From social media influencers to script writers, advertising consultants, and digital marketing professionals, many new-age earners are now finding themselves in the crosshairs of the Income-tax (I-T) department. Several of them have received scrutiny notices questioning why they filed tax returns under Section 44AD, a provision designed to make life easier for small businesses, ET reported. Tax officials say they should have filed under Section 44ADA, which is meant for certain professionals.
What is the difference?
Section 44AD is for businesses that cover resident individuals, Hindu Undivided families and partnership firms except for LLPs. Under this section, businesses with a turnover below Rs 2 crore have to pay tax on 6-8% of their gross receipts.
Section 44ADA is suited for professionals such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession notified by the Board in the official gazette. Under this section, people of these professions can declare 50% of their gross receipts as taxable income with the condition that their turnover is within Rs 75 lakh.
Why is the tax office sending notices?
The core of the confusion does not arise from how the taxpayers filed the returns, but from how their clients deducted tax at source. Clients often deduct TDS under Section 194J, which is originally meant for professional services, levying 10%, while they should instead go for 194C, which is meant for business contracts at 2%. Tax officials then send notices asking why the taxpayer did not file under 44ADA. “The fact that TDS was deducted under Section 194J does not, by itself, mean that income should be declared under Section 44ADA. Only those professions listed under Section 44AA are eligible,” Ashish Karundia, founder of CA firm Ashish Karundia & Co., told ET.
Karundia also pointed out that the Supreme Court has consistently interpreted “business” broadly. It is not limited to trading or manufacturing but extends to any continuous, skill-based activity carried out to earn income. This means that unless a person is in a notified profession under Section 44AA, or earns from commission or agency work, filing under Section 44AD is perfectly valid.
Experts advise taxpayers who have received notices to respond with caution and on a case-by-case basis. Chartered Accountant Paras Savla explained, in a comment to ET, that if the work undertaken resembles a business contract, such as running advertising campaigns, producing branded content, or managing digital channels, filing returns under Section 44AD is appropriate. However, if the activity is closer to professional consultancy as listed under Section 44AA, then Section 44ADA may apply. He further noted that while clients could deduct TDS under Section 194C to classify such income as “business income,” this often raises additional queries from the tax department. “Clients want to avoid unnecessary scrutiny, which is why they often stick to 194J. But that doesn’t automatically make the recipient a ‘professional’ under 44ADA,” Savla cautioned.
This can only point fingers at one thing: India’s tax code has not kept pace with the rise of new-age careers. Professions like influencer marketing, gaming, digital content creation, and social media consulting did not exist when Section 44AA was written. As a result, these taxpayers are stuck in a grey zone, with the tax office interpreting the rules one way, while experts argue for another. Until the law is updated, confusion and disputes are likely to continue.