Opt for presumptive tax scheme only if you can adhere to its rules

Higher limits are positive, but remember you must stick to scheme for 5 yrs

To ease compliance and promote non-cash transactions, Budget 2023 has proposed to increase the threshold limits for the presumptive taxation scheme (PTS). Under this scheme, the taxpayer is required to pay tax on the basis of presumptive income, calculated as a percentage of turnover. The taxpayer doesn’t have to maintain detailed books of accounts and calculate the financial year’s actual profit or loss.

While Section 44AD of the Income-Tax (I-T) Act applies to small businesses, Section 44ADA applies to small professionals. Bharath Gangadharan, Senior Associate, SKV Law Offices, says, “Small businesses, certain professionals, self-employed individuals, and freelancers are eligible to opt for this scheme.”

The change and its impact

For businesses eligible for this scheme (under Section 44AD), the Budget has hiked the turnover or gross receipt limit from Rs 2 crore to Rs 3 crore. The change will apply provided cash receipts during the financial year don’t exceed 5 per cent of total turnover or gross receipts.

The threshold turnover limit for professionals has been increased from Rs 50 lakh to Rs 75 lakh. The 5 per cent cash limit applies here too.

The revised limits will apply from FY 2023-24 (AY 2024-25).

With the threshold levels being hiked, more taxpayers will be able to opt for the scheme. Pratyush Miglani, managing partner, MVAC Advocates & Consultants says, “This will ensure simpler tax filing, and lead to much lower taxes for the businesses and professionals covered.”

Five-year rule

While the increase in limits is a positive step, taxpayers should opt for this scheme only if they can adhere to some conditions that apply. One is that once a taxpayer opts for it, he must adhere to it for at least five years in continuation.

Sandeep Bajaj, managing partner, PSL Advocates & Solicitors says, “If this is not done, the assessee’s books of account for the preceding years may have to be audited.”

Gangadharan adds, “The past ITRs could be reviewed, and any difference in tax liability will have to be paid along with interest and penalty, if applicable.”

TDS vis-à-vis foreign clients

If an Indian professional caters to foreign clients and the latter doesn’t deduct tax at source (TDS), the former should disclose the total income in his tax return and pay tax on it. Suresh Surana, founder, RSM India says, “Since the resident payee would not be subjected to any withholding, he would be liable to pay advance tax if the tax liability exceeds Rs 10,000.”  

Points to remember  

Taxpayers who opt for PTS mistakenly think they don’t need to observe any provision of the I-T Act and often end up getting notices from the tax department.

One point to keep in mind, according to Bajaj, is that once an assessee opts for this scheme, he can’t claim profession- or business-related deductions.

Freelancers or self-employed people who work with international clients on gig websites should be careful.

Gangadharan says, “Keep proper records of all transactions and income. Ensure that TDS is cut by your foreign clients, you receive all the TDS certificates, and you preserve them for future reference.”

The taxable income of a business is normally calculated by deducting permitted expenses from revenue. Under PTS, a sum equal to eight per cent of total turnover or gross receipts is deemed to be the profit on which tax can be levied. This figure is six per cent in the case of digital receipts. In case of a professional, a sum equal to 50 per cent of gross receipts is deemed to be the profit.

Surana says, “Taxpayers eligible for PTS should determine whether their expenses exceed the specified percentage threshold. If a professional’s expenses are less than 50 per cent of gross receipts, that person will find it beneficial to opt for the presumptive scheme.”

Those who opt for PTS don’t need to pay advance tax according to a quarterly schedule. However, they must pay 100 per cent advance tax by March 15 of the financial year.

Assessees with multiple businesses must remember that the total turnover of all their businesses will be considered.

Observe rules for advance tax payment

• Person opting for PTS is liable to pay the whole amount of advance tax on or before March 15 of the financial year
• If she fails to meet this deadline, she will be liable to pay interest under Section 234C
• Under this section, the taxpayer is liable to pay simple interest of 1 per cent per month or part of a month for short-payment or non-payment of instalments of advance tax
• Any amount paid by way of advance tax on or before the 31st day of March shall also be treated as advance tax paid during the financial year ending on that day