Your Questions Answered: How does a presumptive tax scheme work and its advantages?

Q. I am a 31-year-old professional working as a legal consultant with a number of companies in Delhi specialising in labour law. Some of my friends have been filing their taxes under the presumptive tax scheme. I wish to understand how the presumptive tax scheme works and what are the key advantages of opting in for the presumptive tax scheme. Will also request you to highlight the recent changes made to the presumptive tax scheme under the Budget 2023.

Nitya Sunderasan, Delhi

In India after the salaried portion of the population, the second largest segment consists of small business owners and professionals. The Income Tax Act has a particular presumptive taxation scheme that makes the tax assessment and filing process easier for them so that they can concentrate on their primary goal, i.e., running their business.

You can pay tax based on your presumed income under the presumptive taxation system. This makes submitting income tax returns simpler, and under this scheme, small taxpayers are able to pay taxes based on an estimated income rather than maintaining books of accounts and records for each and every transaction and payment. Simply put, the overhead typically associated with maintaining books of accounts and adhering to compliances is greatly decreased by the presumptive taxation scheme.

Who is eligible?

Following entities are eligible to file income tax under the presumptive tax scheme: a resident who (a) may be an individual, (b) Hindu undivided family, or (c) partnership firm that is not a limited liability partnership firm as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008.

The eligible assessee must be engaged in any line of business, excluding the plying, hiring, or leasing of goods carriages as defined in section 44AE, and must have had gross receipts or turnover in the preceding fiscal year that did not exceed two crore rupees.

Which professions qualify?

The following professionals qualify for tax filing under the presumptive income tax scheme under Section 44ADA: A resident of India who works in one of the following professions: a. law; b. medicine; c. engineering; d. architecture; e. accountancy; f. technical consulting; g. interior design; or h. other professions declared by the Central Board of Direct Taxes.

What are the advantages of presumptive tax scheme?

Under the presumptive tax scheme, key advantages available to the taxpayers are as follows:

• It is not necessary to keep books of accounts or get your income audited from time to time.
• Anybody who chooses the presumptive taxation scheme is exempt from the requirement of paying advance tax instalments on the 15ths of June, 15th of September, and 15th of December of every year.
• The shorter and easier ITR-4 form (Sugam) can be used to submit income tax returns (ITRs).
• Lessens the burden of compliance and makes doing business easier.

Deductions in case of presumptive tax scheme

Typically when a taxpayer is filing income tax a number of deductions are available to him in accordance with the regular provisions of the Income-Tax Act, and his/her professional income will be calculated after allowing deduction expenses permitted under the Income Tax Act.

In contrast, when a person chooses the presumptive taxation scheme, the presumed income calculated using the specified rate is the final income, and no additional deductions or expenses for a business, or profession, are permitted. There is only one exception: partnership firms that qualify for the presumptive taxation system under Section 44AE may deduct amounts paid to partners in the form of compensation and interest as permitted by the Income Tax Act. Further, there isn't a separate deduction for depreciation.

TDS and presumptive taxation

According to Section 194J's provisions, tax is withheld at source (TDS) at 10% for professionals. While filing an income tax return, taxpayers have the option of claiming a tax refund on their withheld TDS if their total tax liability is lesser then the TDS withheld.

Increase limits under budget 2023

Under the Budget 2023 the rise in presumptive taxes threshold limitations by Finance Minister Nirmala Sitharaman will help many professionals and small businesses.

Up till now presumptive taxation was available to small businesses with a turnover of up to 2 crore rupees and for professionals having a turnover of up to 50 lakh rupees. The Finance Minister increased these limits to Rs 3 Crore for small businesses and Rs 75 lakh for professionals, subject to the condition that such the taxpayers' cash receipts are no more than 5% of their gross receipts.

Let us understand this with the help of an illustration:

• For instance, a small business that fits the requirements for presumptive tax and has a revenue of 3 crore rupees (the highest limit) is only required to pay tax on 8% of the revenue, or 24 lakh rupees.
• Similarly consider an architect who makes Rs 75 Lakhs a year. He will be required to pay tax on 50% of that amount, i.e., Rs 32.5.

Conclusion

For professionals who want to dispense with the cumbersome task of bookkeeping and getting their finances audited, the presumptive tax scheme is a panacea. Many professionals have switched to the presumptive tax scheme in the recent past. It allows professionals to save precious time which was earlier spent in bookkeeping and getting their accounts audited.

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Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.