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Understanding Section 44AD: Simplifying Taxation for Small Businesses and Excluding Speculative & F&O Trades

3 min Read Jan 10, 2025

Special provisions for computation of profits and gains of eligible assessees engaged in eligible business – F&O and Speculative businesses to be excluded from the scope of section 44AD

Section 44AD of the Income Tax Act was introduced to help small business owners avoid a lot of paperwork and running from one tax office to the other. This provision offers presumptive taxation where the qualified business entities can determine their taxable income at 8% or 6% respectively for gross turnover or receipts from digital transactions. The time and effort in keeping detailed books of accounts are therefore saved. However, there are some businesses, which are excluded from its ambit, for example, speculative and F&O (Futures and Options) businesses for reasons that are rather apparent. Let's understand why.

What Does Section 44AD Say?

Section 44AD applies to individuals, Hindu Undivided Families (HUFs), and partnerships (other than LLPs) running eligible businesses. Under this scheme, eligible assessees with a turnover of up to ₹2 crore can declare profits on a presumptive basis.

This provision is available for businesses like small traders, contractors, and retailers. But it has exceptions too. Subsection 44AD(6) specifically excludes professionals covered under Section 44AA(1), commission or brokerage businesses, and agency businesses.

Why Exclude Speculative and F&O Trading from Section 44AD?

Speculative and F&O trading does not fit into the objective of Section 44AD. Let's find out why:

1. Nature of the Business

Speculative transactions, as defined under Section 43(5), are contracts settled without the actual delivery of goods or assets. Similarly, F&O trading involves derivatives trading, which is financial in nature rather than operational. These are not traditional business activities.

2. Availability of Reports

The profits or losses for speculative and F&O traders can directly be calculated from the trading reports issued by stock exchanges or brokers. Since these reports provide accurate data, one need not have presumptive calculations.

3. High Volume and Complexity

Speculative and F&O trading usually involves high volumes of transactions. Utilizing a presumptive profit rate of 6% or 8% would be difficult and not representing the true earnings.

Legal and Practical Implication

The exclusion of speculative and F&O businesses from Section 44AD has serious implications:

  • No Presumptive Taxation: Traders in these businesses have to calculate their actual income. This means proper records and detailed tax returns.
  • Compliance Burden: Although traders have to comply with tax provisions, the availability of exchange-generated reports simplifies the process.

The Need for Clarity in the Law

Speculative and F&O businesses are not explicitly excluded under Section 44AD(6). This is ambiguous.

To address this, it is proposed that these businesses be included in the list of exclusions under Section 44AD(6). This would:

  • Align with the purpose of the provision.
  • Eliminate confusion for taxpayers.
  • Simplify tax compliance.

 

This amendment would ensure fairness in taxation and reflect the unique nature of speculative and F&O trading.

Benefits of Excluding Speculative and F&O Businesses

  • Clarity for taxpayers: Clear exclusion will remove doubts and disputes.
  • Accurate Tax Calculation: The traders can compute their exact profits or losses using the reports of exchange.
  • Simplified Compliance: The traders are relieved from core activities without the need to depend on presumptive methods.

Understanding Your Tax Responsibilities

Taxation can be complex, especially for unique businesses like speculative and F&O trading. Understanding the rules is the first step to compliance. If you are a trader, consult a professional to ensure accurate filings.

Mind Your Tax, as the best CA firm in Bangalore,  simplifies tax compliance to any business be it small-scale trading or massive participation in the F&O business. All you need from us is at each step so that your tax return is duly done and that is how it will save both time and money for you.

Section 44AD is an excellent tool to reduce the compliance burden of taxes for small business concerns. It must be made commensurate with the type of business concern. The exclusions of speculative and F&O trading will improve its efficiency and equity.

Tax issues or looking for business registration in Bangalore? Head over to Mind Your Tax now! Our professionals make sure that you are clear about each and every rule so that you file with confidence. Your taxes become easy, error-free, and less stressful.