The Finance Act, 2016 includes various amendments that aim at helping professionals and small businesses. One of them is about presumptive taxation, the required paperwork for which was a matter of concern for many professionals such as doctors, lawyers, chartered accountants and others.

The Finance Act has made things simpler for professionals by reducing the amount of effort needed to estimate the income for the year and also to file the return on this.

For taxation purpose, most businesses and professionals have to maintain books of accounts, which are then evaluated at end of each financial year. A profit and loss statement is prepared and tax on income, if any, is paid accordingly. However, there is a special scheme— Presumptive Taxation Scheme (PTS)—under which one can file the return and pay tax on the basis of ‘presumed’ income.

Under PTS, eligible professionals and businesses can compute income on an estimated basis under section 44ADA and 44AD of the Income Tax Act, 1961, respectively, at a minimum prescribed rate. Businesses already had this provision, but from the current financial year, the threshold under PTS for eligible businesses has been raised from Rs.1 crore to Rs.2 crore. Professionals with less than Rs.50 lakh of gross receipts in a financial year are also now under the umbrella of PTS.

Eligible businesses

The scheme can be adopted by an eligible resident individual, a resident Hindu undivided family (HUF) and resident partnership firm. However, limited liability partnership (LLP) firms are not allowed to adopt this scheme. Also, those who claim benefits for their businesses on the basis of those being in free or special economic zones or in backward areas can’t avail of PTS. Even those who are earning income in the nature of commission or brokerage (such as insurance agents or mutual fund advisers) cannot adopt the scheme.

From the assessment year 2017-18, the scheme will cover businesses having a total turnover of less than Rs.2 crore during the financial year. “However, business of plying, hiring or leasing goods carriages referred to in another PTS under section 44AE, are not allowed to adopt this scheme,” said Divya Baweja, partner, Deloitte Haskins and Sells LLP.

Under PTS, if the above mentioned conditions are satisfied, the eligible businesses can estimate their income at the rate of 8% of the total turnover. For instance, if the turnover of the business is Rs.1.75 crore in the financial year and the owner decides to compute income on an estimated basis for filing income tax returns, business income chargeable to tax so calculated would be Rs.14 lakh (8% of Rs.1.75 crore). However, the assessee is allowed to willingly declare income at a higher rate than the minimum of 8% of the total turnover. So, it is on the business owner’s discretion to declare that the profit margin in the business is more than the mandatory 8%. Tax will be paid accordingly. So, in the above example, an income of more than Rs.14 lakh on a total turnover of Rs.1.75 crore can be declared.

Eligible professionals

PTS has now been extended to professionals by inserting a new section—44ADA—in the Act. “Those who are governed or regulated by an institute or body such as doctors, lawyers, architects, interior designers and others can file returns under the scheme,” said Baweja.

According to the new section, eligible professionals, whose gross receipts are below Rs.50 lakh against the rendered services in a financial year, can file tax returns under PTS. For this, 50% of the total receipts during the fiscal will be considered as profit and will get taxed under the income tax head of “profits and gains of business or profession”. For instance, if the receipts of a professional during the year amount to Rs.40 lakh, and she chooses to files her tax return under PTS, her taxable income will be considered at a minimum of Rs.20 lakh. But she can voluntarily declare an income that’s more than the mandatory 50% of the total receipts.

What is considered turnover or receipt?

Under PTS, you can only take into consideration gross turnover or receipts. But it is not clear as to what should be considered as receipts and what should not be. “It depends more on what kind of accounting method you use,” said Amit Maheshwari, managing partner, Ashok Maheshwary & Associates.

“If you operate under the accrual system, take only those sales where you delivered the goods or completed the service within the specified time period you are considering. If you operate on cash basis, recognise only the sales where you received payment within the time period,” he explained.

That means that you can either take into account only the amount of goods or services delivered during the year, irrespective of whether the related payment has been received or not. In other case you can take into account only cash sales, accrued income (income earned but not received) can be taken into consideration in the year it is received.

“The term ‘gross receipts’ has not been defined in the Act, but it includes all receipts in cash or kind, arising from carrying on of business or profession, assessable as income under the Act,” said Neha Malhotra, executive director, Nangia & Co.

Service tax and cess

Along with the fee charged for the service provided, professionals also collect service tax and cess as part of the bill. But will the service tax and cess components, which the professional has to pass on to the government, also be considered as receipts?

“Since gross receipts are not defined, there is not enough clarity on this. (But) as a matter of principle, service tax and cess should not be included in the gross receipts,” said Maheshwari.

The argument here is that since service tax and applicable cess are payable to the government by the service provider, only the service fee should be treated as receipt.

Not allowed to claim

Professionals and businesses availing the benefits of PTS can’t claim tax deduction under sections 30 to 38 of the Act, which would include deduction on expenses such as rent of the shop or office, insurance premium of goods and machines, interest on borrowed capital, employer’s contribution to provident fund, depreciation on assets and machinery, and so on. Under PTS, it is deemed that deductions for such expenses have been factored in.

This means that if the receipts of a professional during the year amount to Rs.40 lakh, then Rs.20 lakh (50%) would be considered to cover cost of office, maintenance, travel, telephone and so on. The remaining Rs.20 lakh will get taxed at the applicable slab rate. In case of a firm, deduction can be claimed for salary and interest to partners.

No advance tax payment

All professionals and businesses generally have to adhere to advance tax payment rules. According to section 208 of the Act, if the total estimated tax on their incomes for the relevant financial year is expected to be more than Rs.10,000 per annum, advance tax has to be paid. One has to pay 15% of the estimated income tax by 15 June, 45% by 15 September, 75% by 15 December and the rest by 15 March of the relevant financial year.

However, with PTS, the assessee is exempt from paying advance tax. This means that she does not have to estimate her income four times a year and pay advance tax accordingly. Instead, she has to go through the exercise only once.

The main aim of PTS is to reduce tax compliance burden and cost of maintaining books of account for professionals and small businesses. While some points are still to be clarified, the scheme is a move forward.