Running a small business or your professional services requires you to do a lot more than just run a business. You can call presumptive taxation a shot in the arm in your tight schedule, as it helps you save a lot of time and effort.
However, like all great things, there is some catch. Section 44D of Indian Income Tax Act defines the rules of presumptive taxation.
Benefit & Catch
Presumptive taxation allows you to pay your tax based on presumptive income. Meaning, you don’t really need to estimate your income by deducting your expenses from revenue. You can simply take a percentage of your total revenue and pay tax on that.
Although, not having to maintain books of account could be one of the benefits of presumptive taxation. However, it’s not that straightforward, as you would still want to know your actual gain or loss in the activity.
This is also a limiting factor as if you opt for presumptive taxation; you cannot claim expenses and deductions from your revenue.
So, the benefit is more like, you may not have to submit the bills and financial statements while filing your taxes. But, you still need to maintain the accounts as a good businessperson. We will see why later in this article.
The Taxpaying Entity
The rules of presumptive taxation differ for different tax-paying entities. The two major classifications are businesses and individual professionals. Individual professionals have been further divided into two sections:
|Legal Entities||Individual Professionals|
|• Sole Proprietorship||• Engineering|
|• Limited Liability Partnership (LLP)||• Legal|
|• Private Company||• Architecture & related|
|• Public Company||• Accountant|
|• Accountant||• Medical|
|• Technical consultant|
|• Interior designers|
Individuals involved in providing professional services other than the ones listed above will need to use the rules for non-specified professions.
When can you opt for presumptive taxation?
You can only opt for presumptive taxation if your turnover doesn’t exceed the following limits:
Exclusions for Presumptive Taxation:
Presumptive taxation rules apply to almost all the professions and businesses which meet the turnover criteria. However, few businesses are excluded from using the presumptive taxation mode of calculating tax liabilities:
What Are the Rates for Presumptive Taxation?
In case of business tax payors rates of taxable income consideration depend on the type of receipt:
1) Consideration for cash receipts is 8% of the total amount received
2) For digital (non-cash) payments, the rate would be 6%
For example, if your business had total revenue of Rs. 1 crore in the previous year, and your cash receipts total up to Rs. 30 lakhs, your taxable income under presumptive tax rules will be Rs. 6.6 lakhs (2.4 + 4.2 lakhs).
If you are a professional opting for presumptive taxation, you can estimate your tax liability on 50% of your total revenue.
Presumptive Tax vs. Expense Books
Here’s why you should maintain your accounting books religiously even if you are opting for presumptive taxation.
Consider the following example:
Rule of Thumb: If your eligible expenses in your profession exceed 50% of your revenue use the normal route. But, of course, to know if your eligible expenses exceed the limit your books have to be in order.
Rules for Mandatory Accounting & Financial Statements
Taxation rules mandate maintaining necessary accounting books for the businesses and professionals which meet any of the following criteria for income and turnover.
The limits apply to the amounts in any of the three immediately preceding financial years:
|Business||Specified Professionals||Non-Specified Professionals|
|Income||1.2 Lakhs||2.5 Lakhs|
|Total Sales / Gross Revenue / Receipts||12 Lakhs||1.5 Lakhs||25 Lakhs|
For example, if you are filing the return for Financial Year 2019-20, your turnover or gross receipts for the FY 2018-19, 2017-18 and 2016-17 would also count.
Specific Books Professionals Must Maintain (Rule 6F)
In case you are a professional, whose gross revenue meets the criteria above, you will need to maintain the following books of accounts under Income Tax Laws. When you file your tax returns, you will need to submit these books for the correct assessment of your tax.
4. Copies of all Bills & Receipts valued more than Rs. 25
5. Original bills for transactions valued more than Rs. 50
6. Medical professionals need to maintain the following two additional books:
Due Dates for Filing Returns:
Due dates for filing your returns would depend on the applicability of tax-audit on your business or profession. Your business or profession is liable to get the books audited for tax and file a tax audit report under the following circumstances:
Due dates for returns with and without tax-audit reports are as follows:
Which ITR Forms to Use?
|Normal Tax Return||ITR 3|
|If opting for Presumptive Taxation||ITR 4|
|Tax Audit Report||Form 3CD|
Presumptive taxation scheme is a good initiative to reduce your burden of tax processing and filing. This rule gives you an option to reduce your tax liabilities even when your business expenses are low.
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