The Law On Presumptive Taxation On Professionals As Proposed By Finance Bill 2016

CA H. N. Motiwalla has analyzed the provisions of section 44ADA proposed to be inserted by the Finance Act 2016 so as to subject professionals to presumptive taxation and explained its advantages and disadvantages

Ease of doing business

The provisions of Finance Bill, 2016 relating to direct taxes seeks to amend the Income-tax Act, 1961 inter alia in order to provide for widening of tax base and anti-abuse measures, and ease of doing business and dispute resolution. The amendments in presumptive taxation scheme have been proposed under this head by the Finance Bill, 2016.

Presumptive taxation scheme for persons having income from business background

Sections 44AD and 44AE were inserted by the Finance Act, 1994 with effect from April 1, 1994. The object for introducing this scheme had been explained by the Central Board of Direct Taxes (CBDT) in its Circular No. 684 dated June 10,1994. Wherein, it is stated that the Estimated Income Method of assessment for certain categories of business is prevalent in several countries. The Tax Reforms Committee has also recommended gradual introduction of the Estimated Income Method in certain areas to facilitate better tax compliance. Accordingly, a section 44AD had been inserted in the Income- tax Act with a view to providing for a method of estimating income from the business of civil construction or supply of labour for civil construction work. The section was applicable to all the assessee whose gross receipts from the above mentioned business did not exceed ` 40/- lakhs. The income from the above mentioned business was estimated @ 8% of the gross receipts paid or payable to an assessee. Further, section 44AE provided for a method of estimating income from the business of plying, hiring or leasing trucks owned by a tax payer owning not more than 10 trucks. Both schemes were optional. Furthermore a proviso to sub-section (2) of Section 44AD as well as to sub-Section (3) of Section 44AE was inserted by the Finance Act, 1997 with effect from April 1, 1994 to provide that in case of firm, the normal deduction on account of salary / interest paid to partners would be allowed, subject to conditions and limits specified in clause (b) of Section 40.

Thereafter, the Section 44AD was amended by the Finance (No. 2) Act, 2009 w.e.f. April 1, 2011, which provided applicability of this section to “eligible assessee” and for “eligible business”. As per Explanation to said section “eligible assessee” means:

i)An individual, HUF or a partnership firm (other than LLP), who is resident, and

ii)Who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of chapter VIA under the heading “Deductions in respect of certain income” in the relevant assessment year.

Similarly, “eligible business” means:

i)Any business except the business of plying, hiring or leasing goods, carriages referred to in section 44AE and

ii)Whose total turnover or gross receipt in the previous year does not exceed an amount of one crore rupees

However, existing Section 44AD, is not applicable to:

a)A person carrying on profession as referred to section 44AA(1);

b)A person earning income in the nature of commission or brokerage; or

c)A person carrying on any agency business.

Success of Section 44AD

The success of this section is judged from the Budget speech of the Hon’ble Finance Minister Shri Arun Jaitley. In para 120 of his speech, he states that:

“Presumptive taxation scheme under Section 44AD of the Income-tax Act is available for small and medium enterprises i.e., non-corporate businesses with turnover or gross receipt not exceeding one crore rupees. At present about 33 lakh small business people avail of this benefit, which frees them from the burden of maintaining detailed books of account and getting audit done. I propose to increase the turnover limit under this scheme to Rupees two crores which will bring big relief to a large number of assessee in the MSME category”.

The Finance Bill, 2016

In pursuance to that the Finance Bill, 2016 provides that in order to reduce the compliance burden of the small taxpayers and facilitate the ease of doing business, it is proposed to increase the threshold limit of one crore rupees specified in the definition of “eligible business” to two crore rupees.

However, it is not comprehensible, why proviso to sub-section (2) of Section 44AD is proposed to be omitted, which reads:

“Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of Section 40”.

This will discourage the small eligible assessee firm to take the benefit of this section as, no amount would be deducted towards remuneration / interest to partners.

Further, sub-sections (4) and (5) of present Section proposes to be substituted by new sub-sections (4) and (5). The Memorandum explaining the provisions of the Finance Bill, 2016 explains the changes, which reads as under:

“It is also proposed that where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five consecutive assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1). For example, an eligible assessee claims to be taxed on presumptive basis under Section 44AD for assessment year 2017-18 and offers income of ₹ 8 lakh on the turnover of ₹ 1 crore. For assessment year 2018-19 and assessment year 2019-20 also he offers income in accordance with the provisions of section 44AD. However, for assessment year 2020-21, he offers income of ₹ 4 lakh on turnover of ₹ 1 crore. In this case since he has not offered income in accordance with the provisions of section 44AD for five consecutive assessment years, after assessment year 2017-18, he will not be eligible to claim the benefit of section 44AD for next five assessment years, i.e. from assessment year 2021-22 to 2025-26.

Further as the turnover limit of presumptive taxation scheme has been enhanced to rupees two crore, it is proposed to provide that eligible assessee shall be required to pay advance tax. However, in order to keep the compliance minimum in his case, it is proposed that he may pay advance tax by 15th March of the financial year”.

It is to be seen whether the above amendments except increasing the threshold limit of eligible business, would benefit small and medium enterprises; because once an assessee opts under this section, he has to declare 8% profits on the gross receipts for continuous period of five years. Further, in case of eligible firm, no remuneration / Interest paid to partners would be allowed as deductions. Hence many assessees would prefer not to opt under this section and would prefer to maintain the books of account and get them audited. This is a retroactive or backward step in “widening the tax base” and “ease of doing business”.

Presumptive taxation for professionals

The existing scheme of taxation provides for a simplified presumptive taxation scheme for certain eligible persons engaged in certain eligible business only and not for persons earning professional income. In order to rationalise the presumptive taxation scheme and to reduce the compliance burden of the small tax-payers having income from profession and to facilitate the ease of doing business, it is proposed to provide for presumptive taxation regime for professionals.

In this regard, new Section 44ADA is proposed to be inserted in the Act to provide for estimating the income of an assessee who is engaged in any profession referred to in sub-section (1) of Section 44AA such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette and whose total gross receipts does not exceed fifty lakh rupees in a previous year, at a sum equal to fifty per cent of the total gross receipts, or, as the case may be, a sum higher than the aforesaid sum earned by the assessee. The scheme will apply to such resident assessee who is an individual, Hindu undivided family or partnership firm but not Limited Liability partnership firm.

Under the scheme, the assessee will be deemed to have been allowed the deductions under Section 30 to 38. Accordingly, the written down value of any asset used for the purpose of the profession of the assessee will be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of depreciation for the relevant assessment years.

It is also proposed that the assessee will not be required to maintain books of account under sub-section (1) of Section 44AA and get the accounts audited under Section 44AB in respect of such income unless the assessee claims that the profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under sub-section (1) of Section 44ADA and his income exceeds the maximum amount which is not chargeable to Income-tax.

This is welcome measure for small professionals who are not required to maintain books of account and offer straightway their income @ 50% of gross receipt. An interesting situation would arise in case of a partner of professional firm wherefrom he receives remuneration/interest. The same would be assessable under the head “Profits and Gains of Business or Profession” as per Section 28(v) of the Act. Now can he claim that he is engaged in the profession and his gross receipts from salary/interest from the firm is less than rupees. fifty lakh, hence he is entitled to claim benefit of Section 44ADA.

Threshold limit under Section 44AB

Under the existing provisions of Section 44AB of the Act every person carrying on a profession is required to get his accounts audited if the total gross receipts in a previous year exceed twenty five lakh rupees.

In order to reduce the compliance burden, it is proposed to increase the threshold limit of gross receipts, specified under Section 44AB for getting accounts audited, from twenty five lakh rupees to fifty lakh rupees in the case of persons carrying on profession.

Thus, it is to be noted that there is increase in the threshold limit of total gross receipts of ₹ fifty lakh in case of professionals for tax audit under Section 44AB. But there is no increase in threshold limit of total sales, turnover or gross receipts in case of a person carrying on business.

So, a person carrying on business and not opting for presumptive taxation under Section 44AD, would have to maintain books of account and get them audited, if his total turnover, exceeds rupees one crore.

Last but not least, a professional who does not opt to offer profit @ 50% of gross receipts under Section 44ADA has to maintain books of account and get them audited if his income exceeds maximum amount not chargeable to tax under Section 44ADA(4) provided his gross receipts from profession does not exceed fifty lakh rupees. As soon as his gross receipts increases rupees fifty lakh, he has to maintain the books of account and get them audited under section 44AB.