eligible. Practically, there will be hardly any company with low income from profession. However if there are such companies, those will be eligible.

Unlike presumptive income from business, where advance tax is payable only by 1 instalment, under this provision advance tax is required to be paid as per revised provisions by 4 instalments.

Unlike the provision for business income, here there is no condition of declaring profits for 5 years.

19.4 No capitalisation:

It should be noted that the percentage of profits stated in these provisions is NOT a presumptive profit. It is actually a “safe harbour”. If a person declares more profits compared to the rate prescribed, the department will not undertake any scrutiny. It will accept the profit disclosed in the return. It does not mean that he is not taxable on profits exceeding 8% of the turnover.

Let us assume that a person has a turnover of Rs. 1.5 crores. He earns a profit of 10% (Rs. 15 lakhs). Now if he declares a profit of 8% (Rs. 12 lakhs), the department will accept the return without questions. Thus he does not pay tax on Rs. 3 lakhs. He does this for 10 years. Over a 10 year period he would have an income of Rs. 30 lakhs (3 lakhs x 10 years) on which he would not have paid any tax. He shows this amount of Rs. 30 lakhs in his books as his capital. In this situation, the department can tax the same. Thus it is not a capitalisation section where you declare lower profit but disclose a higher amount as your capital. This is known as capitalisation of your assets without paying sufficient taxes.

This view is not shared by some professionals. We however believe that this section does not permit earning income in excess of prescribed percentage, and not paying tax.

A question to be considered is should such a person go under the Income Declaration scheme? (see para 13).