Benefits of digital turnover under 44AD of Income Tax Act

Following demonetization, the government has taken several steps to encourage digital payments to promote less cash economy. In the month of December 2016, Ministry of Finance has issued two notifications which will lead to increase in the digital transaction in the business organization.

Let’s have a look at the notification as it is:

Government decides to reduce the existing rate of deemed profit under section 44AD of the Income Tax Act in respect of amounts/receipts through banking channel/digital means 

Under the existing provisions of Section 44AD of the Income-tax Act, 1961 (the Act), in case of certain assesses (i.e. an individual, HUF or a partnership firm other than LLP) carrying on any business (other than transportation, agency, brokerage and commission) and having a turnover of Rupees Two crore or less, the profit is deemed to be 8% of the total turnover.

In order to achieve the Government’s mission of moving towards a less cash economy and to incentivize small traders / businesses to proactively accept payments by digital means, it has been decided to reduce the existing rate of deemed profit of 8% under section 44AD of the Act to 6% in respect of the amount of total turnover or gross receipts received through banking channel / digital means for the financial year 2016-17. However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in cash.

Legislative amendment in this regard shall be carried out through the Finance Bill, 2017.

This is a huge benefit given to businessmen for promoting digital/banking transactions. 

(Source-Press Information Bureau, Government of India, Ministry of Finance, 19-December-2016)

Measures for Promoting Digital Payments & Creation of Less-Cash Economy: Benefit of lower rate of Income Tax on digital turnover for small businesses. 

The benefit of lower rate of Income-tax on digital turnover for small businesses up to a turnover of Rs.2,00,000,00 (Rupees Two Crore), announced by the Government yesterday under Section 44AD of the Income-tax Act, 1961 is a huge benefit given to businessmen for promoting digital/banking transactions. The benefits given are explained in the following paragraph.

If a trader makes his transactions in cash on a turnover of Rs. Two Crore, then his income under the presumptive scheme will then be presumed to be Rs. 16 lakhs @ 8% of turnover.  After availing of Rs. 1.5 lakhs of deduction under Section 80C, his total tax liability will be Rs. 2,67,800/-. However, if he shifts to 100% digital transactions under the new announcement made, his profit will be presumed to be at Rs. 12 lakhs @ 6% of turnover, and after availing of Rs. 1.5 lakhs under Section 80C, his tax liability now will be only Rs.1,44,200/. Here, digital transaction includes payment received by Cheque or through any other digital means. In the following example, the benefit obtained by traders and small businesses is explained in 3 different scenarios:

Apart from making a tax saving of almost 46% by migrating to banking mode, the small businesses would be able to build their books which may also help them get bank loans easily.  Also, if transactions are carried out through banking channels, then anybody having annual turnover up to Rs. 66 lakhs will have zero tax liability after availing the benefit of Section 80C, after amendment of this new rate structure.

(Source-Press Information Bureau, Government of India, Ministry of Finance, 20-December-2016)

As per Income Tax Act,

Section 44AD (1)

Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession.

Section 44AD (2)

Any deduction allowed under the provisions of section 30 to 38 shall for the purposes of sub section 1, be deemed to have been already give full effect to and no further deduction under those section shall be allowed.

Provided that where eligible assessee is a firm, the salary and interest paid to partners shall be deducted from the income computed under sub section (1) subject to the conditions and limits specified in clause (b) of section 40.

Section 44AD (3)

The written down value of any asset of any eligible business shall be deemed to have been calculated as if the eligible business has been claimed and had been allowed the deduction in respect of the depreciation for each of the relevant assessment years.

Section 44AD (4) - Provision related to advance tax not applicable if such case.

Section 44AD (5) - Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains specified in sub section (1) and whose total income exceeds the maximum amount which is not chargeable to income tax, shall be required to keep and maintain such books of accounts and other documents as required under sub section (2) of section 44AA and get them audited and get audited and furnish a report of such audit as required under section 44AB.

This section is nothing but provides a relaxation to the tax payers to declare income on presumptive basis, which should not be less than 8% of the gross turnover or gross receipt during the financial year. However, this relaxation is provided to certain persons and certain business subject to specified conditions which are provided under Sec 44AD of Income Tax Act, 1961. These certain business and certain persons are named as Eligible Business and Eligible Assessee in the Act. Let us discuss this Section.

This section provides that ELIGIBLE ASSESSEES in respect of ELIGIBLE BUSINESS can declare his business income on estimated basis if not maintaining the books of accounts or because of other reasons unable to calculate the business income. This declared income on estimated basis should not be less than 8% of Gross turnover or gross receipts of the business during the financial year.

Now the question arises what’s the meaning of eligible business and eligible assesses as given above. Here the eligible assessee means –

a) Eligible assessee:

• An individual,
• HUF or
• A partnership firm

Who is resident other than a LLP. and

b) Eligible business:

Who has not claimed any deductions under section 10A, 10AA, 10B, 10BA, or deductions under any provisions of Chapter VIA under the heading ‘C’ i.e Deductions in respect of certain incomes in relevant assessment year.

Interpretation: Only resident individual, HUF and Partnership firm can declare income under SEC 44AD. An LLP cannot declare income under this section. Moreover, in case a resident individual, HUF or a partnership firm claims any deduction under section mentioned above also can not declare income under this section

These eligible assesses can declare income on estimated basis in respect of any business except the business mentioned below, if his gross turnover or gross receipts in the previous year does not exceed Rs. 2 crore: -

• A person carrying on profession as referred u/s 44AA (1)
• A person carrying income in the nature of Commission or brokerage. 
• A person carrying on any agency business
• A person who is in the business of plying, hiring or leasing goods carriages.

WHO IS NOT ELIGIBLE TO GET BENEFIT OF THIS SECTION?

1. Non-resident Indians (NRIs)
2. HUF who is NRI
3. AOP
4. NRI firms
5. Local authority
6. Co-operative society
7. LLP (Indian and foreign)
8. Domestic and foreign companies
9. Artificial juridical person
10. Individual, HUF, firm claiming deduction under chapter III relating to hardware and software technology parks, free trade zones (Deduction u/s 10A, 10AA, 10B, 10BA)