Budget 2016 has brought the Professionals under the umbrella of Presumptive Taxation. FM has introduced a new section 44ADA. Professionals with less than Rs.50 lakh receipts in a financial year can avail the so-called benefit of PTS.

For this purpose, 50% of the total receipts of the professional during the fiscal will be considered as profit and get taxed under the income tax head “profits and gains of business or profession”.

 

The Presumptive NP rate of 50% on Professionals and their Partnership Firms, as proposed u/s 44ADA, is considered on very higher side and may cause very high tax incidence on such professionals and their partnership firms.

 

The provisions provides as follows:

• 50% of the Gross Receipts would be treated as the Net Income of the assessee firm.
• No deduction towards Remuneration and Interest would further be allowed to the firm.
• The deduction towards Interest and Remuneration would be deemed to be allowed to the firm.
• The Remuneration and Interest would again be taxed in the hands of the partners as Individual Income.

 

A close analysis of the above provision with an example brings out the following:

a) Gross Receipts of the Firm: Rs 40 Lakh

b) Deemed Income as per the Provisions: Rs 20 Lakh (50% of Rs 40 Lakh)

 

If Partnership Deed provisions for remuneration are on similar lines as per 40 (b) then it would be deemed that Remuneration and Interest as provided in the books has been allowed and firm has to pay tax on

• Net Taxable Income of Rs 20 Lakh.
• Maximum Allowed Remuneration as per Section 40(b) of the Income Tax Act shall be Rs 32.25 Lakh. It means Working Remuneration of 32.25 Lakh on a Profit of Rs. 20Lakh.

Thus, the situation is wherein on a gross total income of Rs 40 Lakh, the firm will have income after allowing all expenses but before remuneration and interest of Rs 52.25 Lakhs.

 

Hence, the government in a way is deeming an absurd situation. The outcome of the situation does not seem favourable and practically possible. Budget came up with weird provisions for Presumptive Taxation.

 

If the same provision gets notified then no assessee will be willing to opt the Presumptive Taxation Scheme as the tax payable under this scheme will be much higher than the tax payable under the normal taxation scheme.

 

Thus, it would be advisable to the government to go through the provision once again and come-up with some feasible provisions.

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