Tax on Business Income

Owning a business comes with its own share of challenges. One of the most important of them is the income tax. While calculating taxes can be as easy using Quicko, knowing the basics of tax on business in India is essential.

  1. Business Income can be speculative or non-speculative
  2. Apart from normal manufacturing & trading business, FnO & intraday trading income from the share market is also considered a business income u/s 43(5) of the IT Act.
  3. Further FnO is considered a non-speculative business income & intraday a speculative business income
  4. One can choose to opt for the regular scheme or presumptive scheme of taxation
  5. When reporting regular business income, ITR 3 is to be filed. When reporting presumptive business income, ITR 4 is to be filed.
  6. income determination:
  7. Set off and carry forward of business income:
    1. Non-speculative loss can be set off against house property income, non-speculative income, speculative income, LTCG, STCG & IFOS
    2. Speculative business loss can be set off only against non-speculative income
  8. Tax Audit Applicability
    1. Regular business income(Section 44AB): A tax audit is applicable if the sales/turnover exceeds ₹10 crores irrespective of the profit/loss.
    2. Presumptive business income (Section 44AD): A tax audit is applicable if the sales/turnover is less than or equal to 2 crores and profit is less than 6%/8% of sales/turnover or there is a loss.

(Note: The rate is 8% for non-digital transactions and 6% for digital transactions.)

Let’s try to understand with some examples.

  1. “I have a trading business of packed food. The turnover for FY 2022-23 is 1.75 crore and the profit is 20 lakhs. Is tax audit applicable to me?”

Ans: Since the turnover does not exceed 10 crores and profit is more than 6% of the turnover, presumptive taxation is not opted for, so a tax audit is applicable.

  1. My turnover is less than 10 crore but more than 2 crores. Is tax audit applicable to me?”

Ans: In this case, the presumptive scheme cannot be opted for since the turnover exceeds 2 crore. However, you will be taxed regularly and a tax audit will not be mandatory but is recommended depending on your income situation.

  1. “I had opted for the presumptive scheme in the last FY. This year my business has made a turnover of 80 lakhs and there is a loss of ₹10 lakhs. Is tax audit applicable to me?”

Ans: Yes, a tax audit is applicable if you opted out of the presumptive taxation scheme in any of the previous 5 years.

  1. “I have a business and the turnover is ₹1.9 crore. I have opted for the presumptive scheme and declared a profit of ₹ 13 lakhs. The turnover is derived from my bank account. Am I liable for a tax audit?”

Ans. The conditions for presumptive taxation have been fulfilled, ie, turnover less than 2 crore and profits are more than 6% of the turnover (bank transaction). So in this case, a tax audit is not applicable.

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