Presumptive taxation for small enterprises - Present and Future

 

Deepak Kalani, FCA, DISA

 

Provisions of Section 44AD, 44AE and 44AF of the Income Tax Act deals with computing presumptive profit of certain trade or business for small entities. Such provision are provided to make them declare profit at the rate specified under these section without maintaining any records and without allowing any other deduction except deduction  allowable u/s 80C to 80U of the Income Tax Act. In my view these are the good provisions for small entities which provides more relief to assessee in compare to department official. Now a day we are watching that changes in provisions of Income Tax Act are revenue favour. Every thing which is decided by High Court/ Supreme Courts in favour of assessee is being amended in the budget to favoring revenue. Hence there are only few provisions under Income Tax Law which provides assessee’s side favour. In this article I am discussing the provision of section 44AD, 44AE and 44F applicable as on today and proposed for future under Direct Tax Code

 

1. Profit and gains of business of civil construction (Section  44AD )

 

Present Provision(Applicable up to 31/03/2010)

 

 

Amendment made by Finance (No.2) Act, 2009 , w.e.f. 01-04-2011 i.e. w.e.f. Financial Year 2010-2011

 

All the provisions are same as applicable presently except the enlarging the scope of section and applicability for only certain assessee.Brief of the changes made by the finance bill are as under:-

 Eligible assessee means : -

1.                  An individual , HUF or a partnership firm not LLP and  who is a resident and

2.                  Who has not claimed deduction under any of the section 10A to 10BA or deduction under any provision of chapter VIA under the heading “C- deduction in respect of certain income i.e. 80H to 80RRB.

Eligible Business Means : -

1.                  Any business except the business of plying , hiring or leasing goods carriages and

2.                  Whose total turnover or gross receipt in the previous year does not exceed an amount of Rs.forty lakhs.

 

Other provision

 

  1. Deduction allowable under section 30 to 38 shall deemed to have been already       allowed. No further deduction is allowable
  2. Salary and interest to partners shall be deductible per clause (b) of section 40   in case of partnership firm
  3.  Advance tax payment is not required.
  4. No books of accounts or audit is required if profit declared according to    aforesaid provisions. If assessee declares lower profit than he has to maintain books of accounts and get it audited.

 

Amendment made by Finance Act (2), 2009 under section 44AD are welcome provision as changes made by the finance Act will enlarge the scope of business as stated earlier now any type of business except business of  plying , hiring or leasing goods carriages referred to in section 44AE will come under the purview of this section . However section will be limited for Individual , HUF & Firm presently it is available for any assessee .  Further section will be applicable only for the assessee who are resident presently same is available to all assessee . It may be noted that section is not applicable for profession as separate definition have been provided under Income Tax Act for business and profession . Here the word business has been mentioned. As per definition given under section 2(13) of the Income Tax Act business included any trade , commerce or manufacturing or any adventure or concern in the nature of trade , commerce or manufacture .

Further section 2(36) of the Income Tax Act defined profession including vocation , Hence income in the nature of business is eligible under eligible business for the purpose of this section . The amendment will create number of controversies in defining business whether the provisions will apply in particular business or not .There are certain business under which there is no relation of rates of profits .Like a person doing share business .He will have to declare 8% of turnover if his turnover is less than 40 lacs even if he has incurred losses otherwise he has to get his account audited. On other side a person who has earned more profit in compare to presumptive rate .He will declare profit as per presumptive rates  without maintaining any records. There are some businesses under which such problem will arise:-

 

 

To avoid any litigation suitable amendment should be made so that genuine assessee should not be suffered and nobody can escape from tax by hiding himself under this provision.

 

Proposed under Direct Tax Code

Schedule fourteenth  of the proposed Direct Tax code provides determination of income on a presumptive basis S.No. 3 of the schedule provides that any business other than business of plying hiring or leasing of heavy/light goods vehicle or profession where gross receipts of the assessee in financial year is less than or equal to one crore is eligible for presumptive taxation and income from that business will be taken at the rate of 8% of total turnover . No further allowance or deduction or loss is allowable under this  code ( Including Interest & Salary to Partners ) provision of this section shall not apply if :-

  1. If the assessee keeps and maintain all the books of account and other document referred in section 83 of the DTC .
  2. He gets his account audited and obtain a report of such audit U/s 86 of the DTC  
  3. Accounts are correct and complete to the satisfaction of A.O .
  4. Income can be property deduced from the accounts.
  5. The assessee produces the books of accounts and other documents before A.O. as and when called for.

 

From perusal of the conditions mentioned in DTC it can be concluded that the assessee has no option except declaring presumptive profit. As if any assessee wants to declare lower profit then he has to face scrutiny by the department (for satisfaction of A.O.)which is too costly/harassment  for assessee in compare to declaring income at the rate of 8% . Under presumptive taxation   he is not required to keep books of account which can not be maintained by the small assessee under DTC. As per section 83 of the DTC following books of accounts are compulsory to be maintained for the purpose of code : -

(a)    Cash Book

(b)   Journal

(c)    Ledger

(d)   Register of daily  Inventory

(e)    Carbon copies of bills

(f)     Carbon copies of receipts

(g)    Original bills or receipts of expenditure exceeding Rs . 50/- .

(h)    Payment voucher of expenditure not exceeding fifty rupees .

 

A Small businessman cannot maintained the above mentioned books and he can not get his accounts audited  without such maintenance hence he has no option except to declare profit as per presumptive rates .The key issue is that partnership firm can not claim deduction of interest and salary from profit as per presumptive provisions under newly proposed Direct Tax Code  which will cause undue hardship for the partnership firm. However amendment made by Finance Act (2),2009 regarding condition of applicability of the provision for certain assessee or status of resident is no more proposed under Direct Tax Code .Further limit has been increase from Rs. forty lacs to one crore which is reliefable provision for the assessee. However non allowing of deduction  for investment under section 80C and interest and salary to partners in case of  partnership firm  are requires some changes.Further the line that accounts are correct and complete to the satisfaction of A.O. also requires some changes.

 

2.Profit of business of plying , hiring or leasing goods carriages (Section 44AE)

 

Present Provision(Applicable up to 31/03/2010)

 

 

Only difference from 44AD & 44AF is that if assessee’s gross receipt is more than 40 lacs from the owing of goods carriage vehicle however no.of vehicle is less than or equal to 10 vehicle and he declares profit as per rate specified under this section no audit or maintenance of books of accounts required .

 

Amendment made by Finance (No.2) Act, 2009 , w.e.f. 01-04-2011 i.e. w.e.f. Financial Year 2010-2011

The only amendment made by the Finance Act (2),2009 is in respect of rates of presumptive taxation which are as under:-

For heavy goods vehicle : - 5000/- per month or part of month for other  than a heavy goods vehicle : - 4500/- per  month  or part of  month .

 

Proposed Under Direct Tax Code

Under direct tax code no other changes has been proposed except the change of 2nd category of vehicle as light goods vehicle which is presently other than heavy goods vehicle however in definition of light goods vehicle same has been defined as vehicle other than heavy goods vehicle . Hence there is no changes in Direct Tax Code except 

Non allowing of deduction  for investment under section 80C and interest and salary to partners in case of  partnership firm .Further as proposed under section 44AD under Direct Tax Code all other provisions for the persons who declares lower profits would be the same hence person engaged in such type of business will have no option except declaring presumptive profits.

 

3.Provision for computing profits and gains of  retail business (Section 44AF)

 

Present Provision(Applicable up to 31/03/2010)

 

Amendment made by Finance (No.2) Act, 2009 , w.e.f. 01-04-2011 i.e. w.e.f. Financial Year 2010-2011

Section will not be available w.e.f. Assessment year 2011-2012 . As same has been merged with section 44AD .

 

Propesed under Direct Tax Code

Not available as same has been merged with any type of business as per section 44AD

 

I have discussed the provisions in detailed so that every person can plan his business in keeping provision in his mind available in coming years. At present we have the provision applicable up to 31/03/2010 and provision applicable from 01/04/2010 and provision proposed under Direct Tax Code from 01/04/2011 so that tax planning can be made in better manner. Summaries chart of provision are given below for ready reference.

PRESUMPTIVE TAXATION

PARTICULARS

PRESENT PROVISION(UP TO 31/03/2010)

PROVISION W.E.F.01/04/2010

PROPOSED UNDER DIRECT TAX CODE W.E.F.01/04/2011

Section 44AD

 

 

 

Applicable

Civil construction or supply of labour

All type of business except business of plying ,hiring or leasing goods carriage

All type of business except business of plying ,hiring or leasing goods carriage

Residential status

Any status

Only Resident

Any status

Status

Any assessee

Individual, HUF, or Partnership firm

Any assessee

Presumptive rate

8%

8%

8%

Turnover limit

40 lacs

40 lacs

1 crore

Salary and interest in case of firm

Allowable

Allowable

Not allowable

Deduction under section 80C to 80U

Allowable

Allowable

Not allowable

Audit requirement

If profit declared is less than presumptive rate or turnover exceeds Rs. 40 Lacs

If profit declared is less than presumptive rate or turnover exceeds Rs. 40 Lacs

If profit declared is less than presumptive rate or turnover exceeds Rs. 1 crore

Books of Accounts

If profit declared is less than presumptive rate or turnover exceeds Rs. 40 Lacs

If profit declared is less than presumptive rate or turnover exceeds Rs. 40 Lacs

If profit declared is less than presumptive rate or turnover exceeds Rs. 1 crore

Scrutiny

Not compulsory

Not compulsory

Compulsory scrutiny of return for satisfaction of A.O. if profit declared is less than presumptive rate

Section 44AE

 

 

 

Applicable

Business of plying ,hiring or leasing goods carriage

Business of plying ,hiring or leasing goods carriage

Business of plying ,hiring or leasing goods carriage

Residential status

Any status

 Any status

Any status

Status

Any assessee

Any assessee

Any assessee

Presumptive rate

Heavy goods vehicle-3500/-P.M.

Other than heavy goods vehicle-3150/-P.M.

Heavy goods vehicle-5000/-P.M.

Other than heavy goods vehicle-4500/-P.M.

Heavy goods vehicle-5000/-P.M.

Light goods vehicle-4500/-P.M.

No. of vehicle  limit

10

10

10

Salary and interest in case of firm

Allowable

Allowable

Not allowable

Deduction under section 80C to 80U

Allowable

Allowable

Not allowable

Audit requirement

If profit declared is less than presumptive rate

If profit declared is less than presumptive rate

If profit declared is less than presumptive rate

Books of Accounts

If profit declared is less than presumptive rate

If profit declared is less than presumptive rate

If profit declared is less than presumptive rate

Section 44AF

 

NOT AVAILABLE

NOT AVAILABLE

Applicable

Business of Retail Trade

 

 

Residential status

Any status

 

 

Status

Any assessee

 

 

Presumptive rate

5%

 

 

Turnover limit

40 lacs

 

 

Salary and interest in case of firm

Allowable

 

 

Deduction under section 80C to 80U

Allowable

 

 

Audit requirement

If profit declared is less than presumptive rate or turnover exceeds Rs.40 lacs

 

 

Books of Accounts

If profit declared is less than presumptive rate or turnover exceeds Rs.40 lacs