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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