What is presumptive taxation?

In budget 2016, the government has increased presumptive turnover limit for firms to Rs 2 crore. This means that such companies with a turnover size of less than Rs 2 crore, need not keep detailed accounts as required for big companies and they have to calculate their income as 8% of their turnover. Tax will be imposed on this income.

Now, what is the concept of presumptive taxation?

Presumptive taxation involves the use of indirect methods to calculate tax liability, which differ from the usual rules based on the taxpayer's accounts. Here, the business entity is required to declare a given percentage of his business turnover as his income and has to pay at fixed percentage of it as tax.

A good definition for presumptive taxation comes from Ehtisham Ahmad & Nicholas Stern. According to them, “The term presumptive taxation covers a number of procedures under which the `desired' base for taxation (direct or indirect) is not itself measured but is inferred from some simple indicators which are more easily measured than the base itself."

The principle of presumptive taxation is usually imposed on those whose income is low or those who are not covered under usual tax coverage and at the same time have taxable capacity.

They are aimed to bring small and medium businesses that are sometimes outside the tax net. The scheme asks individuals and businesses to pay tax for their income and makes tax procedure in a quite simple manner.

Advantages of presumptive taxation

Presumptive technique has certain advantages. One is simplification, particularly in the case of taxpayers with very low turnover. Secondly, presumptive methods of taxation are effective in reducing tax avoidance. Small and medium businesses can be brought into the tax base through presumptive taxation.

The term "presumptive" is used to indicate that there is a legal presumption that the taxpayer's income is no less than the amount resulting from application of the indirect method.

Presumptive techniques may be employed for a variety of reasons.

One is simplification, particularly in relation to the compliance burden on taxpayers with very low turnover.

Presumptive taxation in India

In India, the Income-tax Act has framed the presumptive taxation scheme under two sections - 44AD and 44A.

The presumptive taxation scheme under section 44AD of the Income Tax Act available for small and medium enterprises ( i.e non corporate businesses) sets a limit for presumptive taxation. The limit for such tax has increased to Rs 2 crore of turnover or gross receipts from the existing one crore rupees. The step will help a large number of MSMEs.

The scheme of sections 44AE​ is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing goods carriages. Individuals and companies can take advantage of the section.

In the budget 2016, the government has increased the presumptive taxation turnover limit for MSMEs to Rs 2 crore.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and hence will be relieved from tedious job of maintenance of books of account.

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