How Going Digitally Can Save Tax for Small Traders?

In Budget 2017, there was a major change in the way of doing transactions. There are many changes which are taken to promote the digital transactions. Here is the one of it!!

How Going Digitally Can Save Tax for Small Traders?Existing Provision

Earlier under section 44AD of the income tax act,1961 the businessman having turnover up to Rs.2 crore or less can opt for presumptive income scheme i.e. 8% of the total turnover or the gross receipts are assumed to the net income chargeable to tax. The person has to pay tax on the presumptive income as calculated in this section i.e. 8% of the gross receipts.

Amended Provision

Whereas now the finance minister ‘Arun Jaitely’ has announced that under section 44AD of the act, the presumptive is deemed to be 6% rather than 8% of the amount of gross receipt or gross turnover received through banking channel/ digital means for the financial year 2016-17.

Effect of the amendment

It has been decided that the small traders and the small businesses whose turnover is up to Rs.2 crore or less will have tax benefit on the 2% of the gross receipts as compared to the earlier but only if they receive funds through banking or digitally. This step is taken by finance minister to reduce the tax burden on the small traders and also to achieve the mission of making India digital and cashless economy so that India’s tax structure could be made world class.

This is the benefit given to the people so that they could get motivated to took initiative to pay the tax with less formalities and also at lower rates. This decrease in the percentage of presumptive profit will give a total saving of at least 40%.

How This Scheme of 6% Presumptive Income Provide Benefit?

  • Prior condition kept before the traders and small businessmen is that if they want to take the tax benefit of reduced percentage of deemed profit of 6% from 8% under section 44AD of gross receipts or gross turnover, they must have received payments through banking channel or by digital means for the financial year 2016-17.
  • Apart from tax saving benefit, there are many additional benefits which a small trader or businessmen/ startups can enjoy. They can raise capital or get loan from bank on easy installments for business as the whole of the transactions would be made transparent and nature of transaction being in white. This all will help them to be exposed less to income tax scrutiny and other government audits.
  • Arun Jailtely also says that traders could take tax benefit of up to 30% of the transactions made in digital mode. This step is also taken to motivate people to migrate from physical form of cash to digital transactions.
  • This will help the small traders in many ways example, a trader is having turnover up to Rs.66 lakh will have no tax liability after availing the full benefits of deduction u/s 80C.

Who Can Take Benefit?

The trader and businessman who has been transacting through digital means during the FY 2016-17 would get the benefit of decreased rate.  The benefit could also be taken by the traders who has partially done the transactions in cash and partially in digital means during the FY 2016-17.

The existing rate of 8% of gross receipts or gross turnover will continue to apply for the turnover or receipts received in cash for the FY 2016-17.

Below is the example illustrating the same:

Particulars100% digital transaction (in Rs.)100% cash transactions (in Rs.)50% digital and 50% cash transactions (in Rs.)
Gross total turnover90,00,00090,00,00090,00,000
Digital Receipts 90,00,000045,00,000
Cash receipts090,00,00045,00,000
Deemed Income @ 6%5,40,00002,70,000
Deemed Income @ 8%07,20,0003,60,000
Total Income5,40,0007,20,0006,30,000
Deduction u/s 80C1,50,0001,50,0001,50,000
Taxable Income3,90,0005,70,0004,80,000
Tax Liability14,42040,17023,690
Tax saving (Compared to 100% cash transactions)25,75016,480

It is clear from the above example that if the trader made transactions by digital means it will lead to tax saving. This will be a big relief to small traders and other small shops who will have to pay less tax.

About the Author

arpit goyalArpit Goyal is pursuing CA and & also working as an article assistant in Gurgaon. He has an immense interest in Taxation. He loves to use technology to spread knowledge about taxation & accounts.

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