TDS section applied by payer doesn't decide a person's tax regime

Choose 44ADA if your occupation is mentioned in Section 44AA(1); explain choice of regime with supporting documents

The Income Tax Department is scrutinising social media creators, scriptwriters, advertising professionals, and consultants who filed returns under Section 44AD, questioning why they did not opt for Section 44ADA, according to media reports. The issue stems from the fact that many of these individuals do not fall under the specified professions listed in Section 44AA, creating ambiguity and possible tax disputes.

Essence of Section 44AD

Section 44AD is a presumptive taxation scheme for small businesses—resident individuals, Hindu Undivided Families (HUFs), or partnership firms, excluding limited liability partnerships (LLPs)—with turnover up to ~2 crore (~3 crore if cash receipts are under 5 per cent). “It allows them to declare income at 6 per cent (digital receipts) or 8 per cent (cash receipts) without maintaining books or undergoing audit,” says Rohinton Sidhwa, partner, Deloitte India.

 

The scheme excludes professionals specified in Section 44AA, commission or brokerage earners, agency businesses, and goods carriage operators.

 

“Section 44AD reduces compliance costs and ease of doing business for entities with modest turnover. However, it may not suit firms with low margins and restricts flexibility, as opting out bars re-entry for five years,” says Itesh Dodhi, director, Nangia & Co LLP.

Section 44ADA explained

Section 44ADA covers the presumptive taxation scheme for specified professionals. Resident individuals and partnership firms (excluding LLPs) engaged in specified professions can use it. It allows them to declare 50 per cent of gross receipts as taxable income, provided annual receipts do not exceed ~50 lakh (~75 lakh if cash receipts are below 5 per cent).

 

“Eligible professions include law, medicine, engineering, architecture, accountancy, technical consultancy, interior decoration, company secretary, authorised representatives, and film artists,” says Sidhwa. He adds that new-age careers, such as social media creators, advertising professionals, and scriptwriters, are not yet included under sections 44AA read with 44ADA.

 

Section 44ADA offers simplicity. “By permitting profits to be declared at a flat 50 per cent of gross receipts, it spares taxpayers from the need to maintain detailed books of account or undergo a tax audit,” says Dodhi.

 

Abhishek Soni, co-founder, Tax2Win, points out that advance tax can be paid in one instalment by March 15 under both Section 44AD and 44ADA. Sidhwa points out that a simplified tax return can be filed using ITR-4 form by those falling under both sections.

 

The drawback, Sidhwa points out, is that it applies only to specified professionals, and actual expenses cannot be claimed. “Even if real expenses exceed 50 per cent of gross receipts, half the receipts are deemed as income, which may lead to higher tax liability than the actual profit,” he adds.

TDS concerns

Payers must deduct tax deducted at source (TDS) at 10 per cent under Section 194J for professional services and at 2 per cent under Sections 194C/194J for contractual or technical services. These deductions are reflected in the recipient’s Annual Information Statement (AIS).

 

“If the recipient does not report this as professional income under Section 44ADA, it may cause a mismatch and attract tax department queries,” says Sidhwa. He makes a crucial point: the TDS section or rate applied by the payer does not decide the recipient’s tax regime.

 

“If TDS is deducted under 194J, the taxpayer is deemed a specified professional and may be barred from claiming Section 44AD, which excludes such professions. It is a classic case of technology moving faster than human judgment,” says Dodhi.

Responding to notice

Do not panic on receiving a notice. Verify if your work falls under professions notified in Section 44AA(1). “If yes, explain and revise the return, if needed. If not (for instance, some types of content creation), reply that it is a business activity filed under Section 44AD. Attach contracts, invoices, service details, and legal references as support material,” says Soni.

 

Finally, respond within the deadline to avoid penalties. “Reconcile the income reported in the AIS with the actual receipts. Providing inaccurate or false information may attract additional interest and penalties,” says Sidhwa.

 

He also advises content creators to account for non-cash compensation such as free goods, sponsored vacations, or other benefits, which may be taxable.

How to make right choice  

• File under 44ADA only if your profession is listed in Section 44AA(1)
• Don’t choose 44AD to lower taxes if income is professional
• Seek expert advice if unsure
• In reply to notice, state if your work is a business or profession, offer supporting documents

Source: Tax2Win