Presumptive tax scheme to bring cheer to small businesses and professionals

The Budget presented on Monday has come under fire for the move to tax EPF but there's one proposal that is sure to bring cheer to small businesses and professionals, and that's the presumptive tax scheme.

This scheme covers small businesses with gross turnover up to Rs 2 crore — up from the existing ceiling of Rs 1 crore. It has also been extended to professionals with gross income up to Rs 50 lakh. So what exactly is presumptive taxation? As per Section 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account. However, a person adopting the presumptive taxation scheme can declare income at a prescribed rate of 8% and, in turn, is relieved from the tedious job of maintaining books of account.

However, in case income earned is at a rate higher than 8%, then the higher rate can be declared.

And with the inclusion of professionals, a new Section 44ADA is proposed to be inserted in the Act to provide for estimating the income of an assessed who is engaged in any profession referred to in sub-section (1) of Section 44AA such as legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration or any other profession as is notified by the board in the official gazette and whose total gross receipts does not exceed Rs 50 lakh in the previous year. For the purpose, 50% of the total receipts of the professional during the financial year will be considered as profit and get taxed under the income-tax head "profits and gains of business or profession".

If you look at the table, it's clear that the assessee not only saves on record-keeping headaches, he also saves a considerable amount in taxes. Yes, there can be a few counters to this — mainly that the taxable income could be much below the presumptive taxation rate of 8% and 50% of receipts respectively. And if that is the case then the individual has no option but to maintain the books of accounts.

To further keep the compliance burden minimum, those using presumptive taxation scheme are also allowed to pay advance tax by March 15 of the financial year, as against the normal practice of paying the advance tax in four installments.

However, the taxpayer needs to be careful when opting for this as he or she has to remain in that scheme for 5 years to avail the benefits.

The writer is a certified financial planner

Source: Economic Times

A 25-year-old could lose 18% of retirement income

It's not about paying more in new taxes, which middle-class India has been doing year after year. You just have to count the number of new cesses introduced in the last decade to be sure of this. It's also not about giving up subsidies, which Indians have begun to do rather speedily—the latest example being the surrender of 7.5 million LPG connections in little over a year.

The rage over the new tax on withdrawal from employees' provident fund (EPF) is because the government is seen to be attempting to steal the hard-earned savings of salaried private sector employees. Unlike government employees, private sector workers do not have guaranteed pension or healthcare plan to take care of their sunset years.

Ever since news of the EPF tax broke, people have been worrying about how much of an impact it will have on their nest egg. TOI did the calculations and as the table above shows, if the government goes ahead with the tax on the interest accrued on PF contributions after April 2016, a person starting his career after this could lose 18% of his entire retirement savings at provident fund maturity. Even those in the middle of their career face the prospects of losing between Rs 10 lakh and Rs 20 lakh (12% to 8%) of their retirement corpus.

All this to nudge people towards the National Pension System (NPS) which has failed to get the number of subscribers it expected to because the scheme does not generate as high post-tax returns as the EPF does. By taxing 60% of the interest on EPF withdrawal—if it is not invested in annuity — the government is attempting to make it less attractive for people so that more investment flows into the NPS.

A better way to mend the EPF could have been to fix the dysfunctional employees' pension scheme (EPS), which is a part of EPF. Every EPF member mandatorily contributes towards EPS, but the scheme is designed so badly that the monthly pension cannot exceed Rs 4,000 — an amount that won't equal even 1% of the lastdrawn total monthly salary in many cases.

Times View

The proposal to tax part of the corpus of provident funds on withdrawal needs to be rolled back completely. The salaried middle class has consistently borne the brunt of direct taxation in India and it is unfortunate that instead of making a serious and concerted effort to widen the net, successive governments have opted to squeeze honest taxpayers at every available opportunity.

The latest proposal amounts to double taxation, since the employee's PF contribution is in any case not tax exempt beyond the 80C ceiling of Rs 1.5 lakh per annum.

Thus, those with just decent salaries — often in the last few years of their working lives — would end up having their contribution taxed in the fi rst instance and then 60% of it taxed again at the stage of withdrawal. As for those starting their careers now, quick calculations show they could stand to lose nearly a fi fth of their retirement savings to tax. This is grossly unfair.

The government's argument that the move is aimed at encouraging people to plan for pension for their old age ignores the fact that EPF already has a pension component — in the form of the employees' pension scheme — whose fl awed design has resulted in low payout. Instead of forcing people to move to the national pension system, it should revamp the EPS.

This would ensure competition between EPS and NPS and investors would have the option to choose. If the idea is to promote competition and free market across the economy, why go back to the regulated regime of old? The government shouldn't let ego stand in the way of acknowledging the inherent unfairness of what it's seeking to do.

In any democracy, Budget proposals are not cast in stone and should become law only after debate and discussion. The government should pay heed to the spontaneous sense of outrage this proposal has evoked and let it go. It'll only gain goodwill by doing so.

Source: Economic Times

Government fixes loophole to make non-compete fee taxable for professionals

MUMBAI: Professionals obtaining any sum of money under a non-compete agreement will now be subject to tax with the government having plugged a loophole in the Budget.

Once non-compete agreements were largely restricted to the manufacturing arena.For instance, an outgoing employee would have to sign on the dotted line that he would not share knowhow or a patent that he had helped develop during his employment. Or if he was an inventor, he could be debarred under the non-compete agreement from starting a similar line of business for a certain period. The money received under such non-compete agreements was duly taxed.

"There was no specific provisions to cover professionals who could argue that the sum of money received by him under a non-compete agreement was not taxable," says Gautam Nayak, tax part ner, CNK & Associates.

Now a wide gamut of pro essionals -such as those in he legal, medical, enginee ring or architectural profes sion, or engaged in accoun ancy , consultancy and inte rior decoration, to name a few -have no escape from paying their tax dues when they receive money under a non-compete agreement.

The nature of the tax will be based on the nuances of the agreement. The money received could be taxed either as a capital gain or as income from business or profession. Nayak illustrates: "If a managing partner in a consultancy transfers the right to carry on the firm in its existing name, the sum of money received by him would be a capital gain, subject to a lower rate of tax, assuming the managing partner falls in a higher tax bracket. But if the managing partner decides not to set up a competing consultancy business for a certain period of time, say three years, then the sum of money received under the non-compete agreement will be treated as income from business or profession and taxed at the applicab le income tax rates."

One of the most significant developments in the transfer pricing arena contained in the Finance Bill, 2016 is the introduction of Country-by-Country Reporting (CBCR) norms for the purpose of transfer pricing documentation.

"The new requirement comes into being from April 1, 2016 (financial year 2016-17) for Indian parent companies having consolidated turnover in excess of 750 million euros (or Rs 5,395 crore at current exchange rate). India's transfer pricing authorities will also be able to access CBCR documentation of parent companies, outside India, which have subsidiaries in India, via the mutual exchange of information agreements," explains Sanjay Tolia, partner, PwC.

Typically , the CBCR do cumentation requires reporting various details for each country where business operations are carried out by a company , such as amount of revenues, profit before tax, income paid and accrued, number of employees, assets, and details of activities carried out in each country . CBCR documentation will give Indian tax authorities a global picture of the operations of an Indian-headquartered company and of multinational companies having business in India, and deter mine whether appropriate profits are apportioned to the business operations carried out in India.

Indian-headquartered companies having interna tional operations will need to file CBCR documentation reports for the FY2016-17, before the due date of filing of the tax return, which is November 30, 2017. A graded stiff penalty structure has been prescribed for various noncompliances (see table).

"While CBCR is expected to bring in increased transparency , it is likely to increase compliance burden significantly. Transfer pricing authorities would want to have updated information at least on a yearly basis," says Hitesh Gajaria, chartered accountant and transfer pricing specialist.

"An Indian company , whose parent is resident of a country which is perceived as not co-operating with India for exchange of information, say Cyprus, will find it tougher. The Indian company may not have all the relevant information pertaining to its foreign parent and non-filing of the CBCR will result in a daily penalty ," adds Gajaria.

Source: Economic Times