Presumptive taxation

Presumptive taxation is a method of calculating income tax based on an estimated or “average” income, rather than the actual income earned by a taxpayer. It is designed to simplify tax compliance, particularly for small businesses, professionals, or taxpayers with limited accounting records. Key Features of Presumptive Taxation Simplified Assessment Tax is computed on a presumed rate of income instead of requiring detailed accounting of all receipts and expenses. Targeted Taxpayers Typically applicable to: Small businesses and traders Professionals (like doctors, lawyers, consultants) Certain categories of self-employed individuals Legal Basis Defined under income tax laws or tax regulations of a country. Includes specific presumptive rates or percentage of turnover considered as taxable income. Advantages Reduces compliance burden and record-keeping. Ensures timely tax collection from small taxpayers. Provides certainty in tax liability. Limitations May result in higher or lower tax compared to actual income. Not suitable for large businesses with complex financial transactions. Example (India) Under Section 44AD of the Income Tax Act: Small businesses with turnover ≤ ₹2 crore can pay tax on 8% of total turnover as presumptive income. Actual profit and expense details are not required for tax computation.