Whether GST shall be included while  calculating the gross turnover or receipt for calculating income u/s 44AD or 44ADA?

1. This question is often raised so as to arrive at the amount on which income may be offered for taxation on presumptive basis u/s 44AD or 44ADA.

2. Let us try to know about it.

3. First of all, Section 145A provides for the inclusion of taxes, cess, etc. in the value of sale, purchase and  inventory.

4. However, this inclusion is  limited  to the calculation  of income taxable under the head ‘Profits and Gains from Business or Profession’.

5. The question arises as to whether this provision can be applied to calculate ‘sales turnover’ for Section 44ADand  Section  44ADA?

6. This is a matter  of  divergent opinion and litigation.

7. If an assessee has opted for Composition Scheme under the GST Act  and tax is not recovered  from  the  customer and  is  debited  to  the statement  of  profit  &  loss  as  an indirect expense then

the amount of GST paid by an assessee does not form part of his gross turnover.

In the case of other assessees, as GST is charged from the customer and it is recognized separately in the books of accounts, it is not clear whether the amount of GST should not be included in the definition of the “turnover or gross receipts” for the following reasons:

(a)Section 145A begins with ‘for the purpose of determining the income chargeable under the head Profits and gains of business or profession’ which makes this provision inapplicable for other purposes

.(b)If  GST  recovered  from the customer  is  credited  to  Current Liability  Accounts (Output  CGST  or  Output  IGST  or  Output  SGST)  and  payments  to  the  authority are  also  debited  to  the  said  separate  account,  these  should  not  form  part  of turnover shown in profit and loss account. ICAI’s Guidance Note on Tax Audit also  confirms  that  if  tax  recovered  is  credited  to  a  separate  account,  they  would not be included in the turnover.

(c) Inclusion of GST in the turnover would have the cascading effect, as presumptive income would be computed on the component of GST which is never treated as income of the assessee.

However, the possibility of other views  cannot be ruled out. It would be better if the CBDT clarifies its stand on this matter.