Presumptive Tax Scheme (PTS) simplified!

There are more than six crore Small and Medium businesses in India. It’s not an exaggeration to say that these Small and Medium businesses are a life-line of Indian Economy. 

These businesses have a small number of customers, unlike big companies, LLPs and Ltd companies in the market. Still, they have a considerable market share in the Economy. 

The main issue with these small businesses is their compliance. 84% of these businesses operate as a proprietary firm, a partnership firm. Most of their transactions are in cash and very small compared to big companies. The transactions are primarily for purchasing the goods, maintenance of Business and other minor expenses.

So, they can’t maintain their accounting books regularly. To help these businesses stay complaint and ease their compliance process, the Income Tax Department has exempted them from maintaining books of account. These businesses are also exempted from getting their accounts audited by the certified C.A.

They only need to file their Income Tax Return annually through Presumptive Tax Scheme or PTS. IF you too are a small or medium business owner, this blog will be beneficial for you to understand the features and benefits of this scheme! So keep reading! 

What is PTS?

Presumptive Tax Scheme is a special scheme, crafted for small Business and professionals mentioned in the Income Tax Act. Under this scheme, a taxpayer will not have to maintain his/her book of accounts or get their firms audited by a certified C.A. 

Moreover, the Income-tax calculation process is also simple. Let’s understand it step by step.

  1. If your aggregate turnover through sales of product or services is below 2 crores, you can avail this scheme
  1. First of all, you will have to compute your Profit at 6% on all the payment you received in your bank accounts via online or offline mode.
  1. Then you will have to calculate your Profit at 8% on all the payment you received in cash.
  1. Finally, you will have to add both these profits and the resultant amount will be treated as your Income from business profit.
  1. This is the net Income of your Business.

Note: If you are a partnership firm, you can reduce the net Income by deducting the amount in the form of salary paid to the partners. 

Let’s understand this scheme with a small example

ABC is a proprietary firm involved in the Business of retail trading. Their aggregate turnover through sales for the F.Y. 2019-2020 is INR 60,00,000/-. Out of these sales, 40,00,00/- was received in the form of cash.

The remaining 20,00,000 was received in their account via Internet Banking and other online modes of transactions. Their Net Income from Business will be calculated as follows:

Profit calculation rateSales Amount in INRProfit amount  in INR
Net Income from Business 40,000

In the case of ABC, the Net Taxable Income is INR 40,000. If the ABC were a partnership firm, the remunerations to the partners would be deducted from this amount.

Eligibility for availing PTS scheme

  1. Any small or medium business with the aggregate turnover below 2 crores, involved in the trading, manufacturing or contracting Business can avail benefits under this scheme.
  1. Only resident taxpayers can avail the benefits under this scheme.
  1. Only proprietary firms, HUF (Hindu Undivided Family) and Partnership firm can avail this scheme.
  1. For the small goods transport firms and small professionals, a separate PTS scheme is available. 

Note: Although, depreciation is not allowed while availing the benefit of the PTS scheme, the Written Down Value of your fixed asset can be reduced by 5%.

Let’s say the value of your Place of Business is INR 20,00,000/-. After the completion of a financial year, it’s Written Down Value will become INR 19,00,000/-

Who can not avail this scheme?

  1. Insurance agents and brokerage firms cannot avail benefits under this scheme.
  1. Non-resident taxpayers are ineligible for availing these benefits under this scheme.
  1. No Company or LLP registered under the Company’s Act can avail benefits under this scheme.
  1. If you opt for this scheme, you will have to forego the business deductions under section 80IB, 10A or 10AA. 

Final thoughts

PTS is exceptionally beneficial for small businesses and professionals. It saves them from the unnecessary hassle of maintaining books of account and auditing. It can help them stay compliant in the simplest way possible!

Probal Consulting Group is a leading Taxation, Accounting and Compliance firm that helps individuals, MSMEs and other businesses manage their accounting, taxation regulatory compliance affordably.

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