Taxation of Professionals

Introduction

Income tax is computed and imposed on the taxable income of the taxpayer. Such taxable income is computed under different heads of income like Salaries, House Property, Capital Gains, Business and Profession and Income from other sources. As per the Income tax Act, the taxable income from business and profession is computed in a similar manner and for this purpose, there is no distinction made between business and profession except in case of Presumptive Taxation Scheme (PTS), wherein the PTS income from business and PTS income from Profession is computed in a different manner.

What is the meaning of profession?

“All professions are businesses but all businesses are not professions”.

The ‘trade’ or ‘business’ as it is known, is the exchanging of goods and services for goods and services or goods and services for money. This activity being manual or repetitive does not need intellectual skills or a specialized qualification or training for a period of time to do that. You can do business or trade without any such training or qualification. On the contrary, when the activity involves the idea of an occupation requiring purely intellectual skill or manual skill which is controlled by the intellectual skill of the operator, such an activity is ‘profession’. This skill is acquired by a training or academic education for a period of time.

How are professions treated differently in Income tax?

  • The Income tax Act recognizes only certain professions as professions and NOT all the professional activities are recognized as professions.
  • The Income tax Act prescribes the maintenance of specific books of account for professional income
  • The Presumptive Taxation Scheme (PTS) is different for business income and professional income

The professions recognized by the Income Tax Law

The Rule 6F of the Income Tax Rules, 1962, designates some occupations as professions for the purposes of Income tax Act. In case of these professions, these rules specify the books of account that are to be maintained by the professions mentioned in these rules. The occupations which are designated as professions by the Income tax Rules are as below:

Architectural Accountancy Authorised representative
Engineering Interior Decoration Film Artist
Legal Medical Technical Consultancy
Information Technology Professional Company Secretary

The “Film artist” means any person engaged in his professional capacity in the production of a cinematograph film whether produced by him or by any other person, in the capacity as—

  • an actor
  • a cameraman
  • a director (including an assistant director)
  • a music director (including an assistant music director)
  • an art director (including an assistant art director)
  • a dance director (including an assistant dance director)
  • an editor
  • a singer
  • a lyricist
  • a story writer
  • a screen-play writer
  • a dialogue writer
  • a dress designer

Specific Books of account required to be kept and maintained by a professional

  1. Cash Book
  2. Journal, in case the accounts are maintained on mercantile basis
  3. Ledger
  4. Carbon copies of bills of more than Rs.25
  5. Original bills and invoices in respect of expenditure incurred

In addition to these, a person engaged in medical profession is required to maintain following records

  1. A daily case register in Form No. 3C
  2. Inventory of the stock of drugs and medicines and other consumables used for the purpose of his profession

Such records are to be kept for a period of six assessment years including the current assessment year. In case, the assessment of any of these six assessment years is reopened, records are to be kept till the assessment proceedings are finalized in that case

Presumptive Taxation Scheme (PTS)

If you have income from business and profession and if your taxable income includes such income from business and profession, you need to keep and maintain the accounts and records of transactions (books of account). You also need to get such books of account audited from a Chartered Accountant. However, in case of small taxpayers having business income as well as professional income, the Income Tax Law provides a scheme whereby you don’t need to keep and maintain books of account, if you declare business profits or professional profits above certain fixed percentage. This scheme is called as Presumptive Taxation Scheme (PTS)

The Presumptive Taxation Scheme is of three categories and mentioned in following sections of Income tax Act

Sr. No.

For whom

Section of Income tax Act

01

Small business of individuals, HUFs and firms with total turnover less than Rs. 20,000,000/-

44AD

02

Small professionals with turnover of less than Rs. 5,000,000/-

44ADA

03

Goods Transporters having less than 10 carriages

44AE

Presumptive Taxation Scheme for professionals

The Presumptive Taxation Scheme (‘PTS’) is available from Assessment Year 2017-18 (Financial Year 2016-17). According to this scheme, the person engaged in the specified profession need not maintain books of account nor get the audit done if his total receipts do not exceed Rs. 50,00,000/- and he declares the income from such profession at 50% or more of the total receipts. The salient features of the PTS for professionals are as under:

Applicable to whom?

  1. A resident in India having income from profession.
  2. Individual, Hindu Undivided Family (HUF), Partnership Firm, LLP, Company etc.
  3. Person having total gross receipts of Rs.50,00,000/- or less

How is presumptive income computed?

  1. The total taxable income is computed at the rate of 50% of the total gross receipts of the person in a financial year
  2. If you are having gross receipts of Rs.48,00,000/- and you opt for the PTS, then the presumptive income is computed at Rs.24,00,000/- or more but not less than Rs. 24,00,000/-
  3. You are not allowed to claim any expenses against such presumptive income computed as per PTS

How is depreciation allowed?

  1. Depreciation is not allowed to be claimed against such presumptive income but the assets are valued at the yearend considering as if the depreciation is allowed
  2. For example, if you have gross receipts of Rs.48, 00,000/- and your presumptive income is computed at Rs.24, 00,000/- for F Y 2018-19. 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 Rs.45,00,000/- (by 10% less of actual original value)

What if the profits are declared below 50% of the gross receipts?

  1. If you declare the profits below 50% of the total gross receipts, then you are required to maintain books of account and get them audited also. You are out of PTS.

Any other advantage of PTS on professional income?

  1. You are not required to pay advance tax in all the four quarters of a financial year but you are required to pay advance tax only once i.e. on or before 15th March of a financial year. If you don’t pay whole of the advance tax amount before 15th March, then you will be required to pay interest under section 234C of the Income tax Act