But, some experts warn it may not be a blanket benefit available to all businesses and professionals eligible for presumptive taxation schemes.
How does presumptive taxation work?
Presumptive taxation for businesses and professionals is covered under Section 44AD and Section 44ADA, respectively.
Under Section 44AD, small businesses with a turnover of up to ₹2 crore, whose cash receipts are over 5% of the total, can opt for presumptive taxation. The turnover threshold for businesses with less than 5% cash receipts is ₹3 crore. By opting for presumptive taxation, they have to offer a flat 8% (cash receipts over 5%) and 6% (cash receipts below 5%) of the total turnover as profits to pay income tax without maintaining books of accounts or facing tax audits. Only resident individuals, Hindu Undivided Families, and partnership firms can opt for the option.
Under Section 44ADA, the maximum turnover threshold for professionals to opt for presumptive taxation is ₹50 lakh and ₹75 lakh when cash receipts are over 5% and otherwise, respectively. Professionals are allowed to declare 50% of the turnover as profit and pay tax on it without having to maintain books of accounts or face a tax audit.
Professionals eligible under Section 44ADA include chartered accountants, doctors, technical consultants, lawyers, engineers, architects and interior decorators.
“Persons carrying on the business of commission, brokerage and insurance can’t opt for presumptive schemes,” said Mayank Mohanka, founder, TaxAaram India, and a partner at S.M. Mohanka & Associates.
How can one avail of zero tax under the schemes?
Now, a professional with a turnover of ₹24 lakh can declare ₹12 lakh profit (50%) and won’t have to pay tax under the new regime. Similarly, in the case of businesses that qualify for the 6% profit declaration, income will be ₹12 lakh or below for a turnover of up to ₹2 crore. For businesses that declare 8% profit, turnovers of ₹1.5 crore or below also offer up to ₹12 lakh profit to tax. In both cases, businesses pay zero tax under the new regime.
Some chartered accountants say all such eligible businesses will benefit by paying zero tax. “The taxpayer doesn’t have to provide documents proving the profit they have made to opt for presumptive taxation as long as they fulfil the turnover criteria. It works on self-disclosure without supporting documents,” said Mohanka.
However, what if your actual profits are more than 50% (for professionals) or 6% or 8% (for businesses) of the turnover?
Mohanka said the tax department can’t question your claim of declaring the minimum eligible profit. “The law allows you not to maintain books of accounts and offer 6% or 8% as profit. So, tax officers can’t challenge the business income you declare under the presumptive tax schemes.”
Janhavi Pandit, a Mumbai-based chartered accountant, has a different view. “The 6% or 8% rate is not default or fixed. If the eligible person has income higher than the specified rates, she must declare that, as per the Income Tax Act.”
Pandit is referring to this clause under Section 44AD: “…a sum equal to 8% of the total turnover…or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “profits and gains of business or profession”.
What should you do?
Offering the minimum 6%, 8% or 50% income to tax is the norm, and the tax department has not flagged cases on a large scale where the actual profits may be higher than these limits. However, businesses and professionals should not see this as an opportunity to escape paying taxes under the new regime if their actual profits are substantially higher.
The tax department can notice the discrepancy if an assessee’s investments or big-ticket purchases exceed the income declared. For instance, if a business declares ₹12 lakh profit but has made ₹50 lakh worth of investments in the stock market or buys a house worth ₹3 crore. Or, say it has bought a foreign holiday package of ₹15 lakh, which can be tracked through tax collected at source.
“Investments higher than the declared income are a visible transaction and may indicate that the earnings are higher than claimed. Such cases can be questioned. Unless the taxpayer proves that such huge investments are out of past savings or other sources, she may face challenges. If there is no investment or big-ticket purchases, no one, including the assessee, can precisely calculate the net earnings as the books of accounts are not being maintained,” said Prakash Hegde, a Bengaluru-based chartered accountant.
In this case, the margin of error between the actual and the declared earnings is the deciding factor.
“If the margin of error is insignificant, it may not be an issue. Say, if the actual profit is ₹1 lakh or ₹2 lakh more than the declared ₹12 lakh profit, it may be defendable. But, if the actual income is ₹50 lakh, but the assessee offers ₹12 lakh to tax, it may not be justifiable and is an abuse of law,” Hegde said. The same principle applies to professionals opting for presumptive taxation under Section 44ADA.
Investments can be easily tracked through the Annual Information Statement (AIS) and Form 16AS.
Where cases with investments substantially higher than declared income are flagged, Mohanka said, the tax officer can still not question your claim of declaring minimum eligible income under the presumptive schemes. However, the tax officer can ask for the source of funds for the excess investments made. “If the taxpayer fails to prove the source of funds, such unexplained sources can be treated as undisclosed income, over and above the declared presumptive income,” he added.
To be on the side of caution, businesses should not treat presumptive taxation as a way to avoid paying taxes under the new regime. Hegde warns especially salaried individuals who switch to consulting roles and think they can opt for presumptive taxation to lower their tax burden, “Section 44ADA covers a specific type of professions and other professions that don’t qualify for 44ADA fall under Section 44AD itself. For such professionals, the turnover limit becomes ₹3 crore, assuming they would be receiving the entire amount through banking channels. So, someone with a ₹3 crore turnover would be offering only ₹18 lakh (6%) to tax. Legally, it’s allowed, but whether it’s justifiable is the question.”
Salaried individuals in high-income ranges of over ₹1 crore may be tempted to switch to consulting roles just to save tax, especially if they can qualify for 44AD.
“A director in a company who is not a qualified professional, as required by Section 44ADA, is a case in point. They may want to switch to a consulting role so that they can offer the minimal required amount. But, if such cases go to courts, even though legal wording allows this, I don’t think judges would agree with such an extreme view,” Hegde added.
