Income under Section 44AD or 44ADA: Whether inclusive of GST or excluding it?
One of the most common question while opting for presumptive scheme of taxation under Section 44AD or 44ADA is whether the turnover or receipt is to be taken as inclusive of GST or excluding it?
The controversy is continuing since VAT regime & is even continuing in the GST regime. One school of thought believers that it is after excluding GST whereas the other school of thought believes that it has to be after including GST.
Let us try to understand:
1. Income Tax Act does not define the words “Sales”, “turnover” or “Gross receipts” which is used in section 44AD / 44ADA.
2. As far as GST Act is concerned, section 2(112) of CGST Act, it has been categorically provided that the turnover “excludes Central Tax, State Tax, Union Territory Tax, integrated tax and cess”.
3. Coming back to Income Tax Act-1961 with which we are presently concerned, it may be noted that issue of inclusion of GST in turnover arises due to Sec. 145A.
The Relevant part of Sec. 145A reads as under:
Method of accounting in certain cases :
For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”,—
(i) the valuation of inventory shall be made …..;
(ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.Expanding the above logic for valuation of the stock, GST should be included in the figure of turnover or receipt from presumptive scheme of taxation. On the basis of above contents of section 145A, few professional consider GST as the part of the turnover.
4. However, I believe that we may think of excluding the GST from the definition of the turnover for the following reason:
i. 145A(ii) is for the purpose of valuation of closing stock. It does not specifically refer to GST addition in the turnover or receipts.
It is simply providing for the inclusion of the taxes which are “paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation” and may not cover the GST on Sales i.e., output.
ii. GST is NOT a tax for bringing the goods to the place of its location and condition as on the date of valuation.
iii. The purpose of section 145A is for finalization of the books of accounts. The heading very categorically mentions that it is for the method of accounting.
iv. The role of section 44AD comes during computation purpose and not for the accounting purpose. The income may be low as per books of accounts, but section 44AD provides minimum amount which is required to be offered for taxation in the books of accounts.
Conclusion:
- With above discussion, in my considered view, the GST needs to be excluded for the purpose of section 44AD and 44ADA.
- However, in case of composition dealer, the GST is not separately mentioned and in such a case, the turnover/receipts should be including all the amount and not after deducting the GST component from sales/turnover/receipts.
- Taxpayers may apply the logic of below mentioned article for this purpose as well –
“Applicability of TDS on purchase of Goods: Whether including GST or excluding GST” – https://thetaxtalk.com/2021/06/applicability-of-td/
- My other article which may be relevant for taxpayers on this topic –
Section 44AD does not give a license to the assessee to declare lower income despite the assessee having earned higher income
