Presumptive Basis of Taxation for Small Business in India

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By Himanshu Joshi, Accounts Associate, Dezan Shira & Associates

Mar. 6 – In order to provide small business owners relief from the tedious work of book keeping, auditing and compliance, sections 44AD and 44AE of the Income Tax Act 1961 allows an assessee to determine their income on a presumptive basis. This allows income to be determined at a fixed rate of turnover or a fixed amount, but only for persons that run a business (not a professional worker).

Please find a summary of these two sections below.

Section 44AD
Every assessee that has an eligible business may declare a minimum 8 percent of total turnover or gross receipts as profits from their business. However, total business turnover may not exceed Rs.1 crore.

An eligible assessee is an individual, Hindu Undivided Family (HUF) or a partnership firm (that is not a LLP) who is a resident and has not claimed deductions under section 10A, 10AA, 10B or sections 80-IA to 80RRB.

An eligible business refers to any business other than those mentioned in section 44AE.

Under section 44AD, an assessee is exempted from advanced taxes so far as they relate to their eligible business.

Section 44AE
This section is applicable to assessees that do not own more than 10 goods carriages at any time in the previous year and that is engaged in the business of plying, hiring, or leasing such carriages for goods. In addition, total business turnover may not exceed Rs.1 crore.

The assessee can determine their income as follows:

For heavy goods vehicles: an amount equal to Rs.5,000 per month or part of a month during which a heavy vehicle is owned by the assessee in the previous year.

For any other type of carriages: an amount equal to Rs.4,500 per month or part of a month during which a carriage is owned by the assessee in the previous year.

Common provisions under Sections 44AD and 44AE

  • Any deductions allowed under sections 30 to 38 are valid, and no further deductions are allowed under these sections.
  • In the case of a partnership firm, remuneration and interest paid to the partners is to be deducted from the presumed income (subject to the conditions and limits stated in section 40(b).
  • The provisions of section 44AA (accounts maintaining) and 44AB (tax audit) are not applicable when the assessee determines their income on a presumptive basis.
  • An assessee may claim a higher income than the presumed income if so desired.
  • An assessee may claim lower profits than the profits deemed under these sections. In such a case, the assessee is to maintain the books of the accounts as required by section 44AA, and the accounts must then be audited with an audit report furnished pursuant to the the provisions of section 44AB. However, in case of section 44AD, compliance with sections 44AA and 44AB is only required when the income of the assessee exceeds the maximum amount that is not chargeable by income taxes.
  • The value of any assets used for a business will be deemed to have been calculated as if the assessee had been allowed a deduction in respect of depreciation.
  • The current year’s losses and losses brought forward may be off-set by the income determined under these sections. However, the current year’s depreciation and brought forward depreciation cannot be off-set by the income determined under these sections.
  • An assessee is also eligible for the deductions listed under Chapter VIA (other than sections 80-IA to 80RRB in the case of section 44AD).

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the company brochure.

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