New Section 44ADA – Presumptive Tax Scheme for Professionals

Extract of Section 44ADA from Proposed Finance Bill 2016

Special provision for computing profits and gains of profession on presumptive basis.

After section 44AD of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2017, namely:—

44ADA.(1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent. of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the 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 account and other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.’.

Analysis of Provisions of New Section 44ADA

Why this section is proposed?	• This section is proposed in line with the recommendation of Justice Easwar Committee for simplification of taxation of professionals • Following objects are stated to be achieved through this proposal o To bring parity between small businessmen (who enjoy presumptive taxation u/s 44AD) and small professionals o To reduce compliance burden of small professionals o To facilitate ease of doing profession
How this is sought to be achieved?	This is sought to be achieved by inserting Section 44ADA in the Income Tax Act
Who is the eligible assessee?	Resident assessee who is • Individual (or) • Hindu undivided family (or) • Partnership firm (other than limited liability partnership)
Who are the beneficiaries?	Certain professionals referred to in section 44AA(1) of the Income Tax Act whose total gross receipts from profession does not exceed Rs. 50 lakhs in a financial year.
Who are the eligible professionals?	Persons engaged in any of the following professions: • Legal • Medical • Engineering • Architecture • Accountancy • Technical consultancy • Interior decoration • Other notified professionals o Authorized representatives o Film Artists o Certain sports related persons o Company Secretaries and o Information technology
How much is the presumptive income to be offered?	Higher of: • 50% of the gross receipts from profession (OR) • Income from profession offered by the assessee
Benefits of following this proposed section	• Assessee need not maintain books required to be kept u/s 44AA • Assessee need not get the accounts audited u/s 44AB
When shall the assessee be required to maintain books and to get the accounts audited?	If both the following conditions are satisfied, maintenance of accounts and audit are warranted: • Income from profession is offered at a rate lower than 50% of gross receipts AND • Total income of the assessee exceeds the basic exemption limit
If the assessee follows this section, following items shall be deemed to be allowed	• All deductions from sections 30 to 38 (including depreciation and un-absorbed depreciation / allowances) shall be deemed as allowed; and • Written down value (WDV) of depreciable assets shall be recomputed deducting depreciation which is deemed as allowed. E.g. If WDV (10% block) as on 01.04.2016 is Rs. 1,00,000, the depreciation deemed as allowed will be Rs. 10,000 and accordingly WDV as on 31.03.2017 will be Rs. 90,000.
Effective date	The new section is proposed to be effective from 01.04.2017 (i.e. from Assessment Year 2017 – 18). In other words, advance tax in financial year 2016 – 17 may have to be calculated accordingly.
Author’s notes	• The decision as to whether this provision is to be adopted or not varies from case to case and the decision depends on the following parameters: o Quantum of actual expenditure (i.e. not advisable for a professional having small net profit ratio) o Interest on borrowings o Depreciation available o Quality of accounting systems etc. • Businessmen covered u/s 44AD are permitted to pay the whole of advance tax by March 15. But no such concession is seen vis-à-vis a professional covered under 44ADA. That is to say, all the four installments may be paid. • There is no provision in section 44ADA permitting a professional firm to deduct interest / remuneration paid to partners from the presumptive income offered. • Whether or not the professional firm follows Section 44ADA, its partners can opt Section 44ADA with respect to working partners’ salary / interest received from the said firm • Other suggestions and comments are most welcome

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38 Important Amendment in brief Income Tax : Finance Bill 2016

1. No change in the Income Tax Slab Rates for Individuals / HUF/BOP/AOP

2. In order to promote more Domestic Start Up Companies (Eligible Start Ups) the tax rate for such companies is reduced to 25% + Surcharge & Cess subject to certain restrictions

3. Reduced Tax rate for companies having Turnover less than 5 crores by 1%

4. Surcharge for Individuals having Income more than 1 crore is increased from 12 to 15 %

5. The effective Tax Rate after the amendment are as follows: –

A) Income is less than 1 crore: –

B) Income is greater than 1 crore: –

** After the exhaustion of Basic Exemption Limit available

6. Increase in Income Tax Rebate form 2,000 to Rs. 5,000/- if the Income is less than Rs. 5 Lakhs.

• In nutshell if your income is less than 5 Lakhs then Tax will be paid only on Income over and above Rs. 3 Lakhs.

7. Period for construction of property enhanced from 3 years to 5 years, earlier in order to claim interest paid for Housing Loan the property had to be constructed within 3 Years from the end of the Financial Year in which the property was purchased.

8. Arrears of rent or unrealized rent to be taxed in the Year of receipt u/s 25A

9. Exempted Dividends received by a Resident Individual, HUF/Firms in excess of 10 Lakhs from a Domestic Company will now be further taxed @ rate of 10% + Applicable Surcharge & Cess on the Gross Dividend received, earlier any dividend received was exempted as the dividends have already suffered Dividend Distribution Tax(DDT) @ 15%+ Applicable Surcharge & Cess.

For Example: –

Note: The dividend received will be taxed on Gross Basis ie; If dividend received in Bank A/c is Rs.25 Lacs , then tax will be computed as follows:-

A) Dividend Received – 25 Lacs (Net)

B) Add: DDT Paid on above – 5.23 Lacs ( 25 *17.304/(100-17.304)

C) Gross Dividend – 30.23 Lacs

D)Tax @ 10 % on Gross Dividend – 3.023 Lacs + Applicable Surcharge and Cess

10. STT on Sale of Options is increased from 0.017% to 0.05%

11. Any payments made in excess of Rs.1,00,000 for online advertisements or for provision of digital advertising space to Non Residents will attract tax (equalisation levy) @ 6%, unlike TDS provisions under equalisation scheme ALL persons are liable for deduction failure of which will attract Interest and Penalty proceedings. The levy clearly is targeted to tax various online advertisements companies like Youtube , Google , Facebook , Twitter etc; ,

For Example :- Moon Cricket Pvt Ltd pays 2 crores as advertising fees to Google the possible tax implications if google accepts the levy and if it doesn’t are :-

Particulars	Google accepts the levy	Google not accepts the levy
Advertisement Cost	7,500,000	7,978,723	{75,00,000*100/(100-6)}
Less:Levy @ 6%	450,000	478,723
Net Payment	7,050,000	7,500,000

12. W.e.f 1^st June 2016 in order to curb black money , the Seller of any goods or services have to collect Tax collected at source (TCS) @ of 1% from the buyer if the mode of payment is by cash on the following : –

• On sale of Motor Vehicles, the value of which is exceeding 10 Lakhs
• On sale of any Goods except bullion & Jewellery the value of which is exceeding 2 Lakhs
• On supply of any service the value of which is exceeding 2 Lakhs, however in case if the service recipient deducts Tax under TDS provisions TCS need not be collected.

13. In the Finance Act 2015 Fin Min had proposed to reduce the corporate tax to 25% by phasing out certain exemptions and deductions, in line with the same in Budget 2016 the plan of phasing of certain exemptions and deductions over a period of time are laid down

14. Accelerated depreciation of 20% in order to promote advancement in technology now also available to Power generation, transmission or distribution assesses, earlier the same was available to only assesses manufacturing an article or a thing.

15. In order to promote India to be a Hub of Patent Holders, income from patent earned is proposed to be taxed @ 10% subject to the following conditions: –

• Patent should be developed and granted under Patents Act 1970
• Patentee should be a person resident in India and should be the true and first inventor.

16. In order to encourage more First time buyers of residential house property an additional deduction of 50,000/- is available for the interest paid u/s 80EE if any, subject to the following conditions: –

• Loan is to be obtained from financial institutions
• Loan has to sanctioned in the FY 2016-17
• Maximum amount of loan sanctioned should not exceed 35 Lakhs and the value of property not to exceed 50 Lakhs
• The assesse does not owns any residential property on the Date of acquisition of the property.

17. Limit of deduction for any persons paying rent paid is increased from Rs 24,000 to Rs 60,000 u/s 80GG, however no deduction will be available if House Rent Allowance is claimed or any other property is held.

18. Start-up India: –

a. Scope of capital gains exemptions u/s54GB (Exemption of Long term capital Gains On sale of residential property or a plot of land) widened to boost more investments in Pvt Ltd companies: –

• Period of exemption extended upto 31^st March 2019
• Definition of eligible assesse expanded to include any business earlier the eligible assesse were only assesse manufacturing an article or a thing
• Earlier the company was required to be an MSME the requirement is done away and replaced with eligible start up
• Definition of eligible assets widened to include computer or computer software for a technology driven start up certified by Inter Ministerial Board of certification

b. In order to facilitate start-ups a separate fund is established, yearly upto   2,500 crores for 4 years will be raised by issuing units under such fund. In order to encourage investments in such unit’s exemption is provided under capital gains for sale of Long Term Capital Asset to ALL assesses subject to the following conditions: –

• Maximum Investments by an assesse is restricted to 50 Lakhs for one or more Long Term Capital Assets
• The second investment made for any further sale of Long Term Capital Assets will be eligible for exemption only after exhaustion of 2 Financial Years (ie; 1^st Year of claiming exemption + 2^nd Financial Year)
• Exemption will be available only upto 1^st April 2019
• Units cannot be sold or mortgaged for a period of 3 Years from the date of its acquisition

19. In order to encourage more eligible start-ups deduction of 100% of profits is made available for a period 3 consecutive years out of 5 Years from the date of incorporation u/s 80IAC of Income Tax Act

Eligible Start Up: –

a. Company incorporated on or after 1^st April 2016 but before 1^st April 2019

b. The turnover of the company should not exceed 25 Crores in any of the Financial Years starting from FY 2016-17 to FY 2020-21

c. Company holds a certificate of eligible business from the Inter Ministerial Board of certification.

Eligible Business: –

Business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

20. Employment Generation: –

In order to generate more employment opportunities deductions of 30% of the additional employee costs (on the salary paid to new employees) is provided for a period of 3 Financial Years subject to following conditions u/s 80JJAA: –

• There should be an increase in number of employees which stood on the last day of the Financial Year
• The employee should work for atleast 240 days in the Financial Year
• The salary is less than or equal to 25,000
• Salary is paid by Account Payee Cheque or Account Payee Bank Draft or by use of electronic system channel
• Salary paid to employee who does not contributes to recognised Provident fund are excluded from the above

21. Tax Audit Limit u/s 44AB for Professionals enhanced from 25 Lakhs to 50 Lakhs

22. Amendments in presumptive Taxation for businesses u/s44AD (Scheme for business carrying on Business having turnover below a limit need not maintain books of accounts): –

• Limit enhanced from 1 crore to 2 crores
• Remuneration or Interest paid by partnership firms not be allowed as deduction, earlier the same was allowed as deduction
• Additional parameter for applicability S-44AD introduced
• Advance Tax Provisions made applicable for assesses falling u/s 44AD earlier the same was excluded

23. Presumptive taxation for professionals introduced whereby any professional (as per S-44 AB (1)) having gross receipts less than 50 Lakhs need not maintain books of accounts, by declaring flat 50% as the deemed profits from the profession.

24. The Income Declaration Scheme 2016 to be introduced for voluntarily disclosures of unreported income, salient features of which are as below: –

• Any undisclosed income prior to AY 17-18 can be offered for tax by paying 30% tax, 25% surcharge as Krishi Kalyan Cess on the tax and 25% Penalty on the tax totalling up to 45% of Tax.
• No Interest, penalty and prosecution.
• If the undisclosed income is in the form of investments or assets then the Fair Market Value as on the date of scheme will be the undisclosed income.
• A declaration to be made in the prescribed format
• Tax paid under this scheme shall not be refunded
• Exemption from wealth tax for the assets declared

25. For speedy resolution for Tax cases lying under 1^st Level of appeals (Commissioner Appeals) a new scheme “Direct Tax Dispute Resolution scheme is introduced)

26. Scope of S-143(1) widened to include further 5 clauses

27. Time Limit for filing belated returns u/s 139(4) reduced from 1 year from the end of the Assessment Year to end of the Assessment Year

For Example: –

For AY 2015-16 belated returns can be filed upto 31^st March 2017 however

For AY 2016-17 belated returns can be filed upto 31^st March 2017

28. S-139(5) – time limit for filing revised return has been amended so as to include belated returns under its purview

29. In case of tax or interest not paid at the time of filing of income tax return will not be regarded as defective return u/s 139(9) , earlier many of the returns due to shortfall in payment of taxes at the time of filing Tax returns were treated as defective returns.

30. All payments outstanding as on the last day of the year to railways for use of Railways Assets now brought under the ambit of S-43B whereby if the payments are not made within the due date of filing the Income Tax return , the corresponding expense will not be allowed as a deduction in the respective Financial Year however same can be claimed in the Year of Payment

31. Applicability of Form 15G/H extended to S-194I (TDS on payments of Rent)

32. In cases of refund determined in pursuance to an appeal the rate of interest is being increased from 6 to 9 %

33. Quoting of PAN for a non-resident or a foreign company are relaxed subject to furnishing of a prescribed declaration , earlier Non residents were taxed at a higher rate of tax irrespective of Double Tax Avoidance Agreements

34. Interest received Under Gold monetization scheme 2015 is Exempted from Income Tax and the corresponding gains arising on transfer of such bonds by an individual is also excluded from the definition of transfers u/s 47 under capital gains

35. E-Assessment: –

In order to facilitate e-assessments statutory recognition is given by amending various sections of Income Tax Act

36. Slab Rates for the F.Y.2015-16 (A.Y.2017-16) for Individuals/HUF

• For Individuals (Age < = 60 years)

Limit	Rate
Upto Rs. 2,50,000	Nil.
Rs. 2,50,001 to Rs. 5,00,000	10 per cent
Rs. 5,00,001 to Rs. 10,00,000	20 per cent.
Above Rs. 10,00,000.	30 per cent

• For Senior Citizens

Limit	Amount
Upto Rs. 3,00,000	Nil.
Rs. 5,00,001 to Rs. 10,00,000	20 per cent.
Above Rs. 10,00,000.	30 per cent

• For Super Senior Citizens

Limit	Amount
Upto Rs. 5,00,000	Nil.
Rs. 5,00,001 to Rs. 10,00,000	20 per cent.
Above Rs. 10,00,000.	30 per cent

37. Changes in TDS Provisions.

• Increase in threshold limit of deduction of tax at source on various payments mentioned in the relevant section Act:

Section	Heads	Existing Threshold Limit (Rs.)	Proposed Threshod Limit (Rs.)
192A	Payment of accumulated balance due to an employee	30,000	50,000
194BB	Winnings from Horse Race	5,000	10,000
194C	Payments to Contractors	Aggregate annual limit of 75,000	Aggregate annual limit of 1,00,000
194LA	Payment of Compensation on acquisition of certain Immovable Property	2,00,000	2,50,000
194D	Insurance commission	20,000	15,000
194G	Commission on sale of lottery tickets	1,000	15,000
194H	Commission or brokerage	5,000	15,000

• Revision in rates of deduction of tax at source (TDS) on various payments mentioned in the relevant sections of the Act:

Section	Heads	Existing Rates (Rs.)	Proposed Rates (Rs.)
194DA	Payment in respect of Life Insurance Policy	2%	1%
194EE	Payments in respect of NSS Deposits	20%	10%
194D	Insurance commission	Rate in force (10%)	5%
194G	Commission on sale of lottery tickets	10%	5%
194H	Commission or brokerage	10%	5%

38. Changes in Advance Tax Payment Due dates for All assesse **

Instalment	Due Date	Rate
1st	15th June	15%
2nd	15th September	45%
3rd	15th December	75%
4th	15th March	100%

** Except for Individuals opted Sec.44AD (Presumptive Income) – Due Date is 15^th March.

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