The Centre will amend the Income Tax Act in Budget 2017 to reduce the rate of deemed profit from 8 to 6 per cent for small firms with a turnover of less than Rs.2 crore who receive their payments electronically, the Finance Ministry announced on Monday in a move which will promote digital payments.
While this should encourage the adoption of electronic payments, it could lead to some operational difficulties for companies that conduct their business both electronically and in cash, according to experts.
“In order to achieve the government’s mission of moving towards a less cash economy and to incentivise small traders/businesses to proactively accept payments by digital means, it has been decided to reduce the existing rate of deemed profit of eight per cent under section 44AD of the Act to six per cent in respect of the amount of total turnover or gross receipts received through banking channel/digital means for the financial year 2016-17,” an official statement said.
“Under the existing provisions of section 44AD of the Income-tax Act, 1961, in case of certain assessees (i.e. an individual, HUF or a partnership firm other than LLP) carrying on any business (other than transportation, agency, brokerage and commission) and having a turnover of Rs.2 crore or less, the profit is deemed to be eight per cent of the total turnover,” the statement said.
“There is a provision under the Income Tax Act for small business and service providers,” Amit Maheshwari, Managing Partner, Ashok Maheshwary and Associates told The Hindu. “If a business has a turnover of less than Rs.2 crore, it is not required to maintain books of account. In such cases, the Income Tax Department takes into account a deemed profit of eight per cent for tax purposes. The tax is computed on this eight per cent. This change does not apply to service providers.”
Electronic transactions
The statement clarified that this reduction in the rate of deemed profit would apply only to the revenue generated from electronic transactions with the rate remaining unchanged for revenue from cash receipts.
“This is a welcome measure to encourage a movement towards a digital economy and cashless transactions,” said Surendra Prakash Singh, Senior Director, Deloitte India. “This will not only incentivise businesses to disclose their true income but will also reduce the compliance costs for some small businesses.”
“If you receive your income in electronic form, then the rate of deemed income becomes six per cent from eight per cent,” Mr. Maheshwari said. “But what about people who have both cash income and electronic income? The Department will have to apply two different percentages on these companies.”
The government said the legislative amendment to make the required changes to the Income Tax Act will be carried out through the Finance Bill 2017.
