In a developing country like India, even after sixty years of independence a majority of the population still lives below poverty line. In their day-to-day life, they have to struggle for subsistence. Besides leading an impoverished life, a large number of people are illiterate. Till date, many of them cannot even write their own name. In this situation, the various constitutionally valid laws are nothing but “kale akshar bhains barabar” and cannot be comprehended by the people. In spite of this, it is binding on them to follow such unknown statutes. Any contravention, whether intentional or not, attracts harsh penalties.
Considering this situation, the law of the land is sought to be kept simplified to a certain extent. Every law provides some relief to the illiterate and poor class of entrepreneurs, helping them to abide by the law without being subjected to its complexity.
In the Income-tax Act, 1961, there are sections such as section 44AD/AF/AE/B/BB, etc. which are commonly known as Presumptive Tax Provisions. They mainly cover a certain class of entrepreneurs such as contractors in civil construction, small retailers, transporters, etc. The main intention of these provisions is to tax businesses on a certain percentage of their turnover or receipts. This percentage specified is normally an industrywise approved profitability norm. The relief provided by these sections is in the form of non-maintenance of books of accounts and no further verifications or questioning through cumbersome scrutiny procedures. In short, the taxpayers enjoy’s his peace of mind. However, a provision of compulsory Tax Audit u/s 44AB needs to be complied with, if the profit declared by such specified business organisation is below the prescribed percentage. This provision is aimed at preventing misuse of the relief provided by the Act. In my sixteen years of practice, I have seen many genuine cases where the actual profit earned is below the specified percentage, but due to the threat of harassment through scrutiny procedures, businessmen have adopted the prescribed percentage and have declared higher profits and paid tax on the unreal income. I have also come across a few cases wherein the lack of awareness of law has led to non-conduct of audit and consequently payment of penalty due to noncompliance.
A similar situation may be faced by many in the near future, due to modification in the sections relating to presumptive tax i.e., sections 44AD/AE etc. becoming effective from A.Y. 2011-12. Due to the amendments, section 44AD is now applicable not only to contractors in civil construction businesses but also to all ‘eligible’ business organisations. The definition of ‘eligible business’ as given in the section includes all business organisations run by individuals, HUFs and firms. Therefore, these modifications have a very widespread impact. Further, it is also rather unfair that the rate of 8% net profit has been prescribed across the board, irrespective of the nature of assessess. A majority of such businessman would be small retail traders. For them the rate hitherto was only 5%. The net profit is now suddenly perceived to be 8%! Further, it might so happen that cost of compliance may even exceed the tax liability and on the top of it, the fear of scrutiny!
The positive side is that all small businessmen having a turnover or gross receipts below Rs.60 lakh can seek shelter u/s. 44AD and after declaring 8% profit, can get rid of complicated accounting and audit requirements and threatening scrutiny proceedings. However, on the flipside, due to the effect of the modified section 44AB, all such eligible businesses declaring a profit below 8% will have to maintain their books of account and get them duly audited, besides filing their return of income. Earlier a small organisation having turnover below Rs.40 lakh and not belonging to a specified class under presumptive tax sections, was completely out of the purview of section 44AB and the audit of such organisations was not mandatory under the provisions of the Act.
To make the law fair — percentage of profit should be trade/industry or businesswise based on survey of reasonable sample of the business, rather than ad hoc percentage of 8%. However, if 8% is based on survey carried on by the CBDT, then in the interest of fairness and transparency, the same needs to be disclosed.
