Last year, in order to make income tax compliance easier for professionals such as doctors, lawyers and CAs, the government had introduced presumptive tax scheme under Section 44ADA of the Income Tax Act. It is applicable for professionals who have gross professional receipts up to Rs 50 lakh in a financial year.
If one opts for it, 50% of gross receipts is deemed to be taxable profit from profession without any need for maintaining books of accounts. This presumptive tax scheme for professionals was similar to presumptive tax scheme already provided for small traders and businesses with turnover up to Rs 2 crore. The idea of this scheme is to give relief to small professionals and businessmen from requirement of maintaining books of accounts and computing their taxable income in a much simpler manner. Further, a much simple and brief Income Tax Return Form, ITR-4 was introduced for such professionals and businesses covered by presumptive tax return.
Anomaly in the scheme
The presumptive tax scheme for professionals in its present form has a unique anomaly, which may not be the intention of the law. It is creating hardship for a class of small professionals. This anomaly has to be seen vis-à-vis TDS provisions applicable for professionals, including those rendering fees for technical services, covered under Section 194J of the Act.
As per TDS provisions, income received by any resident person, rendering professional services or rendering any technical, managerial or consultancy services is liable for TDS at rate of 10% on the gross amount.
On the other hand, presumptive taxation scheme under Section 44ADA appears to be applicable only for certain limited classes of “specified professionals” such as, legal, medical, engineering, architecture, accountancy, technical consultancy or interior decoration authorised representatives or a film artist.
This leaves out a number of other small professionals/ service providers, whose services are otherwise considered to be in nature of technical, managerial or consultancy services for the purpose of TDS and at par with above-mentioned specified professions. However, for applicability of presumptive taxation scheme, they are neither considered to be professionals (as they do not fall within meaning of “specified professions”), nor do they fall within definition of small traders/ businessmen under another scheme for presumptive taxation under Section 44AD.
Take the case of a freelance journalist, who receives professional fees for providing services after deduction of TDS at the rate of 10%. He is not a small trader/ businessman to fall within provision of Section 44AD, as he is a service provider. He is also not a professional within the purview of specified professions, to be covered under Section 44ADA.
Thus, despite being a small service provider/ professional, he is not covered under the presumptive tax scheme and is burdened with additional compliance requirements such as maintenance of books of accounts, filling a more detailed income tax return form, in case he wishes to avail deduction for his professional expenses, such as travelling and conveyance, driver’s salary, books and periodicals, etc. In case he does not maintain such books of accounts, he is required to pay income tax on his gross receipts.
Clearly, the above anomaly would not be intention of the lawmakers. Thus, an appropriate amendment in law/ clarification may be issued by the government to cover all small professionals/ service providers, who are covered under Section 194J of the TDS provisions, to cover them also under presumptive scheme of taxation and make this scheme more equitable. This will give much needed relief to small other professionals and make income tax compliance easier for them.
The writer is director, Direct Taxation, Nangia & Co LLP