Running a business is very difficult task since it includes many tedious activities such as after sales, record-keeping, monitoring etc. Considerable amount of funds are required to perform such tasks. Net profit of the business is calculated by deducting all the expenses from the total sales during the financial year. Computation of net profit is also crucial since the expenses for which supporting documents are available could be claimed. Considering these issues, Income-tax department has provided a separate section 44AD for taxation of business on presumptive basis.
Key points from Section 44AD- Taxation of business on presumptive basis:-
- This section is applicable to Individual, Hindu Undivided Family (HUF), resident partnership firm only whose turnover or gross receipts are less than Rs.1 crore. In Budget 2016, this limit has now been increased to Rs. 2 crores.
- Limited liability partnerships (LLPs) are specifically excluded from application of this section.
- The provisions of this section shall not apply to-
a. a person carrying on profession as referred to in sub-section (1) of section 44AA; However from the next fiscal, professionals having gross receipts less than Rs. 50 lakhs are also covered within the ambit of section 44AD as per Budget 2016 . However, instead of 8 % they will be required to disclose 50 % of their gross receipts as their income.
b. a person earning income in the nature of commission or brokerage; or
c. a person carrying on any agency business.
- As per this section, a taxpayer is required to disclose at least 8% of the total sales/turnover as net profit for the financial year. In other words, taxpayer may show any amount of net profit which is more than 8% of the total sales/turnover.
- While computing such 8% deemed net profit, it is assumed that all the expenditures are already considered. Hence, no further deduction is available from the sales.
- However, if a partnership firm is paying any salary or interest paid to the partner then a deduction for these expenses can be claimed from 8% deemed net profit.
- If taxpayer wants to show net profit less than 8% of the sales/turnover, then Tax audit will be applicable to him. In short he is required to get his books of accounts audited.