Given that the economy is in a prolonged slowdown and the common man is refusing to loosen his purse strings, the government may be looking to ease personal income-tax slabs/rates in the Budget in February 2020 to boost consumption. At the same time, to shore up its tax revenues, it is anticipated that the government may tighten the presumptive taxation norms applicable for small businessmen and professionals.
What is it?
To improve the ease of doing business for small businessmen and professionals, the Income-Tax Act provides for calculation of their income for tax purposes on a presumptive basis.
Under Section 44 AD, any resident individual, Hindu Undivided Family (HUF) or partnership firm running a business (other than plying, hiring or leasing goods carriages) can claim 8 per cent of the total turnover or gross receipts as income, if the total turnover or gross receipts do not exceed ₹2 crore in a year.
A lower 6 per cent of the total turnover or gross receipts can be claimed as income, in case of turnover or receipts received as cheque/draft or in electronic mode. Such amount will be then charged to tax at the regular slab rates under the head ‘Profits and gains from business or profession’. Since the income is presumed to be 8 per cent or 6 per cent of the turnover or receipts, this does away with the need for maintenance of meticulous books of accounts or the need for audit, thus relieving the small businessmen of this burden.
Those who opt for this scheme in a particular year must opt for it continuously for the next five years if they are eligible (annual turnover not exceeding ₹2 crore). If there’s a break, they will not be eligible to file returns under the presumptive scheme for five years following the break.
Similarly, under Section 44 ADA, resident assessees engaged in legal, medical, engineering or architectural profession, or the profession of accountancy, technical consultancy, interior decoration or any other profession as notified by the Central Board of Direct Taxes (CBDT), and whose total gross receipts do not exceed ₹50 lakh a year, can claim 50 per cent of these receipts as deemed income under the head ‘Profits and gains from business or profession’.
There is no five-year rule for professionals as there is for businessmen to opt for the presumptive scheme. They can move in and out of the scheme according to their income level each year. This suits them well as revenue flows may tend to be lumpy for them, coming in, say, only on the completion of a project or a contract and not uniformly every month or year.
What can change?
So, how can the screws on presumptive taxation be tightened in the Budget? Experts say that the tweaks can be around the eligible turnover under Section 44 AD or the rate at which the presumptive profits are calculated under the same.
Sandeep Jhunjhunwala, Director, Nangia Andersen LLP, expects that in order to restrict the application, the turnover limit for businesses to be eligible for presumptive taxation will be reduced to ₹1 crore again. It was increased from ₹1 crore to ₹2 crore in Budget 2016. He also expects the rate of taxation to be raised from the current 6 per cent/8 per cent.
Naveen Wadhwa, DGM - Research & Development, Taxmann Publications, says the eligible turnover could be synchronised with the eligibility for composition scheme under GST, which stands at ₹1.5 crore.
The separation of cash and non-cash transactions is also leading to revenue leakage, according to experts. They say that since the eligible businesses are not obligated to maintain any records, they can continue to fall under the presumptive scheme by restricting digital transactions (which leave a trail) to under ₹2 crore for while, entering into cash transactions for the rest of the turnover/receipts. Even if the total turnover or receipts fall under ₹2 crore, checking for the bifurcation in every case to apply the differential rates is tedious and sometimes not possible.
Plugging gaps
There is scope for plugging gaps in Section 44 ADA as well. With only 50 per cent of the professional receipts up to ₹50 lakh considered as income, presumptive taxation for professionals is another area of possible revenue leakage for the government.
In comparison with a salaried professional earning under ₹50 lakh, who just gets a standard deduction of ₹50,000, professional tax deduction of up to ₹2500 and then the Chapter VI A deductions (ie, Sec 80C, 80D, 80G, etc), a professional working on contract and filing returns under the presumptive scheme gets a direct 50 per cent deduction for expenses (since only 50 per cent of receipts is considered as income). He/she is eligible for Chapter VI A deductions beyond that. Thus, there is scope for considering a higher percentage of professional receipts as income. A 30-35 per cent deduction for expenses seems more realistic, say experts.
Taxmann Publications’ Wadhwa also sees room for eliminating GST revenue leakage from professionals by mapping the income disclosed under Section 44 ADA with the SAC code of the service(s) for which GST has been paid by them.
It is noteworthy that the ITR-4 tax return form which is applicable for presumptive taxation assessees, has already been tweaked in 2019, seeking information on the turnover/gross receipt reported for GST along with the GSTIN, in order to enable cross-verification. More details on the GST paid as explained above may be asked in the ITR-4 form from next year onwards.