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Section 44AD of Income Tax Act for AY 2020-21

Section 44AD of Income Tax Act for AY 2020-21

With the objective of providing a reprieve to smaller taxpayers, the Income Tax Act includes section 44AD, 44ADA, and 44AE. These sections eliminate such assesses from the cumbersome task of maintaining and auditing accounts.

Known as the Presumptive Taxation Scheme (PTS), these sections provide special provisions to compute business profits on a presumptive basis.

Meaning of Section 44 AD

According to the Income Tax Act, business owners are mandated to retain regular accounts. In addition, they need to audit their books of accounts. However, when assesses adopt the PTS under section 44 of the Income Tax Act, they may declare income at prescribed rates. This relieves them from the cumbersome task of maintaining and auditing accounts.

Presumptive taxation scheme is designed for small taxpayers involved in any venture excepting those as defined in this section. The following taxpayers may opt for this scheme:

  • Resident partnership firms, which excludes limited liability partnerships (LLP)
  • Resident individuals
  • Resident Hindu Undivided Family (HUF)

The scheme is not available for non-resident taxpayers. Additionally, any assesses who claim claim income tax deductions under sections 10A, 10AA, 10B, and 10BA or under sections, 80HH and 80RRB are not eligible for this scheme.

Businesses excluded from Section 44 AD

Small business owners engaged in ventures excluding the following may claim relief under this section:

  • An individual who earns brokerage or commission
  • Businesses engaged in leasing, plying, or hiring goods carriages as specified under section 44E
  • A person engaged in any agency
  • Insurance agents earning income through commissions cannot adopt the PTS
  • Any business with an annual income exceeding INR 20 crore is not eligible for availing the benefits under the PTS

Computation of business income

The normal way to compute business income is as follows:

Taxable business income = Gross turnover from business operations – business related expenses

When assesses adopt this scheme, the business income is computed at a rate of 8% of the total gross turnover during the year. To encourage small business owners to digitalize their operations, section 44 for 2018 – 19 is modified; the income is calculated at a rate of 6% of the total gross turnover of the business during the year. The gross turnover includes revenues through account payee checks, bank drafts, or through the electronic clearing system.

Therefore, when a business adopts the presumptive taxation scheme, total taxable income is calculated at 6% or 8% based on the gross turnover. However, a business owner may voluntarily disclose a higher income, if required.

Under the regular guidelines of the Income Tax Act, the total taxable income from business operations is calculated after deducting the allowable expenses and disallowing expenses that are not in accordance with the Act.

However, when assesses adopt this scheme, there is no provision for allowing or disallowing any business-related expenses. The taxable income is capped at the prescribed rate of the total gross turnover. Moreover, when this scheme is adopted, there is no additional provision for depreciation. The Written Down Value (WDV) of an asset is calculated according to depreciation provisions under section 32.

Advance tax payment provision

All assesses who adopt the PTS must pay the entire advance tax liability on or prior to March 15 of the previous year. If such advance tax is not paid, interest in accordance to section 234C is levied.

Consequences when assesses opt out of Section 44 AD

Assesses that opt for this scheme must follow it for at least five years. If this provision is not met, this scheme becomes unavailable to them for a period of the next five years. An ideal section 44A example could be to assume that an individual adopts the scheme for the assessment year 2017–18. He continues adopting the presumptive taxation scheme for the next two years i.e. 2018 -19 and 2019–20. However, he does not adopt this scheme during the next year, which is 2020–21. Therefore, the individual will be unable to claim the benefits under this section for the next five years i.e. for assessment years 2021–22 until 2025 –26. During this period, he will have to maintain his accounts and get these audited as per the provision of the Income Tax Act.

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