While the budget side tracked important issues of GST & reduction of corporate tax rates, it had lots in store for small businesses.
Gross Receipts limit raised to Rs 2 crores for small businesses for presumptive taxation – If you are a small business, you can take advantage of presumptive taxation. Presumptive taxation means you do not have to maintain accounting records or draw up a profit & loss account. You are also exempt from getting your accounts audited. You can simply pay tax @ 8% of your gross receipts. However, to be able to take benefit of this scheme, your gross receipts in a financial year should be Rs 1crore or less. In Budget 2016, our FM has increased this limit to Rs 2 crores. Which means small businesses, kirana shops, who have gross receipts under Rs 2 crores, can choose assume income to be 8% of their receipts.
Our take – This is great advantage to small businesses who have meagre resources and do not have the time, money or energy to dedicate to a full time in house accounting person. Those who opt for this scheme do not have to pay advance tax. They have to file their tax returns in ITR-4S, which is simple 2 page form that asks for a lot less information as compared to the long form ITR-4 which runs into several pages. This reduced compliance is bound to give boost to small businesses.
(presumptive taxation is covered under section 44AD & 44AE for small businesses)
Presumptive taxation now also made available to Professionals – In the past professionals were kept out of the presumptive taxation scheme. Which means they necessarily had to maintain some form of accounting records and pay tax accordingly. In the current Budget 2016, govt has extended presumptive tax benefit to professionals as well. Professionals with receipts of less than Rs 50lakhs can take benefit of this. Therefore, doctors, lawyers, interior designers, architects etc can now opt for this scheme if their annual receipts are less than Rs 50 lakhs. They no longer have to file the long form ITR-4.
While businesses can claim income to be 8% of receipts but in the case of professionals, 50% of the receipts have to be shown as profits and tax paid thereon. Those who opt for this scheme, do not have to maintain accounting records or get audit done, they are also exempt from payment of advance tax.
Our take – while this is an excellent move to allow professionals the benefits that come with presumptive taxation, a 50% income assumption on gross receipts, seems fairly high. For example, an interior designer with annual receipts of Rs 40lakhs, who chooses to opt for this scheme, may have to pay tax on assumed income of Rs 20lakhs. The high rate of income assumption may be a barrier for many of the professionals.
(presumptive taxation for Professionals has been added via a new Section 44ADA in the income tax act)
If you are a freelancer, do read our guide to income taxes for Freelancers here.
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