Decryption of Government Small Business Tax Relief on Digital Receipts and Budget 2017 Expectations


Amid the hustle and bustle of demonetization, the government, through the Central Commission for Direct Taxes (CBDT), made an announcement on 19e December 2016, offering huge tax benefits to small businesses with turnover of up to Rs 2 crore, for the promotion of digital payments and banking transactions and for the transition to a less cash economy.

The ad allows companies to report 6 percent profits instead of the current 8 percent under Section 44AD of the Income Tax Act.

What is article 44AD and flat-rate taxation?

In accordance with Section 44AD of the Income Tax Act 1961, any qualifying person who operates a qualifying business and has a turnover (income / revenue) of up to 2 crore rupees may consider and disclose its profits from that business to 8% (or more, at the discretion of the individual) of the total turnover and pay income tax on such deemed profit.

For example, if an eligible business has a turnover of Rs 1 crore, the person can report a profit of Rs 8 lakh and pay taxes at the applicable tax rate only on that figure.

However, the persons eligible for this provision are Indian residents, HUFs and simple partnerships. This provision does not apply to non-residents, limited liability companies (LLP), limited liability companies or other companies, trusts, companies, etc. It also does not apply to professionals and commission agents.

An eligible business is any business:

  • which involves the movement, rental and leasing of goods transport vehicles
  • services of professionals such as engineers, physicians and accountants
  • commission agents and other agency activities
  • having turnover up to Rs. 2 crores

Anyone who opts for Article 44AD is not required to follow and keep books and accounts and supporting documents for their expenses. They are not subject to the tax audit of a Chartered Accountant and are not required to comply with the provisions of the ATD (Withholding at source or Withholding at source) for payments and expenses. The tax department does not question the profit margin as long as it is 8% or more.

What is there for professionals?

Professionals such as doctors, engineers, architects and accountants practicing or providing consultancy / freelance services are not covered by the provision of Article 44AD discussed above. In this case, the government has a separate provision under Article 44ADA, in which it allows professionals to declare a deemed profit of 50 percent or more on their professional receipts up to Rs 50 lakh and obtain the same benefits as those available under section 44AD.

What does the announcement of the CBDT mean?

The CBDT announcement of the 19e December 2016, stipulates that the limit of 8% as mentioned in article 44AD must be reduced to 6% of the total turnover if the receipts are made via digital modes or banking channels and not in cash.

If an individual trader conducts his cash transactions on a turnover of Rs 2 crore, then his income under the presumptive regime will be presumed to be Rs 16 lakh (at 8% of the turnover). After taking advantage of the Rs 1.5 lakh deduction under section 80C, his total tax payable will be Rs 267,800. However, if he switches to 100% digital transactions, under the new announcement, his profit will be presumed to be Rs. 12 lakh (at 6% of turnover), and after taking advantage of Rs 1.5 lakh under section 80C, his tax payable will now only be of Rs 144,200. Here, digital transactions include payments received by check or any digital means.

Here it should be noted that this announcement has no impact on Professionals, LLP or Private Limited or other companies, Trusts and so on.

How to take advantage of this provision?

Startups that are in businesses that are closely held among friends and family and do not plan to do business with third party investors, and that are in commerce (online or otherwise) and other services (including SaaS), may opt to do business as an individual (including sole proprietorship), or as a HUF or simple partnership company and benefit from deemed tax and reduced profit margin on digital receipts after demonetization.

What more can be done in Budget 2017?

This announcement was made by means of a press release. A real amendment to the law is still awaited. The actual amendment will allow us to understand the fine print and the actual requirements for claiming benefits at the reduced 6 percent margin. Also, we’ll have to wait for the budget to see how this layout will be shaped in the years to come, as the announcement talks about the benefits for the 2016-2017 fiscal year, without any clarity as to what lies ahead.

Taxmantra’s point of view on this subject

As we have said in our other articles, the government should aim for more uniformity and a conducive overall environment. Articles 44AD and 44ADA are very good provisions of the Income Tax Act, 1961, which provide simplicity and clarity while leaving a minimum margin for the discretion of the tax service. These are impressive provisions for the ease of doing business. However, at present they are applicable to a very limited number of eligible persons. The startup ecosystem will get a boost if similar simple presumptive taxes are offered for all types of startups, with lower compliance requirements, lower taxes, and a broader base.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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