Income Tax

Tax implication on the small business

Tax implication on the small business

Income tax laws are professed to have a complex structure in India as there are number of claims, deductions, disallowance and exemptions made under the law.  To allow the total income on which the liability of tax is calculated, one has to conduct numerous calculations to the net profit of the enterprise.  One has to be well-versed about the nature of the income, what expenses are allowed or disallowed and what exemption to consider and what not to consider. All these complexities prove hard to understand without the support of a charted accountant and consultants in most cases.

‘Presumptive basis’ for small business

In order to avoid these highly complex calculations and to further promote ease of business for the small owner business. The Indian government has launched a scheme for a certain category of business that specifically has low volume of businesses and also low turnovers. This method is referred as calculation of gain and profit of the business on the “Presumptive basis” mention under the income tax law in India. According to this method, the ‘total income’ for a financial year is presumed to be a specific percentage of the company’s turnover in that financial year.

Applicability of ‘Presumptive’ basis on Small Business

Section 44AD of the Income Tax Act, 1961[1] makes small business persons more independent from the complex tax calculations and also significantly reduces their burden of legal compliances. The owners of these small businesses do not require maintain books of account and are not required to audit them with a chartered accountant

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The salient features of the Presumptive tax are mentioned below:

salient features of the Presumptive tax

Eligible Assessee

This section of Presumptive taxation is only applicable to an Individual, Hindu Undivided Families or a partnership firm that is a resident of India. Also, it particularly mentions that it will not be applicable to the Limited Liability Partnership (LLP) hence, it cannot obtain these benefits.

If any assesses want to opt out of this scheme, then he will not be eligible to claim deduction under the sections 10A, 10AA, 10B, 10BA or any other provision under the heading “Deduction in respect of certain incomes”.

Eligible business                              

The benefits under this provision of Presumptive taxation under this act will not be eligible to the certain assesse who are indulged in following businesses:

  • Any individuals who are carrying a profession defined under section 44AA.
  • Any individual earning income from the professions which involves commission or brokerage.
  • Any business related to agency.
  • Any business relating to leasing or hiring of goods or any business involve plying referred in section 44AE.

Presumptive Profit

All the assesses that are eligible under this provision and involved in the business and whose receipts or total turnover in the previous financial year does not exceed INR 2 Crores, can proclaim eight percent of the total turnover or total gross receipt or a higher amount. Furthermore, the assesse can declare only six percent of the total turnover. It is much simpler compared to any normal business as in this scheme the assesse may simply obtain his total income by calculating 8% or 6% depends solely from business to business. The owner may not require maintaining any books of accounts and just simply pay taxes on the specified percentage of the business.

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According to the income tax act, small business can add depreciation under section 35AD on the manufacturing units. The condition to claim extra depreciation is that the plant should be installed during the year itself. The additional depreciation of 20% above the normal depreciation can use claimed when the machinery is in use.

Opting out

Where an owner of a  small business choose to announce his profit in respect to this section and later opt out to not follow this scheme of ‘presumption basis of declaring income’ in the next five years, then  he shall not be permitted to opt again for this section for next five years from the year he has opted out. In this specific case, the business will be under obligation to maintain books of accounts and get them audited as required by law under section 44AB of the Act.

Salary and interest to partners

The Salary and interest paid to the partners of any small business partnership firm shall not permit to be deducted from the net profit at the rate of 6% or 8% depending on the circumstances of each case.

Presumptive taxation for Small Professionals:

The presumption on the basis of the earning of small professionals is quite similar to the small business. The professional who is eligible under law includes accountancy, technical consultancy, Medical, Legal, Architectural or any other professionals as defined by the official gazette.

The eligibility criteria to calculate small professional’s income on a presumptive basis is only if their receipt not exceeds Rs. 50 Lakhs.

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The relief in the tax laws provided to the owner of small business further contribute in the growth of the economy. There no doubt that this method of calculating the tax has provide a huge relief to the owners of small businesses. The business owner does not have to maintain the book of accounts and only to declare a certain percentage of the total turnover of the business and professional receipts. The business owner does not require involving them self in explaining and giving justification for all the expenses and claims to the designated tax officer in their course of business.

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