Presumptive income scheme for professionals

The Finance Act 2016 has introduced a new presumptive income scheme for professionals by inserting a new section 44ADA into the Income Tax Act, 1961. The new section has come into force with effect from 01.04.2017 i.e. from AY 2017-18. So, from AY 2017-18 professionals will have an option to file their income tax returns u/s 44ADA.

Presumptive Income Scheme u/s 44ADA-for whom?

The target audiences for section 44ADA are resident assessees engaged in notified professions such as profession of accountancy, interior decoration, architectural decoration, technical consultancy, medical, legal or such other profession as may be notified by the Board. Professions of Company Secretary and film artist among others have already been notified by the Board. The assessee engaged in these professions is required to maintain books of account u/s 44AA mandatorily.

Key takeaways of section 44ADA:

The key take away of section 44ADA is that requirement of maintaining books of account is dispensed with if assessee belonging to any of the above professions opts for filing return of income u/s 44ADA. The scheme is particularly beneficial for small or medium professionals as it reduces the compliance burden of having to maintain regular books of account and to fill balance sheet and P&L portion of income tax return in full. However such an assessee shall be expected to maintain some bare minimum records such as bill books to verify his gross receipts as and when required.

  • Salient features of the presumptive income scheme u/s 44ADA:
  • It is available to individual assessee/ partnership firms belonging to any of the above professions.It is an optional scheme.
  • To avail this scheme, gross receipts should not be more than Rs 50 Lakhs as gross receipts exceeding Rs 50 Lakhs will be liable for tax audit u/s 44AB.
  • The estimated income shall be equal to 50% of gross receipts.
  • All the deductions under sections 30 to 38 shall be deemed to have been allowed.
  • The assessee can opt in and out of scheme any time. For example he may file his return for the AY 2017-18 u/s 44ADA and opt out of it for the AY 2018-19. There are no restrictions imposed in this regard unlike section 44AD.
  • The assessee may declare higher income if he so desires.

If the assessee declares income less than 50% of gross receipts and his total income exceeds the exemption limit applicable to him, he shall be required to maintain books of account and get his books audited u/s 44AB irrespective of his turnover/gross receipts.

Whether section 44ADA also applies to a partnership firm of professionals:

The answer to this question is yes. The memorandum to Finance Act 2016 clearly provides that provisions of section 44ADA are applicable on resident assessee who is an individual, HUF or partnership firm. But it is not applicable to LLPs. Thus LLPs of professionals are specifically excluded from the scheme.

Now the question arises whether a partnership firm of professionals opting for section 44ADA will be allowed a separate deduction of interest on partner’s capital and remuneration to partners. It may be noted that section 44AD has also been amended significantly by the Finance Act 2016 so as to omit the provision of deduction of interest on capital and remuneration to partners separately out of presumptive income of 8% of gross receipts. Whether this condition shall be equally applicable to firms of professionals opting for section 44ADA or not? In this connection it is to be noted that neither section 44ADA nor memorandum to Finance Act brings clarity in this respect. However it can be said that to maintain parity between section 44AD and section 44ADA so far as it relates to prohibition of a separate deduction of interest on capital and remuneration to partners, it must have been the legislatures intention to not allow a separate deduction of interest on capital and remuneration to firms engaged in notified professions and opting for section 44ADA. Had it not been the case there would have been disparity between the provisions of section 44AD and 44ADA in this regard. Nevertheless perhaps a suitable amendment in section 44ADA to this effect is warranted.

What is included and excluded in gross receipts for the purposes of section 44ADA:

Since at least 50% of gross receipts are required to be shown as income from profession u/s 44ADA, the big question is what is to be included and excluded from gross receipts? In other words how gross receipts will be arrived at?

Gross receipts, ordinarily would mean total amount of receipts from professional practice during the year. It may also be referred to as the total amount of professional billings during the year. However professionals are also service providers under service tax, so it is an obvious question whether gross receipts are inclusive of service tax charged from clients? Normally service tax charged is shown separately in invoice, therefore in the opinion of the author, gross receipts should be exclusive of service tax. In any case, service tax charged should not be a part of gross receipts since ultimately it is not revenue for the service provider but is deposited with the Government to meet service tax obligations.

Another question that may come up for discussion is that it is very common for the professionals to charge separately a fixed sum as out of pocket and/or office expenses. Whether these charges are also includible even if these are shown separately in the invoice. The author is of the opinion that these charges should be included in gross receipts.

Another question that may be posed is that nowadays it is very common for a professional to act as a visiting faculty in seminars and workshop or oral coaching classes, writing articles of professional interest, authorship of books relating to profession etc. In such cases, honorarium is usually paid to the concerned professional. The question is whether this should also form part of gross receipts? There can be two views possible in this regard. One view is that since these activities are related to one’s profession only hence any receipts whether by way of honorarium or otherwise should be included in gross receipts. Another view may be that gross receipts should consist of total amount of bills issued during the year by the concerned professional. Since activities mentioned above are in the nature of extracurricular activities and for which there is no question of professional billing, receipts from them should not form part of gross receipts though they are off course needs to be disclosed in the income tax return. In the opinion of the author later view appears to be more appropriate.

It is because of these posers perhaps a suitable explanation by way of amendment may be warranted so as to provide clarity in this respect.

Criticism of the scheme:

The scheme is a welcome one so far as it aims to reduce compliance burden on the part of small and medium sized professionals. The only criticism that can be raised is that requirement of declaration of at least 50% of gross receipts as net profit is on a higher side. In case of a medical practitioner who runs a hospital or clinic of his own may find it difficult to declare as high as 50% of total gross receipts as his income business/profession not to speak of income from other sources which may have a huge impact on his tax bill. Moreover in case of non professional partnership firms opting for section 44AD, the presumptive income is only 8% of gross receipts whereas in case of professional firms opting for section 44ADA, the presumptive income is as high as 50%. Thus in real terms it would mean that only 50% of gross receipts are allowed as expenses of profession.

Concluding remarks:

A new beginning has been made by introducing presumptive taxation regime even for professionals. This is no doubt a welcome step. But one gets the feeling that probably the requirement of 50% is on a higher side. Also it would do better if some of the creases underlined in the above discussion are ironed out so as to facilitate easy implementation of the presumptive income scheme.