Background: The Government of India had introduced a scheme of presumptive taxation under Income Tax Act, 1961 to reduce the burden of compliance of small tax payers. Businesses adopting the presumptive taxation scheme are not required to maintain regular Books of Accounts. They can declare the income at a prescribed rate.

The presumptive taxation scheme under section 44AD is basically for taxpayers who are engaged in business (except plying, hiring or leasing of goods and carriages which gets covered under section 44AE, income from agency business and commission and brokerage) and can be opted by resident individuals, resident Hindu Undivided Family (HUFs) and resident partnership firms having a total turnover of not more than INR 2 crores. 

The taxpayers are required to pay taxes on 8% of total turnover in case of cash transactions and 6% in case of digital transactions. This 8% or 6% as the case may be, is basically the net profit from business after assuming all expenses being taken care of. 

Advantages of using section 44AD

The advantages of opting section 44AD are that the taxpayers are not required to prepare and maintain proper Books of Accounts for their businesses and moreover scrutiny from Income Tax Department may not arise as no accounts are being maintained. They are not required to deduct tax at source (TDS) and hence are not required to file quarterly TDS returns. Advance tax is a onetime affair that too in the month of March.

Who should not opt for section 44AD 

If you read provisions of Income Tax and GST together, you can see that the composition taxpayers under GST are not required to prepare and maintain proper Books of Accounts if total turnover is up to INR 1 crore (INR 1.50 crores effective from 1 April, 2019) and when compared to section 44AD of the Income Tax Act, the limit for not preparing and maintaining proper Books of Accounts goes up to INR 2 crores. So, in case, if the total turnover of composition taxpayers exceeds INR 1 crore (INR 1.50 crores effective from 1 April, 2019) then they will be required to opt for normal scheme where they need to prepare and maintain proper Books of Accounts even if the turnover does not exceed INR 2 crores (under section 44AD).

Moreover, in today’s competitive business world, earning 8% or 6% net margin is a tough ask. Businesses end up making a mere 2-3% net margin and if they opt for presumption scheme just not to prepare Books of Accounts, they will end up paying hefty amount of taxes. 

So in a nutshell, if a composition taxpayer’s turnover registered under GST exceeds INR 1 crore (INR 1.50 crores effective from 1 April, 2019) then they have to prepare and maintain proper Books of Accounts. And once you start preparing and maintaining accounts then why pay taxes on the basis of presumption?

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