Taxation has always been a major issue for small and medium enterprises in India. It is a cumbersome task for entrepreneurs to keep accounts, file returns, and interpret complicated tax legislations. In an effort to ease the process, the Indian government promulgated the Presumptive Taxation Scheme (PTS) under Section 44AD of the Income Tax Act, 1961. The scheme allows payment of tax on a presumptive basis by eligible businesses with turnover of up to Rs 2 crores, thereby making compliance much easier.
While everyone has a common notion that companies like ours that have up to Rs 2 crores of earnings have zero tax liability, the reality is otherwise. Companies under this scheme do not pay tax on total turnover, but only on a fixed rate of their turnover, which can lead to low or zero tax based on exemptions and deductions availed.
This blog explains the complete understanding of how small businesses will be benefited from this scheme, the real tax implications, the eligibility criteria, compliance requirements, and major advantages. It also dispels misconceptions and difficulties pertaining to zero tax on turnover up to Rs 2 crores.
Introduction
Small and medium enterprises are the pillars of the economy of India, accounting for employment generation, industrial production, and national GDP. Small business entrepreneurs, though, complain of time consumption and complexity in complying with taxations.
The government brought into effect Section 44AD of the Income Tax Act, 1961, in favour of small businesses to provide them with relief by
- Repealing the necessity to maintain precise books of accounts.
- Eliminates the need for a tax audit on qualified businesses.
- Enables companies to pay tax on a percentage basis of their turnover.
Although this scheme has been very helpful, there are a few misconceptions, especially regarding the concept of “zero tax on turnover up to Rs 2 crores.” Most entrepreneurs mistakenly believe that if their turnover is less than Rs 2 crores, they are totally exempt from tax, which is not true. Rather, the scheme provides for easy calculation of tax and possibly reduced tax liability.
Applicability of Section 44AD Presumptive Taxation
The Presumptive Taxation Scheme (PTS) of Section 44AD is applicable to a broad spectrum of small businesses but also has some limitations.
Who Can Avail Section 44AD?
- Sole Proprietorships, Hindu Undivided Families (HUFs), and Partnership Firms (but not LLPs).
- Firms involved in trading, manufacturing, retail, wholesale, and general services fields.
- Organizations with gross turnover or receipts up to Rs 2 crores in a financial year.
Who Cannot Avail of Section 44AD?
- Companies and Limited Liability Partnerships (LLPs).
- Professionals like doctors, lawyers, chartered accountants, and architects (who need to file under Section 44ADA instead).
- Businesses having brokerage, commission agency, or agency-based transactions.
- Businesses with turnover exceeding Rs 2 crores.
The scheme is significantly advantageous for small businesses as they can file the returns with ease, escape the audits, and substantially lower their compliance costs.
How Zero Tax Benefits Companies with Up to Rs 2 Crore Turnover?
It’s a common fallacy that companies with up to Rs 2 crore turnover are not required to pay any tax. This is somewhat incorrect. However, the government has framed the tax regime such that-
- Tax is NOT assessed on gross turnover but on presumed income.
- Firms need to report a proportionate amount of turnover as taxpaying income, which is 8% of overall turnover if transactions are cash-based or 6% of overall turnover if transactions are electronic (bank transfer, UPI, net banking, etc.).
Such reported income is then taxed as per relative income tax slab rates as may be applicable.
Major Advantages of the Presumptive Taxation Scheme
- No Need to Keep Detailed Books: Firms are exempted from maintaining detailed books of income and expenditure, minimizing accounting efforts and compliance tension.
- No Tax Audits Needed: Firms with turnover exceeding Rs 1 crore are usually obligated to go for tax audits. But under Section 44AD, firms with turnover not exceeding Rs 2 crores are exempted from doing so.
- Promotes Digital Transactions: To facilitate cashless transactions, the percentage of taxable income for digital payments is cut down from 8% to 6%. This helps entrepreneurs go for electronic payment methods as they provide better transparency.
- Tax Filing Made Easy: Entrepreneurs can simply submit their returns via ITR-4, which is relatively easier than any other income tax return form.
- Tax Benefit: Because companies report a predetermined percentage of turnover as income, their taxable income can be less than their true profits, and thus, they pay less tax.
Challenges and Limitations
In spite of its benefits, the scheme is faced with some challenges-
- No Extra Deductions Permitted- Unlike regular tax filings, enterprises are not permitted to claim expenses on allowances such as rent, wages, advertisements, or depreciation.
- Five-Year Lock-In Provision- Once an enterprise chooses to go under Section 44AD, it has to stick to it for five continuous years. If they opt out, they cannot rejoin the scheme for the following five years.
- Not for High-Expense Enterprises- Companies with a high cost of operations will find this scheme less advantageous since they cannot claim expenses separately.
Conclusion
The Zero Tax on Business Turnover up to Rs 2 Crores is a misinterpreted notion. Although businesses with turnover up to Rs 2 crores enjoy the ease of tax compliance under Section 44AD, they are not entirely exempt from tax. Rather, they are taxed on a fixed presumptive income, which is less than actual profits, and thus, tax payments are minimal or even zero in most instances.
For small firms, availing of the presumptive taxation system is a sound financial choice that provides lower compliance requirements, savings in costs, and tax benefits. Familiarity with rules and restrictions will help businesses make effective tax decisions and reap their maximum benefits from this system.
References
The Income Tax Rules, 1962
The Income Tax Act of 1961 (Act No. 43 of 1961)
