Every small business should know this – Presumptive taxation scheme

Every small business should know this – Presumptive taxation scheme

Here we would discuss about the presumptive taxation scheme under section 44AD and how demonetization had a positive impact on this scheme.

Presumptive taxation scheme 44AD

This is an optional scheme applicable for small businesses having annual turnover not exceeding Rs 2 Crore

Who is eligible?

Any resident individual, HUF or partnership firm (not LLP)

What are the benefits?

  • No need to maintain books of accounts
  • No need to get the tax audit done
  • Income would be computed on presumptive basis @ 8 % of annual turnover or gross receipts, i.e. no other expenses would be considered. For example, your business has a turnover of 60 lacs, so your taxable income becomes 60 lacs x 8 % = 4.8 lacs
  • No need to pay instalments of advance tax, just pay advance tax in one instalment on or before 15thMarch

Additional benefit following demonetization

To encourage cash less economy, it has been announced in December 2016 that for the persons and entities eligible under this scheme, the presumptive rate would be 6% instead of 8% in respect to the amount of total turnover or gross receipts received through banking/digital means.

Thus, if you have received 100% of turnover through bank/digital medium, the taxable income for a turnover of 60 lacs would reduce to 60 lacs x 6% = 3.6 lacs

Why should you avail this scheme?

Let’s understand this through an illustration:

Suppose you have an annual turnover of 1.5 crores & let’s assume the net income as 5 % of sales.

Particulars

Without scheme

Under scheme

Turnover

1,50,00,000

1,50,00,000

Taxable income

7,50,000

12,00,000

Tax

75,000

1,85,000

Bookkeeping expense

1,20,000

0

Tax audit expense

15,000

0

Net cost

2,10,000

1,85,000

 

 

 

 

 

 

 

 

 

*The figures are indicative, you might have to incur bookkeeping expense while opting the scheme too and the bookkeeping & tax audit expense might vary. One should compare the actual cost and decide which option is costing less.

Normally, one would save while opting the scheme as bookkeeping expense would be significantly lower & there would be no tax audit expense (which would be there if your turnover is over 1 crore & if you have not opted the scheme.)

Further considering an additional benefit with digital transactions which computes the income at even lower rate of 6%, the savings become even higher

Let’s have a look:

Particulars

Without scheme

Under scheme

50% digital transaction

Turnover

150,00,000

1,50,00,000

1,50,00,000

Taxable income

7,50,000

12,00,000

10,50,000

Tax

75,000

1,85,000

1,40,000

Bookkeeping expense

1,20,000

0

0

Tax audit expense

15,000

0

0

Net cost

2,10,000

1,85,000

1,40,000

 

Even if you assume 50% of the revenue transaction through banking channel, it has a huge impact, the more you transact digitally, the more you save, this surely is a great encouragement towards a cash less economy, especially in unorganised sector.

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