Presumptive Tax Scheme for Small Businesses

Small businesses and shop owners have a limited number of customers as compared to large businesses with massive volumes in sales and purchase transactions. These businesses are mainly operated as proprietary concerns or partnership firms as opposed to companies and LLPs of big businesses. As per the data in the public domain, such businesses called mom and pop stores are 60 million in number in India. The main transactions of small businesses involve sales and purchases of goods and maintenance expenses of shop or establishments as compared to complex transactions and accounts of big businesses.

Keeping this in mind, the Income-tax Act has excluded small businesses from maintaining books of account and getting them audited from a qualified chartered accountant. These businesses, for the purpose of income tax, are required only to estimate their taxable profits/income at or above a certain percentage and they can file their returns. Since they are not required to maintain books of account or get them audited, income tax authorities can not ask them questions related to books of account. This scheme is called a Presumptive Taxation Scheme. This Presumptive Taxation Scheme (PTS) is intended for small businesses and small professionals who are named in the Income-tax Act.

What are the main features of PTS for small businesses?

  • The PTS can be availed by small businesses including trading, manufacturing, contractors etc
  • There is a separate scheme PTS for small goods transporters
  • There is a separate scheme PTS for small professionals
  • The PTS can not be availed by commission/brokerage agencies and life insurance agents
  • The total sales turnover should not exceed ₹2 crores
  • The scheme can be availed by a resident taxpayer only and not by a non-resident taxpayer
  • The scheme cannot be availed by Company and LLP but only by individuals and HUF and partnership firms
  • Once claimed PTS, you again cannot claim business deductions u/s 10, 10A or 10AA or 80IB etc

How is the income computed under PTS?

  • The income on account of sales or gross receipts of the business need to be computed and if the aggregate sales turnover is less than ₹2 crores you are eligible for availing PTS
  • Then compute the business profits at the rate of 8% in case of sales where you have received the money in cash
  • Then compute the business profits at the rate of 6% of sales in case of sales where you have received the money in modes other than cash
  • Aggregate the amount of profits from both modes
  • This is your income from business profits
  • In the case of firms, you can reduce the partner’s remuneration from this to arrive at net business income and in case of others this is net business income

Shree Distributors is a partnership firm and is a wholesale trader in general provisioning goods and has earned gross sales/receipts of ₹1,80,00,000/-. Out of these sales, amount of ₹80,00,000/- is received in cheques, DDs, UPI or wallets or bank transfers and amount of ₹1,00,00,000/- is received in cash then the business income of the same is computed as under:

Particulars Sales Amount () Profits Amount ()
Profits at 8% 1,00,00,000/- 8,00,000/-
Profits at 6%    80,00,000/- 4,80,000/-
Total 12,80,000/-
Less: Remuneration to Partners 1,80,000/-
Net Income from business 12,00,000/-

Thus, the business income of M/s Shree Distributors is ₹12,00,000/-. However, in the case of the proprietary business, this remuneration to partners of ₹1,80,000/- will not be allowed to be deducted.

How is the depreciation on fixed assets allowed?
Depreciation is not allowed to be claimed against such presumptive business income, but the assets are valued at the year-end considering as if the depreciation is allowed. For example, if you have gross receipts of Rs.1,80,00,000/- and your presumptive income is computed at ₹ 12,00,000/- for F Y 2019-20 as in the illustration above. And you have a building of Rs.50,00,000/- used for business on which depreciation can be claimed, then no depreciation is allowed but the written down value of the building as at the beginning of next financial year shall be ₹ 45,00,000/- (by 10% less of the actual original value)

When are the taxes to be paid?
One of the major advantages of PTS is that you DON’T need to pay advance tax in every installment as per quarterly due dates. You can pay the entire tax only in a single installment of 15th March of the financial year i.e. the last quarter of the financial year.