The Finance Bill 2023 proposes raising the presumptive taxation thresholds for micro enterprises (small businesses) and certain professionals to Rs. 3 crore and Rs. 75 lakh, respectively, if their cash receipts during the fiscal year are less than 5% of total gross receipts or turnover.
Clauses 15, 16, and 17 of the Finance Bill 2023 propose raising the threshold limits for presumptive taxation schemes under Sections 44AD (MSMEs/Small Businesses) and 44ADA (Small Businesses) (Professionals).
It has been proposed that, beginning with the fiscal year 2024-25, the gross receipts or turnover threshold limit for eligible businesses under section 44AD be increased from Rs. 2 crore to Rs. 3 crore, and the threshold limit for specified professions under section 44ADA be increased from Rs. 50 lakh to Rs. 75 lakh.
The enhanced new limits will take effect if total cash receipts for the year do not exceed 5% of total gross receipts or turnover. These amendments are intended to make compliance easier and to encourage electronic transactions.
As a result, more micro enterprises will be able to choose presumptive income schemes, reducing the amount of compliance work they must do. It is expected that a greater number of microenterprises will be eligible for presumptive income schemes.
1. At present, Section 44AD of the Income Tax Act provides for a presumptive taxation scheme for the income of small businesses, which applies to certain resident assessees (i.e., an individual, HUF, or partnership firm other than an LLP) who carry on eligible businesses and have an annual turnover or gross receipt of Rs. 2 crore or less. Under this presumptive scheme, profits and gains from business are deemed to be 8% or 6% of turnover or gross receipts, subject to certain conditions. The assessee may, however, declare taxable income greater than 8% or 6%.
2. Similarly, Section 44ADA of the Income Tax Act provides for a presumptive income scheme for small professionals, which applies to certain resident assessees (i.e., an individual or partnership firm other than an LLP) who engage in any profession specified in Section 44AA(1) and whose total gross receipts do not exceed Rs. 50 lakh in a fiscal year. This scheme considers profits and gains from a profession to be a sum equal to 50% of gross receipts. The assessee, however, may declare taxable income in excess of 50%.
3. Section 44AB of the Income Tax Act mandates tax audits for assessees carrying on business or a profession with an annual turnover of more than Rs. 100 lakh (Rs. 10 crore where cash receipts and payments are less than 5%) in the case of business and more than Rs. 50 lakh in the case of a profession. Those who choose and follow the conditions of the presumptive taxation scheme are exempt from tax audit requirements.
4. In order to facilitate compliance and promote non-cash transactions, it is proposed to raise the presumptive scheme threshold limits in Sections 44AD and 44ADA of the Income Tax Act if certain conditions are met:
i) A threshold limit of Rs. 3 crore will apply for eligible businesses where the amount or aggregate of amounts received in cash during the previous year does not exceed 5% of total turnover or gross receipts;
ii) A threshold limit of Rs. 75 lakh will apply under Section 44ADA of the Income Tax Act for professions specified in Section 44AA(1) of the Income Tax Act, where the amount or aggregate of the amounts received in cash during the previous year does not exceed 5% of total gross receipts;
iii) A receipt from a cheque drawn on a bank or a demand drafts drawn on a bank that is not an account payee is considered a cash receipt;
iv) The provisions of Section 44AB of the Income Tax Act will not apply to anyone who declares profits and gains for the previous year in accordance with Sections 44AD(1) or 44ADA(1) of the Income Tax Act, as applicable.
5. These amendments will become effective on April 1, 2024, and will apply to assessment years 2024–25 and onwards.