The Hindu Business Line : Ominous omnibus

The pull of the omnibus presumptive tax scheme is so powerful that even professionals with a thriving practice would be tempted to clamber onto its bandwagon.

S. Murlidharan

The Finance (No. 2) Bill, 2009 contains several provisions and amendments that merit serious consideration. One such measure is the revamping of the presumptive tax scheme. As it is, there are principally three schemes in vogue with none of them registering even a modicum of success — one for retailers with a turnover not exceeding Rs 40 lakh, the second one targeting truckers, and the third, civil contractors with gross receipts not exceeding Rs 40 lakh.

It is proposed not only to merge the first and the third but also make it broad based so much so that anyone at all, be s/he a doctor, engineer or even a manufacturer, can get onto that bandwagon so long as his/her turnover/gross receipts does not exceed Rs 40 lakh during the previous year.

Effective a year later

Hitherto only retailers and civil contractors made the grade. Curiously, the scheme is going to take off after a lag of one year, that is, it is going to be operative only from the assessment year (AY) 2011-12. There is also a marginal increase in the presumptive profit margin on turnover/gross receipts — 8 per cent instead of 5 per cent that was earlier presumed for the retail trade. Civil contractors even earlier were deemed to have made a profit of 8 per cent on their gross receipts.

The pull of the omnibus presumptive tax scheme is so powerful that even professionals with a thriving practice would be tempted to clamber into its bandwagon. The Working Group on Rationalisation of Direct Taxes way back in 1997 had suggested that a professional’s profit should be deemed to be 30 per cent. The Bill, adopting a one-size-fits-all, approach deems it at 8 per cent. This is ridiculously low.

Apologists of the scheme would defend it on the ground that it is better to collect some tax rather than none at all from the hard-to-tax category. But the point is what prevented the Government from differentiating between a business and profession?

High profit margin

It is common knowledge that the profit margin in a profession is the maximum because a professional employs a skeletal staff if at all and incurs minimal overheads. He spends only his cerebral energy as raw material. It is not as if the Income-Tax Department does not know this.

Section 44AB, dealing with mandatory tax audit, draws a line between a business and profession when it mandates tax audit for businesses with turnover exceeding Rs 40 lakh and professions with gross receipts exceeding Rs 10 lakh. This is revealing and telling — what a businessman makes with a turnover of Rs 40 lakh, a professional does so with just Rs 10 lakh of gross receipts.

In its wake, one should not be surprised to find blue-blooded professionals like doctors and lawyers earning sizeable income blithely paying tax under this pleasantly agreeable scheme. Imagine this. A legal practitioner with a flourishing practice earning Rs 40 lakh of fees on paper which he has declared in his return as well, has to pay tax just on Rs 3.2 lakh and if he happens to be a venerable senior citizen, this translates into a tax liability of Rs 10,000 ignoring the education cess. And if he happens to be younger, he would still emerge with minor bruises — Rs 18,000 ignoring the education cess.

Will widen the gulf

It seems the scheme insofar as it reaches out to professionals is not a presumptive tax scheme — it is downright cosseting, nay, a tame surrender. Even the professionals themselves might have taken a 25-30 per cent margin in their stride.

Apart from giving a huge concession and preference in the matter of tax to a section of the tax-paying populace and thus creating two classes of businessmen and professionals — the so-called small and big — the scheme will accentuate the gulf in the matter of taxation between the salaried class and the businessmen.

A vast section of the business community would board this tax omnibus even while a vast percentage of salaried class is exposed to greater tax liability. The only silver lining is the scheme’s doors have been shut to LLPs. But even big partnerships for which the door is open would be tempted into breaking up into smaller ones if only to be within the Rs 40 lakh limit.

(The author is a Delhi-based chartered accountant.)

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