Presumptive Taxation: Section 44AD vs Section 44ADA
The Income Tax Act includes Section 44AD and Section 44ADA, both dealing with presumptive taxation to simplify compliance for different taxpayers. Despite similarities in names and purpose, they cater to distinct groups.
Section 44AD
- Target Group: Small businesses such as shopkeepers, traders, and small contractors.
- Eligibility: Individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs).
- Conditions:
- Business turnover should not exceed ₹2 crore in a financial year.
- Profit Declaration: 8% of turnover as profit or 6% if sales are through digital transactions.
- Benefits: No need to maintain detailed accounts or perform audits.
Section 44ADA
- Target Group: Specified professionals including doctors, lawyers, architects, engineers, and accountants.
- Eligibility: Gross receipts should not exceed ₹75 lakh in a financial year.
- Conditions:
- 50% of gross receipts are presumed as profit; remaining 50% as expenses.
- Note: Cannot separately claim deductions for expenses.
Common Confusions and Issues
- Mistakes in Section Usage: Some professionals incorrectly opt for Section 44AD, aiming for a lower profit declaration, which is not permissible.
- Consequences: Incorrect filing can lead to tax notices, higher liability, or audits.
- Ambiguity in Definitions: The term “technical consultancy” under Section 44ADA is not clearly defined, causing confusion over its scope.
Additional Considerations
- Non-Specified Professionals: Those not covered under either section must calculate taxes traditionally (income minus expenses).
- Reporting Requirements: Year-end balances of debtors, creditors, inventory, and cash must still be reported.
- Bank Statements: Though not part of account books, bank statements can be reviewed for income verification.
Chetan Daga, founder of AdvantEdge Consultancy, emphasizes the importance of correctly adhering to these provisions to avoid issues with tax authorities.
