Presumptive scheme of Taxation – Need for Simplification & Reforms


Presumptive scheme of Taxation – Need for Simplification & Reforms

In order to encourage ease of doing business, the Government has introduced section 44AD in the Income Tax Act – 1961 which provides for computation of Profits and Gains of business on presumptive basis i.e., income is deemed at a minimum fixed percentage of the turnover thereby relieving the taxpayer from the requirements of maintaining the books of accounts. This presumptive scheme of taxation is applicable only to Resident Individuals/HUF, partnership firms. Other classes of taxpayers like AOP, LLP, company etc cannot opt for presumptive scheme of taxation u/s 44AD.

As per section 44AD, Profit & Gains of business is deemed @ 8% of the Gross turnover (Higher sum as may be declared by the assessee but not lower). The rate of 8% can be replaced by 6% for the receipt in digital mode i.e., receipt is by way of cheque, RTGS, Paytm, Google Pay, BHIM, etc.

Presumptive scheme of taxation was introduced in the Income Tax Act – 1961 as a relief measure i.e., to provide a relief to the small taxpayers from the cumbersome requirements of maintaining the books of accounts, vouchers, etc. However, the way the amendment has been carried out, it has become a penal provision rather than providing a relief. Let us analyze it further.

  1. First Issue:
    Section 44AD is applicable if the turnover is not exceeding Rs. 2 Cr subject to the conditions that such assessee offers minimum of 8% or 6% of the turnover as income. At present, there are 4 limits of turnover for tax audit u/s 44AB for businesses (separate limit is there for profession & goods carriage operator), as under:
    (i) Turnover exceeding Rs. 1 Cr for AOP, LLP, Companies;
    (ii) Turnover exceeding Rs. 2 Cr for Resident Individual/HUF/ Firm;
    (iii) Those Resident Individual/HUF/ Firm whose turnover is not exceeding Rs 2 Cr but profit offered for taxation is less than 8% or 6% of the turnover.
    (iv) A special relief from tax audit has been given from FY 2019-20 for all categories of taxpayers if their turnover is not exceeding Rs. 5 Cr if their cash turnover as well as cash expenditure is not exceeding 5% of the total amount.

It may be noted that the AOP, LLP, Companies as covered by (i) above will not be required to get the tax audit report u/s 44AB even if their income is less than 8% or 6% so long as their turnover is less than Rs. 1 Crore. Let us consider a case of a business – X whose turnover is Rs. 90 Lakh and have a profit of say Rs. 5 Lakh.

If X is a company/ AOP or LLP then tax audit would not be mandatory as (a) section 44AD is not applicable in such cases and (b) the provision of section 44AB is also not applicable as the threshold of audit limit in such case is Rs. 1 Cr.

However, if X is an individual, HUF or firm then the audit would be mandatory even though the turnover in such case is less than Rs. 1 Cr.

Is it a relief measure? Is it not penalizing small taxpayers whom section 44AD was supposed to offer the benefit? Companies, AOP etc can offer the income without tax audit u/s 44AB whereas individual/firm/ HUF are subject to tax audit? It is penalizing that one class of taxpayers for whom the presumptive scheme of taxation was introduced.

  1. Second Issue:
    Section 44AD was amended few years back with new sub sections (4) & (5). As a result, if a person has opted for section 44AD in any one year and has not continued offering the income thereafter continuously for 5 subsequent years then such person cannot offer thereafter income u/s 44AD for subsequent 5 years. It means that if a person has opted for a presumptive scheme of taxation u/s 44AD in any one year then he has to remain in the umbrella of section 44AD for the next 5 years. If he goes out of the umbrella of section 44AD in any one of the subsequent 5 years then such person cannot re-enter back in section 44AD for the next 5 years (i.e., such person has to remain out of Section 44AD for 6 years in continuation) Is it logical? Is it relief provision for the taxpayers? Is it not penalizing the small taxpayer who may have a turnover of say Just Rs. 1 Lakh in subsequent years? No such penalizing provision exists for company, firm, AOP etc.
  1. Third Issue:
    There are a lot of taxpayers who are engaged in derivatives(future & options) / shares (intra-day trading) transactions. Income in such cases has to be offered for taxation under the head “Income from Business & profession”. The transactions in such cases are very well documented and leave no scope for manipulations. In the majority of the cases, there is a loss or the profit is lower than the prescribed 8% or 6% of the turnover. As a result taxpayers are forced to get their book audited which is adding an additional compliance burden for otherwise duly verifiable transactions. Ideally, such transactions should have been kept clearly out of the purview of section 44AD and assessee may be allowed to offer the income/loss on actual basis without mandatory audit as stipulated in section 44AD read with section 44AB.

These are just a few of the issues which have made presumptive schemes of taxation harsh in nature. There are lot many. Presumptive scheme of taxation has been introduced to provide ease of business to the small businessmen? It is clear that the new direct tax code is not going to be there & so existing income tax law certainly needs to be simplified. Simplification is not the end but it has to be a process.

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