CBDT Explains benefit of lower rate of Income Tax u/s 44AD for Digital Turnover

Govt. Measures for Promoting Digital Payments & Creation of Less-Cash Economy: Benefit of lower rate of Income Tax on digital turnover for small businesses

Govt. has explained the benefit of measure taken for promoting digital turnover including by cheque, etc. by lowering the rate of presumptive income tax from 8% to 6% u/s 44AD for a small business w.e.f. FY 2016-17, as under:

CBDT Press Release dt. 20 Dec. 2016 

The benefit of lower rate of Income-tax on digital turnover for small businesses up to a turnover of Rs.2,00,000,00 (Rupees Two Crore), announced by the Government yesterday under Section 44AD of the Income-tax Act, 1961 is a huge benefit given to businessmen for promoting digital/banking transactions. The benefits given are explained in the following paragraph.

If a trader makes his transactions in cash on a turnover of Rs.Two Crore, then his income under the presumptive scheme will then be presumed to be Rs. 16 lakhs @ 8% of turnover.  After availing of Rs. 1.5 lakhs of deduction under Section 80C, his total tax liability will be Rs. 2,67,800/-. However, if he shifts to 100% digital transactions under the new announcement made, his profit will be presumed to be at Rs. 12 lakhs @ 6% of turnover, and after availing of Rs. 1.5 lakhs under Section 80C,  his tax liability now will be only Rs.1,44,200/. Here, digital transaction includes payment received by Cheque or through any other digital means. In the following example, the benefit obtained by traders and small businesses is explained in 3 different scenarios:

Particulars100% Cash Turnover (Rs.)60% Digital Turnover (Rs.)100% Digital Turnover (Rs.)
Total Turnover2 Crore2 Core2 Crore
Cash Turnover2 Crore0.80 CroreNIL
Digital TurnoverNIL1.2 Crore2 Crore
Profit on Cash Turnover @ 8%16 Lakh6.40 LakhNIL
Profit on Digital turnover @ 6%NIL7.20 Lakh12 Lakh
Total Profit16 Lakh13.60 Lakh12 Lakh
Deduction u/s 80C1.5 Lakh1.5 Lakh1.5 Lakh
Taxable Income14.50 Lakh12.10 Lakh10.50 Lakh
Tax Payable2,67,8001,93,6401,44,200
Tax SavingNIL74,1601,23,600

Apart from making a tax saving of almost 46% by migrating to banking mode, the small businesses would be able to build their books which may also help them get bank loans easily.  Also, if transactions are carried out through banking channels, then anybody having annual turnover up to Rs. 66 lakhs will have zero tax liability after availing the benefit of Section 80C, after amendment of this new rate structure.

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