TMI BlogPresumptive tax on professionals – must be dropped, in any case presumption of 50% net profit is very high and unreasonableX X X X Extracts X X X X X X X X Extracts X X X X ..... Presumptive tax on professionals – must be dropped, in any case presumption of 50% net profit is very high and unreasonable - By: - CA DEV KUMAR KOTHARI - Income Tax - Dated:- 9-3-2016 - - Professional activities and fixed costs : In any profession, just on starting of own practice, lot of fixed expenses are committed, and during initial years one may not even be able to break even, unless one has backing of family which support by providing infrastructure and manpower free of cost. But such cases are rare, and even if family provides infrastructure, it becomes a moral obligation to pay to the family for the infrastructure facility used by professional. Costs on account of rent in new tenancies, and cost of manpower for a new prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essional is higher in comparison to an established professional. These costs are increasing fast. For example, in old tenancy, the tenant might be paying paltry rent and it is difficult for the landlord to increase rent and evict old tenant, but in new tenancies, current rent is payable and that rent is also increased by 15-20% at short interval- in some cases every 11 months and in many cases after 2-5 years depending on terms and conditions settled initially. New professionals have low fees and high costs : In most of professions, competition is intense and is increasing day by day. People prefer to go to senior consultants. When one go to a junior, fees is bargained and junior professional can charge low fees. Junior professional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has high fixed costs, whereas, seniors have low fixed costs. Therefore, many senior professionals are able to provide service at competitive rates, therefore juniors have to charge much low fees. Therefore, new entrants in profession face many risks due to high costs, and low revenue. New professionals have disadvantage on all ends- they are unable to attract good clients at reasonable rate and they are also unable to talented people at reasonable rate. An assistant may work with a senior professional even without any charges or at low remuneration, whereas he will either not like to work with a junior professional and if he joins a junior professional, he will charge higher remuneration. Many institutes for example ICAI has prescribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d minimum professional fees. But in ground reality we find that even reasonably senior professionals (say with experience of 10-15 years) are unable to charge fees at those rates (unless one adopt unfair practices arm twisting, and creating circumstances of undue advantages). If one want to have a totally fair play, it is difficult to charge even a reasonable fees. Presumptive tax is not at all justified : In case of professionals the revenue as well as costs vary considerably depending on seniority, type of professional work, type of assistant required for different type of work, location of office and home of proprietor / partners and staff, locations of clients, etc. For example in small townships and cities a professional can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manage with two wheeler vehicle up to some years, however, after some time he need to have four wheeler. Again type and location of , office furnishing, equipage, and type of vehicles used will affect profitability. Therefore, presumptive taxation on professionals must be dropped. It also depend on style of working low profile, medium profile and high profile etc. Therefore, presumptive tax is not a suitable method for computing taxable income. For new professionals there must be some concessions : For new industry and newly set up business, the central Government and State Government provide directly or indirectly some fiscal support. For example land at low cost, investment subsidy, concessional tax or subsidy on sales tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , concessional loans etc. However, new professional do not get such support. Professionals employing others must be given benefit of start-up: Professionals starting practice and / or providing employment to others must be treated as start-up and benefits available to start-up must be extended. 50% profit is very high and unreasonable: Presumption of net income in profession @ 50% of revenue is very high and unreasonable. It is complete disregard of ground realities. The newly proposed S. 44ADA: Vide clause 27 the following new section is proposed (with highlights added) Special provision for computing profits and gains of profession on presumptive basis. 44ADA.(1) Notwithstanding anything contained in sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28 to 43C , in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year , a sum equal to fifty per cent. of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head Profits and gains of business or profession . (2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been already given full effect to and no further deduction under those sections shall be allowed. (3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB . . The new section shall be inserted with effect from the 1st day of April, 2017, means it will be applicable from previous year beginning on 01.04.2016. Salient features which need reconsideration: No minimum limit of gross receipts the provision apply without any amount of minimum limit. Thus even if a part time professional has say gross receipt of ₹ 1,00,000/- he will be assumed to have earned ₹ 50000/- net of all expenses including depreciation. I f his income is low or he has suffered loss due to high fixed costs, he will have to get his accounts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udited. This is not proper. The presumptive provision should apply only when gross receipts exceed at least ₹ 50 lakh in a previous year. Rate of 50% is very high: The presumptive rate of 50% of professional fees as net income is very high. The fixed costs and employees costs have increased substantially. In fact, in a new office a professional may not even achieve break-even due to high fixed costs on account of rent, electricity, employees costs, and depreciation on motor car, other vehicles, and office equipment/ apparatus etc. For example let us take a case of a new advocate, starting practice at his own. His fixed expenses can be budgeted as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nature of expenditure Rs. Office rent 30000 x 12 3,60,000 Staff costs - personal assistant, clerk, driver and peon 30000 x12 3,60,000 Staff over time, incentive bonus etc. equal to 3 months salary 90,000 Office electricity 5000x 12 54,000 Car running, up-keep, repair, insurance road tax etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,50,000 Stationary, computer inputs 30,000 Staff welfare, refreshments, tea coffee, cold drinks etc. 600 per day x 330 days 1,80,000 Residential chamber expenses 1,80,000 Interest on loan of 8,00,000 for car, computer, laptop, office equipment, etc. @ 15% 1,20,000 Repair ,up keep , maintenance of office, res. Office, and equipment etc. 72,000 Depreciation on costs of car, equipment etc. on ₹ 10 lakh @25% average ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 2,50,000 Other miscellaneous expenses 24,000 BEP: Total fixed costs up to level of revenue of ₹ 20,00,000/- 18,70,000 22 LAKH Increase in Fixed costs at each next level of 20 lakh 35 lakh 20% 3,74,000 22,44,000 26.40LAKH Increase in Fixed costs at each next level of 15lakh 35- 50 lakh 20% 4,49,000 26,93,000 31.68LAKH Taking 85% contribution towards fixed cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts the Break-even point will be as shown in above table. This contribution is considered at high level because initially a professional will be able to contribute himself in services in higher proportion. However, with increase in level of operation variable costs will go up significantly. Till level of 26.40 lakh revenue there is likely to be loss and after that profit will be about 70-85% of revenue till the next level. At level of fees realization of ₹ 50 lakh the net profit will be as follows: Revenue: ₹ 50.00 lakh Fixed costs ₹ 26.93 lakh Variable costs Rs. 7.50 lakh Net profit ₹ 15.57 lakh this is equal to 31.14% of revenue. The above expense are consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at lower side, for a low profile professional while having office and residence in mediocre localities, and low profile office and residence with increase in business one has to shift office and more fixed assets will be required. The variable costs in any assignment will also be about 15-30% depending on nature of assignment, fees charged and costs involved. Assuming lower variable costs of 15% contribution towards fixed costs @ 85%. The variable costs will increase, when owner/ professional will have to engage more persons and he himself and his fixed staff will not be in a position to complete work, so additional manpower will be needed and entail extra variable costs. Most of items of fixed assets in case of professional have s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort life for example ideally computer require replacement every three years, motor car every 4-5 years, office furnishing every 3-4 years. Therefore, in fact depreciation should be taken at higher rate of about 35% on straight line method so that replacement costs can be amortized timely. Therefore, the presumptive provision is not suitable for professionals. TDS and tax refunds : Rate of TDS on professional s fees is 10%. We find that out of this TDS substantial part is refunded because in initial years due to high cost and low fees and low volumes professionals are not able to achieve even break even and if one is able to work himself at the maximum then only professional are able to earn. This is not possible due to profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al complexities, and competition. Therefore, fixed expenses and variable expenses both are on rise in most of professions. Considering the experience with TDS, low TDS certificates granted to professionals, and refunds out of TDS, it can be said that the provision of presumption to take 50% of fees as net income (that too net of all fixed costs, amortization and depreciation) is not at all justified and workable. Un-necessary work load and compliance cost will be increased: If the provision is introduced, it will entail additional cost of compliance and complications. This will not be in spirit of ease of business promised by government. Reasonable presumptive tax : Considering ground realities author feels that presumptive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on professionals can be on the following lines: No presumptive income till fees realization for one professional is ₹ 30 lakh Presumptive tax between 30 -50 lakh @ 15% Presumptive tax between 50- 100 lakh @ 20% - Reply By satbir singh wahi as = Sir Partner Salary and Interest also not allowed . Dated: 10-3-2016 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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