A scheme for presumptive taxation got introduced which is Section 44ADA which provides an easy as well as simple method of taxation for small professionals. The section offers a scheme of presumptive taxation of both profits and gains from professions which are mentioned under Section 44AA(1) of the Income Tax Act, 1961. There was a time when the benefits of Presumptive Taxation were provided to Businesses under Section 44AD and Transporters under Section 44AE and specified professionals were completely kept out of the scheme. As they were excluded, they had to maintain all their books of accounts, invoices, and so on through a normal system of taxation. These complexities discouraged professionals from filing income tax returns. Thus, the Presumptive Taxation for Professionals was introduced under Section 44ADA in Finance Act, 2016. People can take the benefit of section 44ADA only if their annual gross receipts are under Rs. 50 lakh. Let us analyze the presumptive taxation for professionals under Section 44ADA in a more detailed manner.
What’s the Scope and Purpose of Section 44ADA?
Section 44ADA is a special provision for calculating the profits and gains of small professionals under some circumstances. It was introduced to enable the scheme of simplified presumptive taxation for some specified professionals. This presumptive scheme of tax applied only to small businesses at one time.
The presumptive scheme of taxation is really helpful for the small-scale business houses. It reduces the compliance burden on small professionals and provides ease of doing business. Under the presumptive scheme of taxation, profits generally range at 50% of the gross receipts.
Assessees who are Eligible for the Section 44ADA
It is mentioned in the provision that Section 44ADA of the Act applies only to individuals, Hindu Undivided Families, and partnership firms. However, the section does not apply to Limited Liability Partnership. Surprisingly, the Finance Act, 2021 excluded Hindu Undivided Family from the list of the assessee who would have been eligible to get included for the presumptive scheme without really giving any explanation.
People who are Eligible Professionals under Section 44ADA
There are a lot many kinds of people who are eligible professionals under Section 44ADA, but before going towards that, let us understand that Section 44A(1) prescribes compulsory maintenance for the books of accounts of such kinds of people which shall enable the Assessing Officer to calculate the total income of such people following the provisions of the act. So, sub-section(1) applies to the following:-
- A person who carries on a legal profession.
- A person who carries on a medical profession.
- A person who carries on engineering or architectural profession.
- A person who carries on a profession of accountancy.
- A person who carries on the profession of technical consultancy.
- A person who carries on the profession of an interior decorator.
There are other professionals too mentioned below:-
- Movie artists include a producer, actor, editor, music director, cinematographer, art director, dance directors, cameraman, singer, lyricist, costume designer, story writers, VFX Artists, screenplay, and dialogue writers.
- Authorized Representative means a person who represents another person at a tribunal or any authority constituted under the law for a fee in return. It certainly doesn’t include an employee of the person represented or a person who is carrying on the profession of accountancy.
- And finally any other notified professionals.
What is the presumptive income offered?
The presumptive income offered is 50% of the total receipts from the professional income offered by the assessee from the profession. For instance, Mr. Gaurav is a freelance interior decorator. His total receipts for the year 2020-2021 are Rs. 30 lakh. His expenses are Rs. 10 lakh for the rent, conveyance, traveling, call, and so on. In this case, the net profit under the presumptive scheme is lower than the normal provisions and thus it is a benefit for Mr. Gaurav to offer his income under the presumptive scheme of taxation according to section 44ADA.
What are the benefits that an assessee will get by following Section 44ADA?
These are the benefits that an assessee would get by following Section 44ADA:-
- There will be no requirement of maintaining books under Section 44AA.
- There will be no need of having accounts audited under Section 44AB.
When should an assessee maintain books and get the accounts audited?
If an assessee meets the following criteria, then that person should maintain books and get accounts audited under Section 44AB:-
- Income from the profession is given at a lower rate than 50% of the gross receipts.
- Total income of the assessee should be more than the basic exemption.
What are the implications of choosing Section 44ADA?
All deductions for business expenses are deemed to have been allowed. Once profits are taxed at 50% of the gross receipts, the balance of 50% can be deemed to be allowed for all the business expenses of the assessee. Business expenses may include consumables, cost of services taken from other professionals, daily expenses, books, telephone charges, stationery, and other expenses incurred to carry on the profession.
Conclusion
This was all about the presumptive taxation for professionals under Section 44ADA. Since the specified professionals were completely kept out of the scheme, it was need of the hour to bring them in or add such provisions that would benefit them and would in easing the complexities.
