Presumptive Taxation Scheme Section 44AD of Income Tax Act

The government has introduced a presumptive taxation scheme under section 44AD of the Income Tax Act to assist minor taxpayers. Taxpayers who carry out any business other than the hiring, rent, and lease referred to in section 44AE of the Act. 2021 Budget Review: Section 44ADA applies to all Indian resident assessees. For now, it only applies to the person individually, the Hindu Undivided Family (HUF) or partnership company, other than LLP. This article discusses the presumptive taxation scheme section 44AD of the Income Tax Act.

Meaning of Section 44AD

Section 44AD provides tax exemptions for certain individuals and professionals so as not to require an audit or documentation. This does not apply to assessees whose duties are listed under Section 44AA.

Section 44AD is a discretionary tax plan introduced by the Income Tax Act to reduce the tax burden on small taxpayers. People who fall under the provisions of this program are not required to maintain or show account books, nor are they required to receive an audit performed in the same way. The program aims to assist small-time taxpayers who conduct any type of business, other than those businesses referred to in Section 44AE. However, with the latest revisions to the 2020 Budget, the scope of Section 44AD and its benefits have also been extended to include professionals whose total income during the financial year is less than Rs 50 lakhs.

Characteristics of Section 44AD

• The tax of an assessee under Section 44AD is calculated at 8% of the total gross income for the financial year, provided that the total profit is less than Rs 1 crore. This limit has been increased to Rs 2 crore in terms of the 2020 Budget.
• The provisions of this section apply to any business or service other than the one referred to in Section 44AE.
• Income calculated under this section will be taxable under the slab rates set by the Income Tax Act
• Examiners seeking revenues under this section will not be permitted to claim any additional costs or impairments, other than interest or payments made to partners.

Consequences of exit from the scheme before 5 years

If a person enters the presumptive taxation scheme under section 44AD of the Income Tax Act, they will have to follow the same plan for the next 5 years. If he fails to do so, a presumptive tax plan will not be available to him for the next 5 years.

Example: Mr. A. is involved in the trading business and claims to be tax exaggerated under sec.44AD of AY 2019-20. AY 2020-21 and 2021-22 also provides income based on a tax plan. However, in AY 2022-23, he did not choose a Taxation Scheme. In this case, they will not be eligible for the tax benefits of the next five AY considerations, namely from AY 2023-24 to 2027-28.

Entities that do not qualify for the presumptive tax plan

The Sec 44AD program is designed to provide relief to small taxpayers engaged in any business, except for the following businesses: Payment business, rent, or lease of goods carts referred to in Sec 44AE. Someone who does any agency business. A person earning money in the form of a commission or brokerage; any business with full profits or receipts for everything above two rupees. Annual income last year was Rs. 98 lakh. He can use the proposed tax system under Section 44 AD to avoid the annoying paperwork involved in tax filing at the end of the financial year.

Announcing Low or High Income

According to the Presumptive Taxation Scheme, revenue is calculated exaggerated by an 8% profit margin. If the total receipts were received by check or by bank or electronic clearing system last year, revenue will be calculated at 6% rather than 8%.

The moment a qualified assessee operates in a qualifying business, Section 44AD applies automatically to that business. If the analysis of actual business income is less than 8% of total receipts or profits (estimated revenue as declared under the proposed Section 44AD tax plan), then there is no exemption from keeping account books according to plan. If the actual income is higher compared to the estimated revenue plan, this system allows the examiner to declare a higher income of his or her choice (above the maximum rate of 8%).

Final words

Businesses are required to keep a detailed account, with a profit and loss statement, which is analyzed at the end of the year (financial year), based on the calculation of taxable income and related taxes. To provide relief to minor taxpayers, the government has introduced a program called the Presumptive Taxation Scheme that provides reduced legal compliance. Those who accept the offer under Section 44AD are not required to keep ordinary books of account and are free from the audit of their books of account.