Advantages available to small business owners in Income Tax Act and compliance required.

how to file income tax return properly

Primary compliance required under the Income Tax Act

Income tax return filing is one of the major activities in Income Tax Act compliance, which applies to all persons who are liable to file income tax returns.

Audit of books of account is mandatory if gross receipts from business exceed Rs.1 crore in the financial year, similarly, in the case of professionals the limit is Rs.50,00,000.

Books of accounts are required to be maintained at least for 6 years from the end of the relevant assessment year i.e. after the end financial year books of accounts are required to be maintained for at least 7 financial years in case assessment is not opened where any assessment is opened with the period of 7 financial years then same shall be maintained until the assessment is completed and till the expiry of 7 financial years.

Maintenance of books of accounts by specified professionals as per section 44AA

  1. Specified professional as per section 44AA 
    Legal, medical, engineering, architectural professional, profession of accountancy, technical consultancy, interior decoration, authorized representative, film artist, company secretary, information technology.
  2. They are required to maintain books of accounts if gross receipts exceed Rs.1,50,000 in any previous 3 financial years, and in the case of new business books of accounts are required to be maintained if expected gross receipts are Rs.1,50,000.

Maintenance of books of accounts by other business and professionals

  1. Books of accounts are required to be maintained if total income exceeds Rs.2,50,000 or gross receipts exceed  Rs.25,00,000 in any one of the three previous financial years for individual and HUF. In the case of a new business, if the expected total income of gross receipts crosses RS.2,50,000.
  2. In the case of persons other than individuals, the limit is Rs.1,20,000 for total income and 10,00,000 for gross receipts.

Relaxation in income tax compliances for small businesses.  

  1. In the case of individuals, HUF, and partnership firms, if their turnover from business or profession other than specified professions does not exceed 2 crores during the financial year profits can be declared U/s44AD as 8% of profits in case of receipts in cash, and 6 % for receipts through credit to a bank account.
  2. In case individuals and partnership firms carry on their profession, presumptive taxation under Section 44ADA can be opted and profits @ 50 % of gross receipts can be declared. The threshold limit is Rs.50,00,000 for section 44ADA. The benefit of Section 44ADA does not apply to HUF.
  3. In the case of all persons, if their gross receipts and payments made in cash do not exceed 5 % of total receipts and total payments during the financial year, then the limit for a tax audit is Rs.10 crores, and the person is liable for tax audit only if turnover exceeds Rs.10 crore for the financial year.
  4. Books of accounts as per section 44AA read with Rule 6F are not required to be maintained for businesses that have opted for the benefit of section 44AD and section 44ADA.
  5. Advance tax provisions are applicable for those who are opting for a presumptive taxation scheme with a relaxation in payment of the first three installments. Estimated advance tax can be paid in a single installment on or before the 15th of March.
  6. In case of an eligible business whose turnover exceeds Rs.1,00,00,000 and Rs50,00,000 for professionals’ profits to be declared is less than the minimum percentage provided in sections 44AD and 44ADA then the accounts shall get audited as per Section 44AB, and also maintenance of books of accounts as per section 44AA is applicable.
  7. TDS provisions apply to individuals and HUF only when provisions of section 44AB are applicable.

Important practical points that should be considered by small taxpayers

  • In the case where the option to declare profits less than 8 % or 6 % has been opted for, a tax audit shall be done, and lower profits can be declared.
  • Aspects such as consistent net profit ratio shall be considered in case the benefit of 44AD is opted, for instance, if in the previous financial year, the net profit declared is 20 percent, and in the current financial year to save taxes if the person opts for presumptive taxation and declares profits at 8 % while income tax business return filing then net profit ratio gets reduced drastically, and it will affect the net cash flow required by the bank for determination of the amount of loan eligible.
  • In the case of a person who had opted for the benefit of presumptive taxation, u/s 44AD declares profits less than the percentage to be declared U/s. 44AD in the next 5 financial years, then he shall not be eligible to opt for the scheme for the next 5 financial years following the year of non-compliance. So once the taxpayer has exited from the scheme, he/she is not eligible for the next 5 years to opt for Section 44 AD benefits. This provision does not apply to section 44ADA for the declaration of income professional income.
  • It is advised to properly plan the choice of section 44AB at the beginning of the financial year, the decision at the end of the financial year may lead to interest U/s 234B and 234C interest for deferment and delay in payment of advance tax.
  • Similarly, in the case of TDS compliance, if TDS provisions are not complied with, as a result of opting for presumptive taxation from the beginning of the financial year and subsequently if the presumptive taxation benefit is opted then it will lead to non-compliance of TDS provisions like TDS return filing, TDS payment, and TDS deduction.
  • In the case of maintenance of books of accounts, we recommend maintaining books of accounts even if the benefit of presumptive taxation is opted, because non-compliance with TDS provisions or advance tax provisions will lead to the payment of additional interest and late fee only, and it will not lead to further issues, however if accounts are not maintained and if it is required as a result of change of mind in getting books of account then it will lead to unnecessary complications and default U/s 44AA.
  • In the case of profit and loss accounts, balance sheets, and depreciation statements, are required to be prepared for application to loan or overdraft facilities, and financial statements needed to be prepared additionally for taxpayers who opted for presumptive taxation even though it was not required for preparation and filing of income tax return.
  • In case a transaction is made through a non-account payee cheque, the same shall be considered a cash transaction for the calculation of the percentage of profits and determination of threshold limits.