Decoding the government’s tax break to small businesses on digital receipts and expectations from Budget 2017

27th Jan 2017
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In the midst of the hue and cry caused by demonetisation, the government, through the Central Board of Direct Taxes (CBDT), came up with an announcement on 19th December, 2016, giving huge tax benefits to small businessmen having a turnover of up to Rs 2 crore, for promoting digital payments and banking transactions and moving towards a less-cash economy.

The announcement allows businesses to declare 6 percent profits instead of the current 8 percent under section 44AD of the Income Tax Act.

Credit : Shutterstock

What is section 44AD and presumptive taxation?

As per section 44AD of the Income Tax Act, 1961, any eligible person running an eligible business and who has a turnover (Revenue/Receipts) of up to Rs 2 crore can deem and disclose their profits from such business at 8 percent (or higher, at the discretion of the person) of the total turnover and pay income tax on such deemed profit.

For instance, if an eligible business has a turnover of Rs 1 crore, the person can declare a profit of Rs 8 lakh and pay taxes at the applicable tax rate only on that figure.

However, eligible persons for this provision are resident Indian individuals, HUFs and simple partnership firms. This provision is not applicable for non-residents, Limited Liability Partnerships (LLP), Private Limited or other companies, trusts, societies and so on. It also does not apply to professionals and commission agents.

An eligible business is any business:

  • that involves plying, hiring and leasing of goods carriage vehicles
  • services by professionals like engineers, doctors and chartered accountants
  • commission agents and other agency business
  • having a turnover up to Rs. 2 Crore

Any person who is opting for section 44AD is not required to follow and maintain books and accounts and supporting documents for their expenses. They are not subjected to tax audit by a Chartered Accountant and are also not required to comply with the provisions of TDS (Tax deducted at source or withholding taxes) for payments and expenses. The tax department shall not question the profit margin as long as it is at 8 percent or more.

What’s there for professionals?

Professionals like doctors, engineers, architects and accountants practicing or providing consultancy/freelance services are not covered in the provision of section 44AD discussed above. In this case, the government has a separate provision under section 44ADA, wherein it allows the professionals to declare deemed profit of 50 percent or more on their professional receipts up to Rs 50 lakh and get the same benefits as available under section 44AD.

What does the announcement by the CBDT mean?

The CBDT announcement of 19th December, 2016, states that the limit of 8 percent as mentioned in section 44AD shall come down to 6 percent of the total turnover if the receipts are through digital modes or banking channels and not through cash.

If an individual trader makes his transactions in cash on a turnover of Rs 2 crore, then his income under the presumptive scheme will then be presumed to be Rs 16 lakh (at 8 percent of turnover). After availing of the Rs.1.5 lakh of deduction under Section 80C, his total tax liability will be Rs 267, 800. However, if he shifts to 100 percent digital transactions, under the new announcement, his profit will be presumed to stand at Rs 12 lakh (at 6 percent of turnover), and after availing of Rs 1.5 lakh under Section 80C, his tax liability will now be only Rs 144,200. Here, digital transactions include payments received by cheque or through any digital means.

Here, it must be noted that this announcement does not have any impact on professionals, LLPs or Private Limited or other companies, Trusts and so on.

How can one take advantage of this provision?

Startups that are into closely held businesses amongst their friends and family and do not foresee looping in third party investors, and are into trading (online or otherwise) and other services (including SaaS), may opt for doing business in individual capacity (including sole proprietorship), or as an HUF or simple partnership firm and take benefits of presumption taxation and reduced profit margin on digital receipts post demonetisation.

What more can be done in Budget 2017?

This announcement was made by way of a press release. Actual amendment in law is still awaited. The actual amendment shall allow us to understand the fine prints and actual requirement for claiming benefits at the reduced margin of 6 percent. Further, we will have to wait for the Budget to see how this provision will be shaped in the coming years, because the announcement speaks about the benefits for FY 2016-17, with no clarity as to what lies ahead.

Taxmantra’s take on this

As we have said in our other write-ups, the government should target more uniformity and an overall conducive environment. Sections 44AD and 44ADA are very good provisions of the Income Tax Act, 1961, which bring in simplicity and clarity while leaving minimum room for the discretion of the tax department. They are awesome provisions towards the ease of doing business. However, at present, they are applicable to a very limited set of eligible persons. The startup ecosystem will get a boost if similar simple presumptive taxes are proposed for all types of startups, with lesser compliance requirement, lower taxes and a wider base.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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