Section 44AD

Section 44AD is a part of the Income Tax Act in India that makes it easier for certain small businesses to pay taxes. Instead of keeping detailed records of every transaction, eligible businesses can simply declare their income as a fixed percentage of their total sales or receipts. This helps save time and effort by avoiding the need for maintaining complex books of accounts.

What Is Section 44AD Of The Income Tax Act?

Under Section 44AD Income Tax Act, small taxpayers with a turnover of less than Rs 2 crore can benefit from presumptive taxation. This means they don't need to maintain detailed books of accounts. Instead their profits are presumed to be 8% of their turnover. However if their income is received digitally or through the bank the presumed profit rate is reduced to 6%. It's important to note that taxpayers who opt for this presumptive taxation scheme cannot claim deductions for business expenses under sections 30 to 38 of the Income Tax Act.

Features Of Presumptive Taxation Under Section 44AD

Under Section 44AD Income Tax Act small business owners with an annual gross turnover of up to Rs 2 crore can calculate their taxable income as 8% of their gross turnover. This provision was updated from the previous limit of Rs 1 crore as per the Budget 2020. This simplified tax scheme applies to most businesses and professions except those covered under Section 44AE.

Taxpayers using Section 44AD Income Tax Act must follow the prescribed income tax slab rates. They cannot claim additional deductions or depreciation except for interest or payments made to partners. This scheme offers the benefit of not requiring detailed maintenance of books of accounts simplifying tax filing.

Individuals must file their income tax return showing the presumptive income as proof of their profits. They must pay the full advance tax by March 15th each year as per the requirements of Section 44AD. By using Section 44AD taxpayers who keep proper books of accounts can take advantage of these simplifications.

Who Is Eligible To Opt For The Presumptive Taxation Scheme Under Section 44AD?

Section 44AD Income Tax Act in India offers a simplified presumptive taxation scheme for small businesses. To qualify for this scheme, the taxpayer must be a resident individual, a Hindu Undivided Family (HUF) or a partnership firm (excluding Limited Liability Partnerships or LLPs).

Eligibility is limited to those who have not claimed tax deductions under Sections 10A, 10AA, 10B or 10BA nor under Sections 80HH to 80RRB during the assessment year. Additionally, businesses involved in plying, hiring or leasing goods carriages as well as those earning income through brokerage or commission cannot adopt Section 44AD. However professionals like doctors, lawyers and architects can opt for the presumptive taxation scheme under the newly introduced Section 44ADA from April 1, 2017.

The scheme under 44AD Income Tax Act is intended for small businesses and professionals including sole proprietors, partnerships and LLPs. To be eligible the business's total turnover or gross receipts should not exceed INR 3 crores per financial year (as of August 2023 subject to changes). Moreover, if the turnover or receipts are from digital transactions, a reduced presumptive income rate of 6% applies instead of 8%.

It's important to note that certain professions such as legal, medical, engineering, architectural, accountancy, technical consultancy and interior decoration are excluded from Section 44AD. Professionals in these fields must use other applicable taxation schemes.

Benefits Of Opting For Presumptive Taxation Under Section 44AD

Section 44AD of the Indian tax code offers several benefits for small businesses by simplifying the way they calculate and pay taxes. Here’s a breakdown of its key advantages:

1. Simplified Tax Calculation: Instead of maintaining detailed accounts and undergoing audits eligible businesses can calculate their taxable income at a fixed rate based on their total turnover or gross receipts. This makes the process much easier and straightforward.

2. Reduced Compliance Burden: Small businesses don't need to keep detailed accounting records or undergo audits. This saves them time, effort and costs associated with tax compliance.

3. No Need for Detailed Books: Businesses using Section 44AD are exempt from keeping regular books of accounts. They don’t need to record every purchase, sale or expense which simplifies their accounting process.

4. Fewer Audits: Businesses are only required to undergo a tax audit if their income exceeds certain limits. Specifically, the audit requirement kicks in if their income is more than 12% or 16% of their total turnover or gross receipts reducing the audit burden for many small businesses.

5. Encourages Digital Transactions: If businesses receive their income through digital means they can benefit from a reduced presumptive income rate of 6% instead of the usual 8%. This promotes digital transactions and encourages businesses to go cashless.

6. Better Tax Planning and Cash Flow Management: With a predictable method of calculating taxable income businesses can better plan their taxes and manage their cash flow. They know their tax liability in advance based on their turnover which helps in financial planning.
 

Application Of Section 44AD

1. Section 44AD of the Income Tax Act applies to all types of businesses except those involved in the leasing, plying or renting of goods which are covered under Section 44AE. Therefore, businesses in these categories cannot claim deductions under Section 44AD.

2. Individual taxpayers, Hindu Undivided Families or HUFs) and partnerships, provided they are Indian residents are eligible to claim deductions under Section 44AD of the Income Tax Act. However limited liability partnerships or LLPs are not eligible under this section.

• Taxpayers under Section 44AD can file their income tax returns by declaring profits at 8% or higher of their total turnover or gross receipts. If they choose not to use Section 44AD and report profits below 8% they must maintain detailed books of accounts and have these accounts audited by a certified Chartered Accountant.

4. Section 44AD does not apply to those engaged in professions listed under Section 44AA or to those earning income through agency work, commissions or brokerage.

Procedure For Calculating Tax Under Income Tax Act Section 44AD

Section 44AD allows small businesses to calculate their income on a presumptive basis at 8% of their gross receipts or turnover for the financial year. This provision which started in the financial year 2017-18 aims to promote digital transactions and encourage small businesses to adopt digital payment methods. If the business's gross receipts or turnover are received through an account payee bank draft, account payee cheque or electronic clearing systems the income is calculated at a lower rate of 6%.

Penalties For Non Compliance With The Provisions Of Section 44AD

Non compliance with the provisions of Section 44AD can attract several penalties and consequences. Here are the main penalties and repercussions:

1. Ineligibility for Presumptive Taxation Scheme for Next 5 Years

If a taxpayer opts out of the presumptive taxation scheme after having availed of it they will not be eligible to avail of the benefits of Section 44AD for the next 5 assessment years. They will have to maintain detailed books of account and undergo a tax audit if their income exceeds the basic exemption limit.

2. Maintenance of Books of Accounts

If a taxpayer opts out of Section 44AD they are required to maintain books of accounts and get them audited as per Section 44AB if their total income exceeds the basic exemption limit.

3. Regular Assessment Procedures

Non compliance can also lead to the taxpayer being subject to regular assessment procedures which may involve more scrutiny from the tax authorities.

4. Other General Penalties

Other general penalties under the Income Tax Act for non compliance such as underreporting or misreporting of income may also apply.

Conclusion

Presumptive Taxation Scheme under Section 44AD is designed to help small businesses by making tax filing easier and less burdensome. It allows eligible businesses to pay tax based on a set percentage of their turnover rather than keeping detailed financial records and undergoing audits. This scheme simplifies the tax process and provides relief for small business owners as long as they follow the rules and conditions laid out by the government.