Sections 44AD, 44ADA, and 44AE of the Income Tax Act provide for a Presumptive Taxation Scheme, which relieves small taxpayers of the time-consuming task of keeping books of account and having their accounts audited. The ICAI’s Direct Taxes Committee recently published a “Handbook on Estimated Income Scheme under Income-tax Act, 1961” to provide basic understanding and guidance on the subject. The handbook covers relevant provisions, case laws, examples, and practical issues relating to presumptive taxation in a clear and concise manner, allowing members to better understand the provisions.
What is Presumptive Taxation/Estimated Income Scheme?
Presumptive taxation is a method of determining tax liability that is different from the traditional rules based on the taxpayer’s accounts. The term “presumptive” refers to the fact that the taxpayer’s income is greater than the amount resulting from the use of the indirect method. A person who uses the Presumptive Taxation/Estimated Income scheme can declare income at a prescribed rate and, as a result, is relieved of the time-consuming task of maintaining books of account and having the accounts audited. Using this method, taxpayers can pay their taxes based on presumptive income, which is a percentage of total revenue, rather than estimating their income by deducting expenses from revenue.
History of the Estimated Income Scheme
The Estimated Income Scheme, also known as the Presumptive Tax Scheme, was first introduced in the Finance Act 1994 in order to encourage better tax compliance. The Tax Reforms Committee, led by Dr Raja Chelliah, recommended it, and such a method of assessment for certain categories of businesses was common in several countries at the time. The scheme aimed to assist small unorganised business entities by exempting them from maintaining books of accounts and auditing the accounts. Sections 44AD and 44AE were subsequently added in 1994 to provide a method of estimating income from the business of civil construction or supply of labour for civil construction work, and plying, hiring, or leasing goods carriages, respectively.
Sub-section (5) was omitted in the Income-tax (Second Amendment) Act, 1998, and a new sub-section (5) was inserted, allowing assesses to claim lower profit if they kept books of accounts in accordance with section 44AA and had their accounts audited in accordance with section 44AB. The Finance Act of 2009 substituted new Section 44AD, making it applicable to all eligible assesses carrying on eligible businesses with gross receipts of less than Rs 40 lakhs.
ICAI’s Handbook on Estimated Income Scheme
The ICAI’s “Handbook on Estimated Income Scheme under Income-tax Act, 1961” is a useful tool for members to help them comply with presumptive taxation provisions and procedures in a more objective manner. The handbook covers various procedural aspects of presumptive income taxation and aims to update members’ knowledge base in a simple and concise manner. The ICAI’s Direct Taxes Committee has taken the initiative to publish handbooks covering various procedural aspects of presumptive income taxation and plans to publish more such handbooks in the future.
Benefits of Presumptive Taxation
Small business owners and self-employed individuals benefit from presumptive taxation in several ways. For starters, it streamlines the tax filing process by reducing paperwork and record-keeping requirements. For small business owners who may not have the resources to keep detailed financial records, this saves time and effort.
Second, it simplifies the compliance burden for small taxpayers by exempting them from the requirement to keep books of account and have them audited. This is especially useful for businesses in the informal sector, where record-keeping and compliance can be difficult.
Third, because the tax liability is based on a fixed percentage of turnover or gross receipts, it provides certainty and predictability in tax liability. This enables small business owners to better plan their finances and avoid surprise tax bills.
Finally, presumptive taxation contributes to the expansion of the tax base by encouraging small taxpayers to come forward and declare their income. This assists the government in increasing tax revenue while decreasing tax evasion.
The Presumptive Taxation/Estimated Income Scheme relieves small taxpayers of the time-consuming task of keeping books of account and having their accounts audited. The ICAI’s “Handbook on Estimated Income Scheme under Income-tax Act, 1961” provides a basic understanding of the topic and updates members’ knowledge base in a simple and concise manner. Members can use this handbook to help them comply with the provisions and procedures.
The Handbook on Estimated Income Scheme under the Income-tax Act of 1961 is a useful resource for members of the Institute of Chartered Accountants of India (ICAI) who are involved in presumptive income taxation. It provides a detailed guide to the relevant provisions, case law, examples, and practical issues that may arise when dealing with the presumptive taxation scheme.
ICAI’s Handbook on Presumptive Taxation/Estimated Income Scheme under the Income-tax Act, 1961: February 2023 Edition (Under Revision)