Section 44AD of the Income Tax Act, 1961

Introduction

Small firms can get benefit from Section 44AD of the Income Tax Act, 1961 through a presumptive taxation system. This clause enables eligible taxpayers to report their income based on their turnover as opposed to keeping books of accounts and finding out their actual earnings and losses.

Eligibility Criteria under section 44AD

To avail of the benefits under Section 44AD, the conditions are:

• Eligible Assessee: Individuals, Hindu Undivided Families (HUFs), and partnership firms are all eligible assessees under the system. However, limited liability partnerships (LLPs) are not eligible.
• Eligible Business: The assessee should be engaged in an eligible business.
• Percentage of Sum earned by Assessee: The assessee earns the amount of 8% or 6% of total turnover or gross receipts in the previous year.
• Chargeable under the head: It will be chargeable under the Head of Profits and Gains of Business and Profession

Who will be an “eligible assessee” under Section 44AD?

An eligible assessee will be:

• Resident individuals
• Hindu Undivided Families (HUFs) – who is a Resident
• Partnership companies  –  who is a Resident (except LLPs)

What is an “eligible business” under section 44AD?

An eligible business is:

1.  Any business (except a business of plying, hiring, or leasing goods carriages under Section 44AE), and
2. Total turnover or gross receipts in the previous year does not exceed – Rs. 2 crores

Percentage of total turnover or gross receipt earned under Section 44AD chargeable to tax under PGBP

• 8% of total turnover or gross receipt- Where the amount received is through cheque, bank draft or electronic clearing system, or another electronic method.

• 6% of total turnover or gross receipt –Where the amount received is not through cheque, bank draft or electronic system, or another electronic method.

Non-Applicability of Section 44AD in certain cases

The provision is not applicable to the person:

1. Carrying Agency business
2. Earning commission or brokerage income
3. Undertaking professions like accountancy, technical consultancy, etc. (Section 44AA)

Effect of opting for presumptive taxation under Section 44AD

The effect of opting for presumptive taxation is as follows:

• Advance tax
  •  Taxpayers under this scheme are required to pay advance tax in a single installment on or before the 15th of March of the financial year.
• Deductions
  •  Deductions are not applicable to taxpayers who choose the presumptive taxation option under Section 44AD. Instead, the Income Tax Act will deem that the deductions under Sections 30 to 38 have been given full effect.
• Written Down Value
  •  The written down value will be deemed to have been calculated and the assessee the deduction for depreciation is allowed.
• Opting of Scheme for 5 years
  • As per section 44AD(4) of Income Tax Act, if a person opts for a presumptive taxation scheme, then he is also required to follow the same scheme for the next 5 years. If he fails to do so, the presumptive taxation scheme will not be available to him for the next 5 years.
• No Maintenance of Books of Account
  •  If the taxpayer declares earnings at a higher rate and doesn’t opt for the scheme for 5 years, they are required to keep books of accounts and have them audited and furnish a report.

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Advantages of Section 44AD

• Reduced compliance Burden: Taxpayers opting for the scheme can save themselves the trouble of having to keep regular books of accounts, which can be a big pain for small enterprises.
• Tax Savings: For eligible taxpayers, the program may result in tax savings because they are allowed to declare their income at a minimum of 6% or 8% of their gross revenues, which is less than the profits the company actually makes.
• Relief from Tax Audit: Taxpayers who choose the program do not need to conduct an audit.

Disadvantages of Section 44AD

• Restricted Deductions
  •  Sections 30 to 38 of the Income Tax Act do not provide any investment or expense deductions for tax payers who choose the scheme. Certain taxpayers may have larger tax obligations as a result of this.
• Limited Applicability
  •  LLPs are not eligible for the scheme, which is only available to businesses with yearly revenues of up to Rs 2 crores.
• Non-Applicability of Other Schemes
  •  If a taxpayer elects the Section 44AD plan, he or she is not eligible to use other schemes for saving taxes.
• Usage of the scheme for minimum of 5 years
  • Tax payers who choose the program are required to use it for a minimum of 5 years in a row. If the tax payer decides to cease the scheme before the period of 5 years has passed, they must keep books of accounts and pay taxes accordingly.

Difference between Section 44AD and Section 44ADA

Conclusion

In conclusion, Section 44AD provides a presumptive taxation system at the rate of 8% or 6%. It provides for a simpler tax compliance regime for eligible small businesses. Additionally, it helps in reducing the compliance burden for such taxpayers.

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