Finance Bill 2016 has introduced section 44ADA to extend presumptive tax scheme to professionals. Opinions remain divided on whether 50% is too high a rate. Another implication of it has stumped partnership firms, where taxable profits end up more than the actual profits!
There appears to be an error in setting the 50% rate, particularly in view of the fact that partners’ remuneration and interest u/s 40(b) will be treated as if they are already allowed. In other words, 50% of gross receipts will be assumed to be taxable profits after giving effect to all expenses, including those mentioned in section 40(b).
Section 40(b) provides for maximum remuneration and interest for a working partner as follows:
(a) on the first Rs. 300,000 of the book-profit or in case of a loss: Rs. 150,000 or @90% of the book-profit, whichever is more;
(b) on the balance of the book-profit: @60% of the book profit
Book profit is net profit after all expenses, but before remuneration and interest.
Let us assume Rs. 5,000,000 as gross receipts for a professional partnership firm in a year. Taxable income as per section 44ADA will be Rs. 2,500,000. We will do reverse calculations to arrive at the profits so taxed.
In INR
Book Profit
|
Rate
|
Remuneration
|
Net Profit
|
300,000
|
90%
|
270,000
|
30,000
|
6,175,000
|
60%
|
3,705,000
|
2,470,000
|
| 6,47,5000 |
3,975,000
|
2,500,000
|
The book profit, in this case, adds up to an amount more
than the gross receipts!
Now, what
would happen if the recommended rate of 33.33% given by the Income Tax
Simplification Committee (Ch. Justice R.V. Easwar) was included? Taxable income
as per section 44ADA would be Rs. 1,666,500.
In INR
Book Profit
|
Rate
|
Remuneration
|
Net Profit
|
300,000
|
90%
|
270,000
|
30,000
|
4,091,250
|
60%
|
2,454,750
|
1,636,500
|
4,391,250
|
2,724,750
|
1,666,500
|
In this case, the book profit (before partners’ salaries) is
87.8% and remuneration is 54.5% of the gross receipts, which appears fair for
both the assessee and the exchequer.
This issue definitely needs immediate attention, failing
which presumptive tax for professionals will lose its practical application.