Get a hike in presumptive tax limits now
2 min read . Updated: 02 Feb 2023, 02:06 PM IST
PremiumProfessionals earning up to ₹75 lakh in a financial year will now be eligible for presumptive taxation, as long as their cash receipts are within the 5% cap of overall turnover.
Finance minister Nirmala Sitharaman has increased the threshold limits for availing presumptive taxation, a move that will benefit numerous small businesses and professionals.
“Micro enterprises with turnover of up to ₹2 crore and certain professionals with turnover of up to ₹50 lakh can avail the benefit of presumptive taxation. I propose to provide enhanced limits of ₹3 crore and ₹75 lakh, respectively, to the tax payers whose cash receipts are no more than 5%," the finance minister said in her budget speech.
“The presumptive tax regime is a simplified way for filing tax returns for smaller businesses and professionals. The concept of presumptive taxation is ‘what you declare in the returns is treated as your income’. It takes away the burden on the tax-payer to declare business-related expenditure, etc. This will ease compliance burden for lot of small businesses and professionals," said Aditya Sesh, founder and managing director, Basiz Fund Services.
Presumptive taxation for businesses is covered under section 44AD of the Income Tax Act. As of now, businesses which have a revenue of up to ₹3 crore can avail the benefit of presumptive taxation, as long as not more than 5% of this revenue is in cash receipts.
For example, a businessman who has a revenue of ₹3 crore (the maximum limit) and meets the eligibility criteria of presumptive tax is liable to pay tax on only 8% of the revenue, or ₹24 lakh.
Similarly, professionals earning up to ₹75 lakh in a financial year will now be eligible for presumptive taxation, as long as their cash receipts are within the 5% cap of overall turnover.
For example, let’s consider a lawyer earning ₹75 lakh in a financial year from his practice; he will be liable to pay tax on 50% of his gross receipts or ₹37.5 lakh. Not just an individual, but partnership firms and hindu undivided family (HUF) can also avail the presumptive tax mechanism. It excludes limited liability partnerships (LLPs).
“The 5% cash limit ensures that there is more transparency. Allowing more businesses to use presumptive tax mechanism will improve the ease of doing business for smaller enterprises," says Ashok Shah, founding partner of NA Shah Associates.
“The enhancement of presumptive tax limits will reduce the compliance burden for small businesses and prompt them to avail of this option. Small business owners don’t need to maintain separate bank account statements, separate cash files, sales files or audit books to fulfil the compliance requirements. If they meet the enhanced eligibility criteria, they can simply go through the presumptive tax mechanism," said CA Abhishek Soni, co-founder of Tax2win.
Under presumptive taxation, small businesses and professionals are exempted from maintaining their books of accounts or getting audits done. Otherwise, businesses are required to maintain books of accounts as per the IT Act.
While the move will benefit more businesses and professionals, there is a cooling-off period of five years if they opt out of the scheme midway. So, if you were to opt for the scheme in FY24, FY25 and FY26 but not in FY27, then you can’t avail presumptive taxation for five years from FY28-FY32.
It is also important to remember that once you opt for presumptive taxation, you cannot claim tax deductions that are otherwise available to a regular taxpayer.
