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Presumptive Taxation
Presumptive Taxation

Presumptive Taxation: Simplified Guide for Small Businesses

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Running a small business comes with its own set of challenges, and managing taxes can be a particularly daunting one. To ease this burden for small taxpayers, the Indian government introduced the presumptive taxation scheme under Section 44AD of the Income Tax Act. This blog post delves into the details of presumptive taxation, its benefits, and a crucial new condition that businesses need to be aware of.

Understanding Presumptive Taxation

Presumptive taxation is a simplified tax filing method designed specifically for small businesses and professionals. Unlike the regular income tax system, where you need to maintain detailed accounting records and declare your actual income and expenses, the presumptive scheme uses a pre-determined income percentage based on your turnover. 

Benefits of Presumptive Taxation for Small Businesses:

  • Presumptive taxation eliminates the requirement to maintain detailed accounting records. 
  • You can file your return using the ITR-4 form, which is much simpler compared to the regular ITR-3 form used for detailed income and expense calculations.
  • Under the presumptive scheme, you are not subject to tax audits, further reducing your compliance burden
  • While the exact tax liability depends on your specific circumstances, the presumptive scheme often leads to a lower tax burden compared to the regular tax system.

Eligibility Criteria for Presumptive Taxation:

The presumptive taxation scheme is not open to all businesses. To be eligible, your business must meet the following criteria:

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  • Turnover limit: Your business turnover in the previous financial year must be less than Rs. 3 crore (increased from Rs. 2 crore in Budget 2023).
  • Nature of business: The scheme is applicable to businesses engaged in any trade or profession except for those involved in plying, hiring, or leasing vehicles (covered under Section 44AE).
  • Business entity: The scheme extends benefits to resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding Limited Liability Partnerships).

Consulting with an advisor specializing in Income Tax Consultancy can help you determine if the presumptive scheme is the right fit for your specific business and financial situation.

Important Points to Consider:

  • Presumptive income: Under the scheme, a pre-determined percentage of your turnover is considered your income. This percentage is 8% for regular receipts and 6% for digital receipts (received through online modes).
  • Advance tax: Unlike the regular system, where you pay taxes throughout the year, the presumptive scheme requires you to pay 100% of the tax liability by March 15th of the relevant financial year.
  • Cash receipts limit: The recent budget (2023) introduced a new condition for businesses opting for the presumptive scheme with a turnover exceeding Rs. 2 crore. At least 95% of the total receipts must be received through digital modes (online payments, etc.).

New Condition: Staying in the Scheme for 5 Years

One crucial aspect of the presumptive scheme that businesses need to be aware of is the recent introduction of a minimum stay requirement. If you choose to opt for the presumptive scheme, you are generally expected to stay in it for at least five consecutive assessment years. This means declaring your income as per the pre-determined percentages for five years.

What Happens if You Break the 5-Year Rule?

The five-year restriction applies only if you exit the scheme by declaring a profit lower than the pre-determined percentages (8% or 6%). Here’s a breakdown of the scenarios:

  • Exiting due to ineligibility: If your business becomes ineligible for the scheme due to exceeding the turnover limit (Rs. 3 crore) or your business not qualifying under the nature of business criteria, the five-year restriction won’t apply. You have the option to rejoin the scheme later if you become eligible again.
  • Exiting by declaring lower profits: If you declare a profit lower than 8%/6% and switch to regular tax filing (ITR-3), you cannot re-enter the presumptive scheme for the next five years. This can be a significant penalty, so it’s important to carefully consider your projected profits before opting out.

Example:

Let’s consider Mr. H’s business to illustrate the new condition:

  • In FY 2018-19, Mr. H’s business had a turnover of Rs. 1.5 crore. He declared a profit of Rs. 12 lakh and opted for the presumptive scheme.

In FY 2019-20, his turnover exceeded Rs. 2 crore (the previous limit), making him ineligible for the scheme due to exceeding the turnover limit. The five-year restriction wouldn’t apply here.

  • He can rejoin the scheme in FY 2020-21 if his turnover stays below Rs. 3 crore (the new limit).

The presumptive taxation scheme is a valuable tool for small businesses in India to simplify tax filing and potentially reduce their tax burden. However, it’s important to understand the eligibility criteria, the new five-year lock-in requirement, and the potential drawbacks before making a decision. 

Role of Income Tax Consultants

Expert Income Tax Consultants like Master Brains India can assess your specific business situation, analyze your profit margins and expenses, and guide you towards the most tax-efficient option. Their expertise can help you make informed decisions about opting in or out of the presumptive scheme, ensuring you stay compliant and maximize your tax benefits. Don’t hesitate to seek professional guidance – a tax consultant can be a valuable asset in your business journey.

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