As government found it hard to bring small businessman and kirana shop owners in to the tax net; it launched the presumptive taxation scheme. It was better to have these businessmen pay some tax instead of having them outside the tax net.
Since these businessmen had meagre resources they were made exempt from maintaining accounting records. Now they could be tax complaint without any hassles.
What is presumptive taxation scheme?
Presumptive scheme of taxation means your income is calculated on an assumption instead of actual basis. Actual basis is when you deduct business expenses from business income and pay tax on the balance. Let’s understand what presumptive basis is.
Any business with a turnover of Rs 1 crore or less could take benefit of presumptive scheme. (The limit of Rs 1 crore has also been enhanced to Rs 2 crore in Budget 2016).
Opting for this scheme meant-
- Business income was assumed to be 8% of turnover
- No accounting records had to be maintained
- No expenses can be deducted from this business income, 8% of your turnover is your Net Income
- No advance tax had to be paid
- A short income tax return ITR-4S could be filed instead of the long form ITR 4
Professionals were not allowed to opt for this scheme earlier. It was Justice Eashwar committee that recommended that this scheme be extended to professionals as well. This recommendation was incorporated in Budget 2016.
(Presumptive taxation for businesses is covered under section 44AD)
Features of presumptive scheme for professionals
A new section has been inserted in the income tax act Section 44ADA. It said that professionals with receipts of Rs 50lakhs or less could opt for the presumptive scheme. Their income shall be assumed to be 50% of their receipts. And they could avail the following benefits of presumptive taxation –
- No accounting records are required to be maintained
- Business income was assumed to be 50% of receipts
- No expenses are allowed to be deducted from this business income, 50% of your receipts is your Net Income.
- No advance tax has to be paid
- A short income tax return ITR-4S could be filed instead of the long form ITR 4
Who can opt for this scheme?
- You must be a professional – who are carrying on profession of legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, an authorized representative, film artist, company secretary and information technology. Authorized representative means – any person, who represents someone, for a fee or remuneration, before any Tribunal or authority under law. Film Artist includes a producer, actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, dress designer – basically any person who is involved in his professional capacity in the production of a film. (These are the professions listed under section 44AA(1).
- Your receipts in the financial year must be Rs 50lakhs or less.
- Freelancers who do technical consultancy such as website designing or software development can also opt for this scheme.
- Note that Businesses are covered under section 44AD.
From when is this scheme applicable and what I do need to do to opt for it?
- This scheme is applicable from 1st April 2016. Which means professionals will file ITR-4 for financial year 2015-16 or assessment year 2016-17. In the next year, which is financial year 2016-17, they can opt for this scheme.
- Remember that this scheme applies only when your receipts are Rs 50lakhs or less. You must continue to maintain proper details of your receipts.
- Keep proper records of your expenses.
- You are still eligible to claim all the deduction listed under section 80.
- You’ll benefit immensely from this scheme if you are a freelancer and your expenses are less than 50% of your receipts. Earlier you paid tax on higher income, now your income is 50% of your receipts. You’ll be paying much lower tax.