Justice Easwar panel recommends a brand new section 44AG catering to professionals whose turnover during a financial doesn’t exceed Rs 1 crore. Their income would be deemed to be one-third of the gross receipts.
To wit, if a lawyer reports a gross fee of Rs 1 crore, his professional income would be deemed to be Rs 33.33 lakh, with Rs 66.67 lakh being deemed to be legitimate professional expenditure for which he doesn’t have to adduce any proofs. This is a huge advantage to practicing lawyers as opposed to their brethren working as law officers in companies.
Let us say Gupta and Aggarwal went to the law school together, and on completion Gupta chose to practice independently whereas Aggarwal preferred the safety of employment. Suppose both get Rs 50 lakh.
For Gupta this would be his gross receipts from practice of profession and for Aggarwal this would be his gross salary. Gupta would laugh up his sleeve. Why? Because, his taxable income would be deemed to be just Rs 16.67 lakh assuming he has no other income whereas Aggarwal would be condemned to paying tax on Rs 50 lakh salary income assuming there is no tax-free allowance included in his salary and he too has no other income.
Aggarwal would pay income tax through his nose. Easwar panel has thus further accentuated the hiatus between professionals and the salaried taxpayers. A professional gets enormous scope to ‘arrange’ his expenses like by paying salary on paper to his senior citizen father or father in law or both, booking travelling expenses, conveyance expenses and entertainment expenses imaginatively without arousing suspicion so as to reduce his taxable income within his comfort levels. Now Easwar panel has rendered such manipulations needless, with a generous two-third deemed expenditure.
The panel says the 8% presumptive income scheme in vogue for small traders has been a success. Presently it can be latched onto by small traders with an annual turnover not exceeding Rs 1 crore, the same cut off point proposed by Easwer panel for professionals.
But the difference between the two when it comes to profit making cannot be lost on anyone. A trader sells what he buys but a professional sells nothing except his cerebral power! In the event, a profit margin of just 33.33% is a largesse. Many small professionals operate from the comfort of their homes. Their overheads including rent are likely to be very small.
Small doctors may incur a much larger expense account than lawyers but even for them a presumed margin of just 33.33% is a joke.
If Easwar panel recommendation is implemented, many legal officers and salaried doctors would try to clamber the professional bandwagon where possible. Pay CTC (cost to the company) hitherto shown as salary now as fee, would be their refrain.
That would bring about parity between the mythical Gupta and Aggarwal. Such a flexibility is possible in the private sector but government-employers won’t play ball with the salaried professionals.
Now let us see the baleful effect on the tax collections. Mr. A with a professional receipts of Rs 4 crore, would have four units earning this amount -- Rs 1 crore by Mr. A the individual, Mr. A and Mrs. A, the partnership firm in which they are partners an offshoot of their life partnership assuming she is also a lawyer and two other partnerships similarly created with the second partner in all the three firms being different.
Of course, partnerships have to pay a flat rate of 30% tax but that would not unduly worry Mr. A because he has latched on to the presumptive tax bandwagon four times, so to speak, with telling effect.
The government would do well to tweak the Easwar panel recommendations as follows while enacting the proposed section 44AG:
* Profit margin of 50% from the recommended 33.33%;
* cut off point of Rs 50 lakh from the recommended Rs 1 crore given the fact that with more than Rs 50 lakh fee, a professional is no longer small whereas a trader can retain the small tag even at Rs 1 crore; and
* A professional cannot clamber into the 44AG bandwagon repeatedly i.e. he can reap its benefit either as a sole practitioner or as a partner in just one partnership firm.
Of course to end the salaried professionals’ heart-burn the income tax law needs to provide a lot more by way of relief to the harried salaried class. As it is, they have to content themselves with chewing antacids.