Govt enhances presumptive taxation limit; a peek into how it will be beneficial for MSMEs, professionals

Presumptive taxation scheme: The government extended the limit for presumptive tax for small businesses from Rs 2 crore to Rs 3 crore and for individual professionals from Rs 50 lakhs to Rs 75 lakhs.

The government has proposed to enhance the limit for presumptive taxation for MSMEs and certain professionals. Image Source: PTI

Presumptive taxation scheme: The government in the budget 2023 proposed to enhance the limit for presumptive taxation for MSMEs and certain professionals provided their cash receipts are less than 5 per cent of the total turnover or gross receipts.

The government extended the limit for presumptive tax for small businesses from Rs 2 crore to Rs 3 crore and for individual professionals from Rs 50 lakhs to Rs 75 lakhs.

The existing provisions of the Income Tax Act provide for a presumptive income scheme for small businesses and certain professionals. Micro enterprises with a turnover of up to Rs 2 crore and certain professionals with a turnover of up to Rs 50 lakh can avail of the benefit of presumptive taxation.

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What is Presumptive Taxation?

In simple terms, taxpayers who opt for presumptive taxation do not need to estimate their income by deducting their expenses from revenue. Taxpayers only have to calculate a percentage of their total revenue and pay taxes on that.

Why govt wants to enhance limit?

The MSMEs are growth engines of the Indian economy and the move is aimed at promoting non-cash transactions. The increase in threshold limits has been proposed in order to ease compliance and to promote non-cash transactions.

The presumptive schemes for eligible business and professions will benefit more persons in the small and medium segment.

Income tax sections under presumptive taxation

The Income Tax Act has framed the Presumptive Taxation Scheme under sections 44AD, 44ADA and 44AE of the Income Tax Act, 1961.

Moreover, to support MSMEs in timely receipt of payments, the government has proposed to allow deduction for expenditure incurred on payments made to them only when payment is actually made.

Under the current provisions, in case of small businesses a sum equal to 8 per cent or 6 per cent of the turnover or gross receipts is deemed to be the profits and gains from business subject to certain conditions.In case of professionals, a sum equal to 50 per cent of the gross receipts is deemed to be the profits and gains from business.

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Presumptive Taxation Scheme