Presumptive taxation for individuals is a good move

One of the key proposals in this budget was the introduction of presumptive taxation scheme for professional individuals, HUF and partnership firms (excluding limited liability partnership).



Under presumptive taxation scheme, the profits of a taxpayer is deemed to be at a prescribed percentage of the gross receipts from business and the taxpayer is not required to maintain books of accounts if they opt to offer such prescribed percentage to tax. The benefit of presumptive taxation scheme was earlier available for small and medium enterprises i.e., non-corporate businesses.



However, based on the popularity of the scheme among small and medium enterprises and recommendations made by a panle report under the chairmanship of justice R V Easwar, the presumptive taxation scheme has now been extended to professional individual, HUF and partnership firm (excluding limited liability partnership). As per the proposal, professionals with receipts of less than Rs 50 lakhs in a year may offer 50 per cent of their gross receipts from business to tax as profits for the year. Where profit is less than 50 per cent, the taxpayer will be required to maintain books of accounts and have the same audited as per the provisions of the law. The scheme is applicable only for income earned under the head business and profession. Accordingly, if a taxpayer has income from other source, viz interest or dividend then such income has to be offered to tax at normal prescribed rates.



For example, say a professional individual earns Rs 40 lakhs from his profession and has dividend income of Rs 10 lakhs. Then gross taxable income of the individual will be Rs 30 lakhs – 50 per cent of Rs 40 lakhs i.e., Rs 20 lakhs (income from business and profession) plus Rs 10 lakhs (income from other sources). An individual can also claim deductions under chapter VIA of the Act from its gross taxable income.



Further, if a taxpayer opts to be taxed under the presumptive taxation scheme and offers 50 per cent or more of their gross receipts as profits then any deduction allowable under section 30 to 38 of the Act will deemed to have been given full effect and no further deduction of any business expense will be allowed for that year. For example, say a professional firm opts to offer 50 per cent of its gross revenues then deduction on account of salary to partners and interest on capital will deemed to have been allowed in full and no additional expenses can be claimed. One of the burning issues about the presumptive taxation scheme has been the determination of gross total receipts and whether VAT, service tax will form a part of it. Though the government has addressed these issues in the past, a taxpayer opting for the presumptive taxation scheme has to be extra cautious while arriving at his gross total receipts and should ensure that the same tallies with form 26AS/ bank statements.



The extension of presumptive taxation scheme for professionals is a positive attempt made by the government to simply taxation procedure and facilitates ease of doing business in India for small and medium professionals. Though the prescribed 50 per cent rate seems to be on the higher side, the taxpayer’s decision to opt for the scheme will depend on number of factors like the quantum of actual expenditure, interest on borrowings, depreciation available, quality of accounting system etc. In the recommendation report made under the chairmanship of Justice R V Easwar, it was suggested that professional with receipts of less than 1 crore be given the option of presumptive tax scheme.