While salaried individuals are subject to tax withholding at source and are automatically brought under the tax net, small businesses who may not be subject to tax withholding, manage to escape the tax net. Individuals who work as freelancers, caterers, tutors, artists etc may be earning taxable income and have a responsibility to pay taxes and file their tax returns.
However, most small income earners either out of ignorance or indifference, do not bother to file tax returns. Their sectors are highly cash-driven and no formal accounting process is adopted. The government is tracking significant cash deposits and hence it is advisable that all assesees ensure they are tax complaint.
Return filing and audits
An individual who carries out a proprietary business or profession would need to file his tax returns in Form ITR 3. The individual would also need to report income from all other sources like interest income, capital gains, house property income etc and mandatorily file his tax returns if his total income exceeds the maximum amount not chargeable to tax.
The due date of filing the tax return is July 31 except in cases where a tax audit is mandated, i.e. where the turnover of a resident individual from business exceeds `1 crore or if the gross professional receipts exceeds Rs 50 lakh. In such cases the due date would be September 30. Individuals engaged in specified businesses with turnover within specified limits have the option of computing their taxable income on a presumptive basis.
Taxes are required to be computed on the taxable income based on the applicable slab rates.
Maintenance of books
Individuals carrying on notified professions such as legal, medical, engineering, accounting etc are mandatorily required to maintain books of accounts. For others, the requirement to maintain books of accounts is mandatory under Income–Tax Act only if the professional receipts of an individual exceeds Rs 1.2 lakh or gross receipts or turnover from business exceeds Rs 10 lakh in any one of the three immediately preceding previous year.
For FY 2017-18, these limits have been enhanced to Rs 25 lakh for business income and Rs 2.5 lakh for professional income respectively. However, it is recommended that all self-employed individuals maintain a basic set of books like a receipt register, cash book, expense register etc. that helps in determining their income at the year end. Maintaining supporting documents like receipts for expenses incurred is advisable.
Expenses specifically incurred for the business alone are eligible for deduction as business expenditure. Even legitimate business expenditure in excess of `10,000 in aggregate paid to a person in a day may not be deductible for tax from April 1, 2017 if such payments are made in cash. It is necessary to draw a profit and loss account at the end of the fiscal year to compute the net profit for the year.
One is required to be cognizant about compliance requirements of indirect taxes such as VAT, service tax and labour laws to avoid any challenges on those fronts. While filing a tax return may appear to be an onerous task, one needs to take this responsibility seriously and diligently so that India builds a larger tax base and moves to being a tax compliant society.
The writer is partner Deloitte Haskins and Sells LLP. With inputs from Aarti Raote, director, Deloitte Haskins and Sells LLP