Are you an SME? We explain how to take advantage of income tax on digital turnover

Earlier this week, finance ministry had rolled out a benefit of lower income tax rate, under section 44AD, for small businesses with turnovers up to Rs 2 crore if it were in digital/banking transactions. 

Government of India, on December 20, said, " If a trader makes his transactions in cash on a turnover of Rs Two Crore, then his income under the presumptive scheme will then be presumed to be Rs 16 lakhs @ 8% of turnover. After availing of Rs 1.5 lakhs of deduction under Section 80C, his total tax liability will be Rs 2,67,800/-."

However, if he shifts to 100% digital transactions under the new announcement made, his profit will be presumed to be at Rs. 12 lakhs @ 6% of turnover, and after availing of Rs. 1.5 lakhs under Section 80C,  his tax liability now will be only Rs.1,44,200/, the statement read. 

Here is an example where the benefit obtained by traders and small businesses is explained in 3 different scenarios:

Scenario 1: 

If an SME is dealing its entire Rs 2 crore turnover in cash, then the tax payable after all deductions and sundry calculations will come to Rs 2.67 lakh. 

Scenario 2:

An SME with 60% digital turnover, will have deemed profit of Rs 7.2 lakh at 6% and Rs 6.4 lakh at 8% on the profit on cash turnover. This means that the total taxable income will be Rs 12.10 lakh and tax payable will reduce by Rs 74,160. 

Scenario 3:

However, if an SME has all of its Rs 2 crore turnover in digital or banking transactions, then the deemed profit of Rs 12 lakh will be taxed at 6% and not 8% bringing the total tax liability to Rs 1.44 lakh only. 

Government said, "Apart from making a tax saving of almost 46% by migrating to banking mode, the small businesses would be able to build their books which may also help them get bank loans easily.  Also, if transactions are carried out through banking channels, then anybody having annual turnover up to Rs. 66 lakhs will have zero tax liability after availing the benefit of Section 80C, after amendment of this new rate structure."