Introduction:

To reduce the burden on small tax payers, Government of India has introduced presumptive tax under Section 44AD of the Income Tax Act. In the past, they had to do the hard work of maintaining books of accounts and doing audits.

These provisions provide a simplified method of calculating profits and profits for businesses, freeing them from the need for regular audits and meticulous maintenance of audit records. Any business, except those engaged in leasing, hiring, and plying, is eligible to opt for this presumptive scheme.

Section 44AD: 

Section 44AD of the Income Tax Act provides a different provision, proposing a simplified tax regime designed for small businesses. Especially beneficial for small-scale traders, manufacturers, and professionals with annual turnovers below a designated threshold,  this scheme simplifies tax planning This blog aims to analyze the broad aspects of 44AD, which in scope, including eligibility , Benefits  and  criteria.

Applicability of Section 44AD:

Section 44AD applies to small businesses with gross income not exceeding Rs. 2 crore, including resident and non-resident taxpayers. however, it does not extend to the following categories.

• A person engaged in a business as defined under section 44AA(1).
• An individual conducting a business involving the plying, hiring, or leasing of goods carriages.
• A person engaged in the provision of services as part of his business activity.
• An individual generating income in the form of commissions or brokerage.
• An individual conducting any agency business.

Conditions Under Section 44AD: 

• Earlier, 44AD of the Income Tax Act included all Indian resident accounts. Following the Budget 2021 amendments, limited liability partnerships (LLPs) have now been extended to include Hindu undivided families (HUFs), individual residents, or partnership companies
• The Income Tax Department has amended sub-section (4) of 44AD to bring in new circumstances. Individuals choosing this presumptive taxation scheme must now comply with the following:
• Declare their gains according to this presumptive scheme for a period of five consecutive years.
• If a person chooses to declare and file benefits under regular employment (ITR-3) before the end of five years, he will lose the presumptive tax benefits and will be exempted from the scheme after five years in the next section.

Eligibility for Section 44AD:

The following conditions must be fulfilled to qualify for the benefits of 44AD.

• The taxpayer may be an individual resident, a Hindu Undivided Family (HUF), or a partnership firm.
• The gross income of the business should not exceed Rs. 2 crores per financial year.
• The taxpayer must be engaged in a business other than plying, hiring, or leasing goods carriages or providing services.

Limitations of Section 44AD:

There are specific limitations on the benefits provided by 44AD, including:

• If the taxpayer claims a profit of less than 8% of gross income, they are obligated to maintain regular books of accounts and undergo auditing.
• The taxpayer is not allowed to set off any loss from income derived from covered business under 44AD.
• If the taxpayer has claimed deductions under Sections 10A, 10AA, 10B, 10BA, or Chapter VI-A of the Income Tax Act, they are obligated to maintain regular books of accounts and undergo auditing.

Benefits of Section 44AD: 

Section 44AD provides the following benefits to small businesses.

• The taxpayer is considered to have made a profit of 8% or more of gross income, as declared by the taxpayer.
• The taxpayer is exempted from paying advance tax for income earned from the business covered under 44AD.
• The taxpayer is relieved of the responsibility of maintaining the books of account on a regular basis.
• The taxpayer is not obligated to have the accounts audited, except when the declared profits are less than 8% of the gross turnover.

Audit under Section 44AD: 

A taxpayer is exempt from audit of his or her accounts if the reported income is 8% or more of gross income. However, if the reported income is less than 8% of gross income, the taxpayer must be audited by a Chartered  accountant. The audit report must be filed with the income tax return. The last date for filing income tax returns of taxpayers covered under 44AD is July 31 of the assessment year.

Maintenance of Account  Books : 

One of the most important advantages of Section 44AD is that they are exempted from the necessity of maintaining books of accounts on a regular basis. However, it is important to emphasize that the taxpayer must still support important records, including income, expenses, and details of sales and purchases throughout the year That record these types are important proofs of the income received at the time of need.

Advance Tax payment under Section 44AD: 

The taxpayer is exempted from the liability to pay advance tax on income derived from business covered under 44AD.Instead, the entire tax liability can be settled by paying self-assessment tax at the time of filing the Income Tax Return.

Conclusion:

In summary, Section 44AD of the Income Tax Act provides a refined tax regime designed for small businesses with a turnover of less than Rs. 2 crore and works. It reduces the responsibility of maintaining and maintaining routine books of accounts. However, it is important to adhere to stipulated policies and procedures to avail these benefits. The taxpayer covered by this section must also maintain its limits and ensure the accuracy of the income statement.