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I-T Act change to help small firms move to e-payment (Relevant for GS Prelims and Mains Paper II)

Centre amends IT tax provisions:
The Centre will amend the Income Tax Act in Budget 2017 to reduce the rate of deemed profit from 8 to 6 per cent for small firms with a turnover of less than Rs.2 crore who receive their payments electronically.

While this should encourage the adoption of electronic payments, it could lead to some operational difficulties for companies that conduct their business both electronically and in cash, according to experts.

Current Provisions: 
Under the existing provisions of section 44AD of the Income-tax Act, 1961, in case of certain assessees (i.e. an individual, HUF or a partnership firm other than LLP) carrying on any business (other than transportation, agency, brokerage and commission) and having a turnover of Rs.2 crore or less, the profit is deemed to be eight per cent of the total turnover.

There is a provision under the Income Tax Act for small business and service providers “If a business has a turnover of less than Rs.2 crore, it is not required to maintain books of account. 
In such cases, the Income Tax Department takes into account a deemed profit of eight per cent for tax purposes. The tax is computed on this eight per cent. This change does not apply to service providers.

Reduction is applicable on electronic transactions only:
The statement clarified that this reduction in the rate of deemed profit would apply only to the revenue generated from electronic transactions with the rate remaining unchanged for revenue from cash receipts. But what about people who have both cash income and electronic income? The Department will have to apply two different percentages on these companies.”

 



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