The preferred approach to taxation for an MSME is usually humble in finance in India. Therefore, the Ministry of Finance, has come up with a series of beneficial schemes. However, none have had a widespread impact as the Presumptive Taxation Scheme under section 44AD of the Income Tax Act. In terms of presumptive taxation, a micro, small, or medium enterprise can choose to follow simplified calculations instead of straightforward accounts if they have a turnover of up to Rs. 2 crores when it is applied. To ease their compliance burden, MSME needs will be focused on the expansion of the business.
What is the Presumptive Taxation Scheme (PTS)?
The Presumptive Taxation Scheme was introduced for the benefit of small businesses with a simplified tax structure. Instead of keeping detailed books of accounts that may require an audit, they are permitted to declare a fixed percentage of their turnover as taxable income.
Key Features of the Presumptive Taxation Scheme:
Simplified Taxation: The MSMEs need not maintain detailed financial records; presumptive income can be disclosed.
Reduction in compliance burden: There cannot be a necessity for detailed accounting or tax audits.
A prescribed income to be considered for tax is 8% of the annual turnover—6% if it is from digital transactions.
Eligibility: It is accessible to individuals, HUFs, and ordinary partnerships (not LLPs) engaged in business activities excluding those getting income by way of commissions, broking, or transport-related undertakings.
There is a limit of a maximum of Rs. 2 crores of turnover in the business.
Eligibility Criteria for MSMEs
MSMEs seeking to avail themselves of the benefit of the Presumptive Taxation Scheme will have to meet a few conditions mentioned as follows:
The business must be carried out by resident individuals, Hindu Undivided Families, or partnerships (other than LLPs).
The total turnover during the financial year does not surpass Rs. 2 crores.
The business does not operate in agency commission, brokerage, or leases of goods carriages.
If availed of such a scheme, the MSME should declare income at 8% of turnover on cash transactions and 6% where sales are made through digital modes.
If MSMEs avail themselves of the scheme, profit on cash transactions must not be less than 8% of turnover, while those on digital transactions must not be below 6%.
So does a turnover of Rs. 2 crore mean no taxes are to be paid?
Many entrepreneurs understand this black-and-white way of looking at Section 44AD: the turnover as high as Rs. 2 crores, no tax. They couldn’t be more wrong. It is a case-finding exercise in which presumptive income would still determine tax liability along the lines of income tax slabs.
Example Calculation
Let us take a real-life example to understand how taxation works under this scheme:
Business Turnover: Rs. 2 crores
Mode of Transactions: 100% Digital
Presumptive Income: 6% of Rs. 2,00,00,000 = Rs. 12,00,000
Now we shall apply the income tax slabs to this income:
Up to Rs. 2,50,000: Nil
Rs. 2,50,001 to Rs. 5,00,000: 5% tax = Rs. 12,500
Rs. 500,001 to Rs. 1,000,000: 20% tax = Rs. 100,000
Above Rs. 1,000,000: 30% tax on Rs. 200,000 = Rs. 60,000
Total Tax Payable = Rs. 1,72,500 (before cess and rebates)
Thus, though the entrepreneurs benefit from a lower compliance burden, they remain liable to pay income taxes on presumptive income.
Opting for Presumptive Taxation Scheme (PTS) can save time and money, allowing businesses to focus on growth.
Features of the Presumptive Taxation Scheme for MSMEs
The Presumptive Taxation Scheme (PTS) presents various benefits for MSMEs under Section 44AD:
1. Simplified Tax Compliance
Under the proposed scheme, there is no need for MSMEs to keep elaborate books of accounts, thus relieving a great burden from tedious paperwork. This has allowed business owners more time to devote to growing and expanding than on troublesome tax filings.
2. Lower Taxable Income in Case of Digital Transaction
To promote the cashless platform, the government provides a lower presumptive income percentage of 6% for digital payments. This is again a reduced tax burden on businesses that adopt online payments.
3. Tax Audit Exemption
Tax audit will not be compulsory for businesses with a turnover of up to Rs. 2 crores when opting for the presumptive taxation scheme. This brings significant savings on costs and times associated with audit procedures.
4. Easier Tax Filing
With a fixed percentage of tax on income of turnover, the Income Tax filing may actually become easier for the companies.
4. Easier Tax Filing
The amount of taxable profit is a certain percentage of a gross turnover figure. Hence, filing an Income tax Return (ITR-4) under this scheme becomes very convenient and faster.
5. Promotes Growth of MSMEs
Less compliance burden and more simplified tax become a multiplicator to invest its time and resources in their operations-from hiring new employees to expanding in the market. Presumptive Taxation Scheme (PTS) simplifies tax compliance for MSMEs with turnover up to ₹2 crore.
Common Misconceptions About the Scheme
Turnover of Rs 2 Crores attracts Zero Tax: Previously made very clear, the scope of this scheme is very much simplified for record keeping; however, the business must also be taxed on presumptive income.
Compulsory Scheme Selection: The business has an option not to enroll under this particular scheme should they desire to do so and to maintain the usual books of accounts.
Exemption from filing an Income Tax Return: Despite presumptive taxation, all businesses should file their income tax returns, and the benefits of regular tax apply.
Challenges for MSMEs Under the Presumptive Income Tax Scheme
Among them is that while there are a number of advantages accorded to the scheme, there remain some challenges as follows:
- Not all include limited liability partnerships
- Businesses earning less than 6-8% in actual profits incur a greater burden in tax
- Loss of tax deductions available in ordinary income tax
- How Invocreto Helps MSMEs with Tax Compliance
Managing invoices, finances, and taxation can be quite cumbersome, especially for MSMEs. Invocreto, one of the leading invoicing and billing software, integrates powerful features for assisting small businesses in:
- Automating invoicing and billing.
- Tracking income and expenses
- Easy tax reporting.
- Automatic compliance with GST and income tax rules.
By virtue of the new technologies, MSMEs will be able to simplify the taxation process and focus on scaling their business.
Conclusion
The Presumptive Taxation Scheme under Section 44AD is one of the biggest boons for MSMEs by way of a simplified tax compliance process and is, thus, not considered a submission of added administrative burden. The other is in respect of zero tax on a turnover of Rs. 2 crore, this is, of course, a misconception; the business still needs to comply and pay the taxes in accordance with presumptive income and the applicable tax slabs.MSMEs can declare a presumptive income instead of maintaining detailed financial records.
For maximum tax savings and compliant business conduct, MSMEs should consider monetising digital transactions and conducting financial planning efficiently. Invocreto is the best way to go for easy tax processing, invoicing, and financial management, framing the very nature of business operations.
Searching for an efficient invoicing and tax management system? Try Invocreto today!
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