Section 44AD of the Income Tax Act offers significant relief to small businesses by simplifying the way they pay taxes. Instead of maintaining detailed records for every transaction, eligible businesses can declare their income as a fixed percentage of their total sales or receipts. This presumptive taxation scheme helps save time and effort, avoiding the complexity of maintaining extensive books of accounts. In this article, we will explore how Section 44AD promotes easier tax compliance for small businesses, encouraging growth and fostering a supportive environment for entrepreneurship.
What Is 44AD In Income Tax?
Under Section 44AD of the Income Tax Act, small taxpayers with an annual turnover below ₹2 crore can utilise presumptive taxation. This scheme eliminates the need for detailed bookkeeping, as profits are assumed to be 8% of the total turnover. If income is received digitally or through bank transactions, the presumed profit rate is lowered to 6%. However, those opting for this scheme are not permitted to claim deductions for business expenses under Sections 30 to 38 of the Income Tax Act.
Also Read More About Section 44AA of the Income Tax
Section 44AD: Key Features
1. Turnover Limit
Small taxpayers with a turnover of less than ₹2 crore can benefit from presumptive taxation, with profits presumed to be 8% of turnover. For receipts through digital or banking channels (95%), the presumed profit rate is reduced to 6%, promoting cashless transactions.
2. Exclusions
Businesses involved in plying, hiring, or leasing goods carriages and those earning income through brokerage or commission cannot adopt Section 44AD. These exclusions ensure that the scheme is targeted towards genuinely small businesses and not misused by larger or different types of enterprises.
3. Deductions
Taxpayers under this scheme cannot claim deductions for business expenses under Sections 30 to 38. This simplifies the tax computation process and reduces the potential for disputes over deductible expenses, ensuring a straightforward tax calculation based on turnover.
4. Compliance
Taxpayers using Section 44AD must follow the prescribed income tax slab rates, file returns showing presumptive income, and pay advance tax by March 15th each year. This ensures timely tax payments and reduces the administrative burden associated with maintaining detailed accounts and undergoing audits.
Eligibility for Section 44AD
To be eligible, a taxpayer must be an individual, a Hindu Undivided Family (HUF), or a partnership firm (not an LLP). Your business’s annual turnover should not exceed Rs. 2 crore (with potential exceptions for higher turnovers under specific conditions).
If your business involves plying, hiring, or leasing goods, or if you earn income through brokerage or commission, you cannot opt for this scheme. Additionally, certain professionals like doctors, lawyers, and architects have a separate presumptive taxation scheme under Section 44ADA.
Essentially, if you’re a small business owner with a relatively low turnover and aren’t in a specifically excluded business, you might benefit from the simplified tax calculations under Section 44AD.
Benefits of Section 44AD
1. Simplified Tax Calculation
Taxable income is calculated at a fixed rate based on the total turnover or gross receipts, simplifying the tax computation process. This eliminates the need for small businesses to delve into complex accounting procedures, saving time and reducing potential errors in tax reporting.
2. Reduced Compliance Burden
Businesses opting for Section 44AD do not need to maintain detailed accounts or undergo audits, which significantly lowers their compliance burden. This provision is particularly beneficial for small enterprises that may lack the resources to manage extensive accounting requirements.
3. Fewer Audits
Businesses are only required to undergo audits if their income exceeds certain limits, reducing the frequency and cost associated with tax audits. This provision is designed to ease the compliance load on small businesses, ensuring they are not overburdened with audit requirements.
4. Encourages Digital Transactions
A lower presumptive income rate of 6% is applied to digital receipts, incentivising businesses to adopt cashless transactions. This not only promotes transparency but also aligns with the government’s push towards a digital economy.
5. 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. Knowing the tax liability in advance based on turnover helps in financial planning and ensures that businesses can allocate resources more efficiently.
Penalties For Non-Compliance With Section 44AD
1. Ineligibility For Presumptive Taxation Scheme For Next 5 Years
If a taxpayer opts out of the presumptive taxation scheme, they are disqualified from using the scheme for the next 5 years. This rule discourages frequent switching and ensures consistency in tax reporting.
2. Maintenance of Books of Accounts
Taxpayers who opt out of Section 44AD must maintain detailed accounts and have them audited in accordance with Section 44AB. This requirement ensures that comprehensive records are kept for accurate tax assessment.
3. General Penalties
Additional penalties for underreporting or misreporting income may apply, which can include fines and interest on unpaid taxes. These penalties encourage accurate tax reporting and compliance with the provisions of the Income Tax Act.
Latest Budget Updates
The Budget 2024 brought significant changes to the presumptive taxation limits for FY 2023-24 (AY 2024-25). The 44AD limit has been increased from ₹2 crore to ₹3 crore, provided that 95% of the receipts are through digital modes.
Taxpayers must declare profits under the presumptive scheme for at least 5 consecutive years, as opting out disallows them from using the scheme for the next 5 years. Specifically, the section 44AD turnover limit must be less than ₹3 crore if 95% of the receipts are digital, with a minimum net income of 6%. The income is calculated on a presumptive basis at 8% of the gross receipts or turnover for the financial year, which is reduced to 6% for receipts through digital channels.
These updates aim to encourage digital transactions and simplify the tax compliance process for small businesses and professionals.
Conclusion
Section 44AD of the Income Tax Act plays a crucial role in supporting small businesses by simplifying their tax filing processes. Allowing them to declare income as a fixed percentage of turnover reduces the burden of maintaining detailed records and undergoing audits. The recent updates in Budget 2024 further ease compliance and encourage digital transactions, making it even more advantageous for small business owners. This scheme not only simplifies tax obligations but also promotes transparency and efficiency, ultimately contributing to the growth and sustainability of small enterprises in India. Professionals can also benefit from similar provisions under Sec 44ADA, ensuring a broad application of these simplified tax measures.
FAQs
What is Section 44ad of Income Tax Act limit?
The turnover limit is ₹2 crore, with a potential increase to ₹3 crore under specific conditions.
Can professionals opt for Section 44AD?
No, professionals must use Section 44ADA for presumptive taxation.
What is the presumed profit rate for digital receipts under Section 44AD?
The presumed profit rate is 6% for digital receipts.
Are businesses required to maintain detailed books of accounts under Section 44AD?
No, businesses are exempt from maintaining detailed books of accounts under Section 44AD.
What happens if a taxpayer opts out of the presumptive taxation scheme?
The taxpayer cannot use the scheme for 5 subsequent years and must maintain detailed accounts and undergo audits if income exceeds the exemption limit.
