Entrepreneurship and starting your own business have become a buzz today. Everywhere you turn, you can see a new start-up popping up. This, honestly, is a sign of growth. This culture, though, is happening all around the world right now, and for instance, in the US, there are over a hundred thousand businesses that are established each day.
Well, with a business comes one thing for sure – taxes. When you make turnovers, you would have to know that there would also come the need to pay taxes. In this post – we are going to be talking about presumptive taxes for your business or your profession.
What Actually Are Presumptive Taxes
The Income Tax Act established the idea of presumed taxation as a means of easing the burden on taxpayers with annual revenues under two crore rupees. The dictionary definition of the word “presumptive” is “presumed in the lack of more knowledge.”
Accordingly, the presumptive taxation system is one that allows the adopter to declare income at a set rate and relieves them of the laborious task of maintaining books of accounts and conducting audits of accounts.
Who Can Opt For It?
Depending on the types of firms and professions, three distinct sections of the Income-tax Act – 44AD, 44ADA, and 44AE – define the system. At first, the presumptive taxation scheme’s framework applied to taxpayers who had designated businesses (as defined in section 44AD) or who operated, leased, or hired trucks (section 44AE). But beginning on April 1, 2017, the presumption scheme (44AD of Income Tax Act) was also expanded to include professionals.
A Small Taxpayers Relief System
According to Indian income tax regulations, everybody engaged in business must keep books of accounts and have the accounts audited. However, small taxpayers may find it difficult to maintain their books of accounts and conduct audits of their financial statements. Therefore, the presumptive taxation plan allows a person to declare income at a predetermined rate and be exempt from the upkeep of books of account and audit in order to give compliance relief for small taxpayers.
Small taxpayers are given respite from audit and bookkeeping maintenance under Section 44AD. With the exception of the business of operating, leasing, or renting goods carriages, all taxpayers engaged in business are entitled to participate in the program. Also ineligible is anyone running an agency business or making money through commission or brokerage. Additionally, anyone offering services in law, medicine, engineering, architecture, accounting, technical consulting, or interior design is not qualified for the presumptive taxation scheme under section 44AD.
Small taxpayers that operate businesses that include the renting, leasing, or plying of goods carriages are intended to benefit from Section 44AE’s compliance relief provisions. Therefore, the program can only be used by someone who owns no more than ten goods trucks. The prohibition against owning more than ten vehicles is perpetual.
How is Presumptive Taxation Good for You?
- The Central Government incorporated the National Defense Fund.
- Minister of the Crown’s National Relief Fund
- Your net income represents 8% of your turnover for purposes of presumptive taxation under Section 44AD, and you must pay tax on that amount.
- You must pay advance tax, but you can pay it entirely by March 31 rather than calculating your income and paying tax each quarter. For taxpayers who choose the presumptive plan, advance tax is due by March 15 of the applicable fiscal year if you anticipate having an income tax burden greater than Rs. 10,000.
- Only 6% of your receipts, which are in digital (non-cash) form, will be considered your net income for tax purposes.
- You are not required to keep accounting records.
- Your accounting records do not need to be audited.
When is Presumptive Tax Not Included?
For practically all professions and businesses that meet the turnover requirement, presumptive taxation laws apply. However, only a few companies are prohibited from determining their tax liability using the presumptive taxation method:
- Agency for life insurance.
- Any form of commission-based company.
- Operating, hiring, or leasing goods transportation companies.
Presumptive Taxation and Your Accounting Books
Here is why, even if you choose presumptive taxes, you should preserve your accounting records religiously.
One of two choices to reduce your efforts in calculating your taxable income and negotiating the confusing deductions is presumed taxation.
You should determine whether the presumed method is advantageous for you.
Think about the following instance:
- You are a certain professional who earned Rs. 20 lakhs during PY 2019–20.
- You believe that your acceptable business expenses total 11 lakhs rupees in total.
- Given that the conventional method would result in a lower taxable income for you, presumed taxation might not be the best choice.
Use the conventional approach if your qualifying professional fees total more than 50% of your income. Of course, you need to have clean records in order to determine whether your eligible expenses exceed the cap.
The best thing about presumptive taxation is that you will not have to keep an exhaustive book of accounts to yourself, whether a business or a profession – because when you do have to start keeping books, especially when you are not legally required to, it just becomes tedious and tiresome.