Govt has reduced tax burden on small traders & businessmen

Updated on: Jan 13th, 2022

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7 min read

Measures for Promoting Digital Payments & Creation of Less-Cash Economy

In yet another game-changing move, the ministry of finance has lowered the rate of deemed profits that are chargeable to tax under the presumptive scheme for businesses.

For the small business traders doing business in manufacturing, wholesale, retail or trading, opting for presumptive scheme of taxation u/s 44AD, earlier 8% of total turnover/gross receipts were taken as net income chargeable to tax.

But in a move to promoting digital transactions and creating a cashless economy, the Government of India has incentivised small traders/businesses by giving a beneficial lower rate of 6% of deeming profits on their total turnover, thereby giving a total tax savings of at least approximately 40%.

In the words of our Hon’ble FM- “There will be a significant tax benefit for small traders if you turn digital. It is a tax incentive to support digitisation of economy,” Mr. Arun Jaitley told the media. “If we calculate, many traders will get a tax advantage of more than 30 per cent for transactions in digital mode,” he added. How to take the benefit of the presumptive scheme of 6%? To take the tax benefit & save taxes, government has put a precondition for traders / businesses to proactively accept payments by digital means, thereby reducing the existing rate of deemed profit of 8% under section 44AD to 6% in respect of the amount of total turnover or gross receipts received through banking channel / digital means for the financial year 2016-17.

Apart from saving taxes, there are additional financial benefits for the small traders/ business/start-ups for raising capital/ taking loans from Banks, as due to the transparency & nature of transactions being in white, they would be exposed less to income tax scrutiny & other government audits.

Who all stand to benefit? Traders & Businessmen who were already transacting through digital means during the current financial year, would stand to benefit the most as this clarification seems to be retrospective in nature & applicable for transactions from 01/04/2016 up to 31/03/2017.

Don’t worry even if you had transactions received in cash during the year, you could still stand to benefit by doing your future transactions through digital means up to 31/03/2017 & enjoy the lower rate of deemed profit on the turnover received out of digital transactions on pro rata basis.

However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in cash. We have explained the tax benefit/ savings which the trader & businessmen would be entitled to in case they adopt the incentive measure of the government, in example below:

Particulars100% Digital Turnover during the FY(In Rs.) {A}100% Cash Turnover during the FY(In Rs.) {B}50% Turnover in cash & 50% Digital Turnover(In Rs.)  {C}
Gross total turnover1,00,00,0001,00,00,0001,00,00,000
Digital Turnover1,00,00,000                 0  50,00,000
Cash Turnover                 01,00,00,000  50,00,000
Deemed profit @6%   6,00,000           N.A.    3,00,000
Deemed profit @8%          N.A.    8,00,000    4,00,000
Total Profit    6,00,000    8,00,000    7,00,000
Deduction u/s 80C    1,50,000    1,50,000    1,50,000
Taxable Income    4,50,000     6,50,000    5,50,000
Tax payable        15,452        56,650       36,048
Tax Savings (B-A/B-C)       41,198            NIL       20,596

As can be seen above, in the instant scenario trader having a total turnover of Rs.1 crore, in case of digital transactions would end up saving almost 72% of his taxes by taking to the beneficial scheme of digitisation by the government. This would a big relief for small traders, Kirana shops etc. who would now have more capital in their hands to save & invest. Legislative amendment in this regard shall be carried out through the Finance Bill, 2017.  

Press release of the Government of India- http://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/571/Measures-Promoting-Digital-Payments-Creation-of-Less-Cash-Economy-19-12-2016.pdf

For reporting the income on presumptive basis, ITR-4 needs to be filed. Follow our page for better understanding & easy filing. If you’re a trader and want to file your taxes, visit our page on tax filing for traders. *Photo credits: Deccan chronicle

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Quick Summary

The Ministry of Finance lowers tax rate for small business traders to 6% if they accept digital payments, aiming to promote cashless transactions and create a less-cash economy. By proactively accepting digital payments, traders can benefit from reduced taxes and other financial advantages. Those transacting digitally during the financial year will benefit the most, with potential tax savings of over 30%. This incentive is applicable for transactions from 01/04/2016 up to 31/03/2017.

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