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Understand and Ease the Burden of Tax Compliance with Section 44AD

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Section 44AD aims to lessen the tax burden on small assessees or taxpayers. No person covered under the provisions of this section shall be obliged to keep or maintain Books of Account or to audit them.

To ease the financial burden of paying taxes, the Indian government has introduced various taxation schemes. Section 44AD is a taxation scheme where individuals such as business owners and small-scale enterprises are not required to audit their account books for filing taxes. 

Recent updates from the 2020 general budget include individuals earning less than Rs 50 lakhs to receive Section 44AD benefits. From now on, it only pertains to a resident individual, a Hindu Undivided Family (HUF), or a partnership company other than an LLP. Suppose you are running a small business and must declare your income to the government. In that case, Section 44AD of the Income Tax Act (1961) applies to you.

Did You Know? Section 44AD is a tax regime for small businesses, and Indian entrepreneurs welcome it.

The Objective of Section 44AD

Section 44AD eases the compliance burden on small taxpayers, encouraging entrepreneurship in India. It is highly applicable to sole proprietorships and limited liability partnerships (LLP) with a turnover of up to 2 crores.

New Condition (Section 44AD(4)) for 2023

According to Section 44AD(4), if an eligible assessee declares profit for any prior year in accordance with the provisions of this section and then declares profit for any of the subsequent five assessment years relevant to the prior year without complying with the provisions of subsection (1), he is ineligible to benefit from the provisions of this section for the subsequent five assessment years.

Also Read: What is Presumptive Income under Section 44ADA of Income Tax?

Let’s use an example to understand the situation better:

Mr. H’s revenue for the fiscal year 2018–19 was Rs. 1.5 lakhs. He chooses a presumptive income scheme under section 44AD and reports an annual income of Rs. 12 lacs. Mr. H’s revenue for the fiscal years 2019–20 is Rs 2.1 crore, and for 2020–21 is Rs 1.9 crore. 

Can section 44AD be chosen for the fiscal years 2022–23? 

The taxpayer cannot choose a presumptive income plan for the following five years. Section 44AD(4) of the Income Tax Act states that if a taxpayer opts for the presumptive income scheme under Section 44AD and declares profits at a rate lower than 8% or 6%, as the case may be, the provisions of Section 44AD will not apply to him for the next five assessment years

Features of the Section 44AD Presumptive Tax Scheme

Subsection (4) of Section 44AD is redefined in the 2021 Union Budget. Thus, to take advantage of the Presumptive Taxation Plan, you must meet the following requirements:

  • You must follow the scheme requirements for at least five consecutive years to clear your profits.
  • The presumed benefits will be lost if you demonstrate and report earnings using a typical company ITR 3 before 5 years following enrollment in the Plan. You could do this by demonstrating and reporting earnings using a typical company ITR 3. Also, the tax plan prevents you from receiving presumed tax benefits for five years.
  • When you first submit taxes under ITR 3 for regular business, the 5-year clock ticks. The government implemented the 5-year ban to deter scheme misuse.
  • The threshold for implementing the Presumptive Tax Scheme was increased from 1 Cr. to 2 Cr. During the 2016 budget.
  • The minimum required net income is 6% if receipts are digital and 8% of your annual sales.
  • You are exempt from keeping the books of accounts under the normal taxation rules for commercial entities. Moreover, an audit examination is not required for your accounts books.
  • The assessee didn’t pay advance tax before the change. However, if your expected tax exceeds 10,000, you must pay 100% advance tax by March 15 of the current financial year. This is under Section 44ADA‘s Presumptive Taxation System.
  • To lessen the compliance burden, you must file an ITR4, which is significantly shorter and easier than an ITR3.
  • Businesses, not professionals, are subject to the 5-year requirement for maintaining the Presumptive Taxation System.
  • You cannot use Section 44AD advantages while claiming a deduction under Sections 30 to 38, including depreciation or unabsorbed depreciation.
  • As a result, determine the write-down value (WDV) for a legitimate claim after accounting for depreciation as if under Section 32.

Also Read: Income Tax Refund Status Online – Learn How to Check ITR Refund Status Online

Eligibility Requirements under the Income Tax Act’s Section 44AD

Assessees with a gross annual income of more than 2 crores must pay income tax following ordinary tax laws. They are not eligible for Section 44AD benefits. The depreciation and cost deductions allowed by Sections 30 to 38 are not permissible when an assessee asks for relief under Section 44AD. The government also gives businesses that do transactions online incentives worth up to 8% of their gross income.

The following taxpayers may use Section 44AD of the Income Tax Act:

  • Professional service providers, whether people or companies
  • Partnership-forming businesses (excludes limited liability partnership firms)
  • Unbroken Hindu families
  • Professionals include lawyers, doctors, interior designers, technical consultants, architects, engineers, and chartered accountants
  • Professionals and businesses with annual revenues below 1 crore.
  • Those who, during the tax year, did not make any deductions under Sections 10A, 10B, 10AA, 10BA, 80HH, or 80RRB.

People and Businesses Ineligible for Tax Deduction Under Section 44AD

According to Income Tax Section 44AD, people and businesses in the following categories are ineligible for tax deductions:

  • Those who run brokerage firms work for agencies or receive a commission-based salary.
  • Those employed in one of the professions listed in Section 44A (1)
  • Those companies with a gross or overall turnover of greater than ₹2 Crores
  • Foreigners who live in India and non-resident Indians
  • Those who have previously benefited from tax benefits under Sections 10A, 10B, 10AA, and another 10BA during the assessment year.

Application of Section 44AD

  • Section 44AD applies to all businesses except leasing or renting products. The assessee cannot claim deductions under Section 44AD since Section 44AE’s rules cover these specific enterprises.
  • As long as they are Indian residents, Hindu Undivided Families (HUFs), individual assessees, and partnerships are all eligible to make deduction claims under Section 44AD. Limited liability partnerships (LLPs) are exempt from the application of this clause.
  • Every assessee may file returns at 8% or higher if they file income tax returns under Section 44AD. He or she will be required to keep accounts reports and have them audited by a licensed Chartered Accountant. This is if they choose not to make returns under this section and earn less than 8% of their turnover.
  • Assessees who practice any of the listed professions in Section 44AA are exempt from Section 44AD. Assessees who work for an agency, get commissions or engage in broker transactions are ineligible to claim a deduction under this section.

Also Read: Section 44AD of Income Tax Act and It’s Features & Applications

Amendments to Section 44AD of the Income Tax Act

Section 44AD provides unique provisions for company earnings and losses. The following are some of them:

  • Assets mentioned in subsection (1) should be accounted for in tax calculations and deductible based on the pertinent assessment years.
  • If the assessee operates a firm, the interests and compensation given to partners will be subtracted from the estimated income.
  • Companies applying for tax returns under Sections 44AB and Section 44AA are not eligible for the provisions indicated under Section 44AD. They must consider the gross receipts and monetary restrictions this section imposes in their calculations.

Conclusion

Every company must maintain records of its formal books of accounts, profit and loss statements, and other documents used to calculate its tax liability. Nevertheless, since Section 44 AD of the Income Tax Act came into effect, they are no longer required to inspect the books of accounts. Instead, they are given a rate based on the Presumptive Taxation System slabs.  

Anyone can apply for Section 44AD online through a CA or private agency. This is done by visiting the Income Tax Department website. This clause will ultimately save time and compliance costs.

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