One of the key proposals in this Budget has been the introduction of a presumptive taxation scheme for professionals. This had been one of the recommendations of the Justice Easwar Committee, which has been accepted, though in a modified form. A similar presumptive scheme has been in existence for many years for small businesses. How does the new scheme work, and how would it impact professionals?
The scheme would apply to all professionals from the next financial year, i.e. 2016-17. Professionals would mean lawyers, doctors, engineers, architects, chartered accountants, technical consultants, interior decorators, film artists (actors, cameramen, directors, music directors, art directors, dance directors, editors, singers, lyricists, story writers, screenplay writers, dialogue writers and dress designers), income tax consultants (who qualify as authorised representatives), company secretaries and information technology professionals. It would apply not just to individuals carrying on such professions but also to other entities such as partnership firms and limited liability partnerships engaged in such professions.
Only those persons whose gross receipts from the profession do not exceed 50 lakh during the year (as against 1 crore recommended by the Easwar Committee) can avail the benefit of the scheme. Under the scheme, 50% of the gross receipts (as against 33.33% recommended by the Easwar Committee) or such higher sum than that, claimed to have been earned by the taxpayer, is taxable as income from such profession. No expenses are allowed, and depreciation is regarded as having already been allowed. The significant procedural advantage is that books of account and vouchers are not required to be maintained by such a person, nor is any audit required in such a case.
In substance, any professional who falls within the criteria of the scheme is required to offer at least 50% of her gross receipts to tax as her professional income. When would she offer a higher amount to tax? Where she has acquired assets exceeding such 50% of her gross receipts, she would need to offer such higher amount to tax, to be able to substantiate the acquisition of such assets. If she offers only 50% to tax, but makes investments or acquires assets exceeding such income, the excess investments or assets cannot be regarded as having been acquired out of disclosed income.
What happens if her income is actually below 50% of the gross receipts? In such a case, the taxpayer has two options—either offer 50% of gross receipts to tax as professional income, or maintain books of accounts and vouchers, get the accounts audited, and file the return claiming such lower income. In the latter situation, the taxpayer would have to justify all the expenses that she claims against the gross receipts. This would certainly create a difficulty for young professionals who are in the early stages of their careers, where their fee income may not be sufficient to cover their fixed overheads, such as rent. Such professionals would necessarily have to get their accounts audited if their taxable income (from all sources) exceeds 2.5 lakh. One wishes that the requirement of audit would not apply to such young professionals, maybe for the first five years of their professional career.
In the case of partnership firms falling within the ambit of such a scheme, there is no provision for allowance of interest and remuneration to partners in computing the professional income, as applicable to all other partnership firms. Such remuneration allowable is generally around 60% of the profits, and therefore many professional partnership firms may not find this new presumptive tax scheme attractive. What happens if the partnership firm has paid interest and remuneration to partners? This may result in double taxation, since the firm would be regarded as having been allowed all permissible expenses in the computation of the 50% net income, while the remuneration and interest received by the partners would be taxable in their hands.
It may be noted that the scheme applies only to the professional income, and all other taxable income, such as interest and capital gains, has to be considered as a part of the total income offered to tax. So, deductions for life insurance premium, Public Provident Fund, National Pension System, mediclaim and donations would be allowed against such income.
The scheme does not apply to a professional who also carries on a business. For instance, if an interior decorator not only charges fees as a professional, but also carries on a business of undertaking contracts of making furniture, painting, and other such work, only the professional fees that she receives would be covered by the scheme. Her business income may either be covered by the presumptive scheme for business, or would be taxable on the basis of her actual profits of that business.
The presumptive taxation scheme is, therefore, attractive for mid-size professionals, who do not have to undergo the hassles of maintenance of books of accounts and vouchers, audit, as well as a scrutiny of income tax assessment.
Gautam Nayak is a chartered accountant.