A case in point is the increase in the number of taxpayers consequent to the introduction of presumptive basis of taxation for certain businesses and professions, on account of it being a simpler and equitable system. The purpose of this paper is to discuss the need for further improvement in the scheme of presumptive taxation under the laws governing direct tax in India.
According to the Economic Survey Report 2017-18, the tax department loses over 65% of its cases against taxpayers upon appeal. This, coupled with the fact that the government is committed to making India an investor and taxpayer friendly country, leads to the inescapable conclusion that any method than can be adopted to make the tax system simpler, fairer and less litigative deserves serious consideration. The number of taxpayers on the register of the tax department can increase dramatically with the simplification of tax laws.
In the context of income tax, the term ‘presumptive’ is typically used in a situation where a certain proportion of receipts of the taxpayer is deemed to be his taxable income. Presumptive taxation can be used for any tax that is based on normal accounting record, such as income tax, value added tax or sales tax, turnover tax, GST, etc. but is most commonly used for income-tax. This paper focusses on direct taxation because a new indirect taxation regime in the country has already been introduced in the form of Goods & Service tax (GST) which, hopefully, will be the catalyst of reform of indirect taxation laws.
The objective of a presumptive taxation scheme is to encourage voluntary compliance by taxpayers engaged in small and medium level businesses. The administrative and compliance cost of the Income-tax department is also lower as compared to taxation of business under the regular provisions of law. The advocates for a presumptive method of taxation also claim that it helps reduce tax avoidance. The use of presumptive taxation as a tax tool is gaining currency in a number of countries.
India has introduced presumptive taxation for certain types of businesses and professions. The government, over the years, has liberalized the relevant provisions to cover a greater number of taxpayers. The Finance Minister in his budget speech for 2018-19 recognized that there has been a 41% increase under the presumptive scheme, which is a clear indication that the taxpayer prefers to opt for presumptive taxation over the normal approach. The relevant extract of budget speech of 2018-19 is provided below:
“Madam Speaker, recognising the need for facilitating compliance, Government had liberalized the presumptive income scheme for small traders and entrepreneurs with annual turnover of less than `2 crores and introduced a similar scheme for professionals with annual turnover of less than `50 lakhs with the hope that there would be significant increase in compliance. Under this scheme, 41% more returns were filed during this year which shows that many more persons are joining the tax net under simplified scheme.”
The finance minister in his budget speech also acknowledged the fact that the turnover and taxes paid by the taxpayer under the scheme were not satisfactory, Thus, there is a need to introduce anti abuse provisions or certain conditions, in order to ensure that the scheme is not misused and at the same time government meets their revenue target with lesser administration. Critics of the presumptive scheme of taxation argue that it could result in a complete re-writing of the law and might unsettle existing tax positions which have crystallized over a period of time. However, this paper provides for a solution that can be considered for the scheme to be extended to a larger group of taxpayers and at the same time potentially increase revenue by taking away numerous incentives and holidays provided under the Income-tax Act, 1961 (“IT Act”).
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