The Presumptive Taxation Scheme was designed to ease tax compliance for small businesses and professionals. It allows eligible individuals to declare a fixed percentage of their total turnover or gross receipts as profit, eliminating the need to maintain extensive books of accounts.
Key Takeaways
- Increased Turnover Limits: The expanded threshold enables a larger number of businesses and professionals to opt for the presumptive taxation scheme.
- Transparent Profit Reporting: Taxpayers are expected to report actual profits if they exceed the presumptive rate, promoting greater accuracy.
- Balanced Compliance: The scheme maintains simplicity while preventing misuse, ensuring fair taxation for all.
- Fewer Tax Disputes: Clear guidelines reduce confusion, helping avoid conflicts related to income reporting.
- Boost to Digital Payments: Lower tax rates on digital receipts incentivise cashless transactions and promote formal business practices.
What is presumptive taxation scheme (PTS)?
The presumptive taxation scheme is an alternative tax method for small businesses and professionals to simplify compliance. Instead of maintaining extensive records, taxpayers declare income at a fixed rate based on turnover.
Eligibility criteria:
- Available for businesses with turnover up to Rs.3 crore under Section 44AD and professionals with gross receipts up to Rs.75 lakh under Section 44ADA.
Tax computation:
- Businesses declare 6% or 8% of total turnover as taxable income, depending on digital or cash transactions.
- Professionals declare 50% of total gross receipts as taxable income without deductions.
Income Tax Bill 2025: Clarity on Presumptive Taxation
The New Income Tax Bill 2025 addresses a long-standing ambiguity surrounding the Presumptive Taxation Scheme under Sections 44AD and 44ADA.
Previously, it was unclear whether taxpayers were required to report only the presumptive profit (6%/8%) or their actual earnings. The revised provision now clears this up—taxpayers must declare either 6% or 8% of their turnover (as applicable), or their actual profit, whichever is higher.
This change ensures greater transparency and aligns declared income with real earnings, while still maintaining the simplified compliance framework for small businesses and professionals.
Why is this important?
1. Stops Underreporting of Profits
Earlier, some businesses with higher actual profits were misusing the presumptive taxation scheme by declaring only the standard 6% or 8%, despite earning much more. The updated rule now mandates that if actual profits exceed the presumptive rate, they must be disclosed—closing this loophole.
2. Fewer Tax Disputes, Clearer Rules
Ambiguity around profit declaration had often led to disputes between taxpayers and the Income Tax Department. This clarification removes room for interpretation, helping both sides avoid unnecessary legal hassles.
3. Promotes Honest Tax Practices
By tightening reporting norms, the government encourages businesses and professionals to report true income, fostering a culture of transparency and accountability in tax filing.
4. Simplifies Process, Maintains Equity
While the presumptive taxation scheme continues to simplify compliance for small taxpayers by doing away with detailed records, it ensures that those earning beyond the standard percentage contribute fairly to the tax system.
Also read: Taxation Meaning
Who will be most affected by the new presumptive taxation rules in India?
The new presumptive taxation rules under the Income Tax Bill 2025 will impact various categories of taxpayers.
Small businesses and traders
- Increased turnover limits may allow more businesses to opt for presumptive taxation, reducing compliance burdens.
Freelancers and professionals
- Digital professionals, doctors, lawyers, and consultants may need to adjust their tax planning due to new gross receipt limits.
Businesses relying on cash transactions
- Firms dealing primarily in cash will be impacted as digital payments are incentivised with lower tax rates.
Examples
Presumptive Taxation is a simplified tax scheme that helps small businesses and professionals reduce compliance burden by allowing them to declare a fixed percentage of their income as taxable. It’s ideal for those who want to avoid detailed bookkeeping while staying compliant. Here’s how it applies across different professions and trades:
Who Can Opt for Presumptive Taxation?
- Small Retailers - Declare 8% of turnover (e.g., grocery shops with turnover up to Rs. 2 crore)
- Freelancers and Consultants - Under Section 44ADA, declare 50% of receipts (e.g., graphic designers earning Rs. 50 lakh)
- Transport Operators - Pay tax per vehicle under Section 44AE (e.g., truck owners with multiple vehicles)
- Medical Professionals - Clinics earning below Rs. 75 lakh can declare 50% as income
- Commission Agents - Excluded from presumptive taxation and must file regular ITRs
- Wholesale Traders - Can declare 8% of turnover if within the Rs. 3 crore limit
Also read: What is Tax Avoidance
Conclusion
Presumptive taxation provides a simplified approach to tax compliance, benefiting small businesses and professionals. The proposed changes in the Income Tax Bill 2025 aim to expand eligibility and encourage digital transactions while ensuring fair tax contributions. Understanding the new rules is essential for affected taxpayers to optimise their tax liability and remain compliant. With evolving tax laws, proper planning and awareness will help businesses and professionals navigate these changes effectively.
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