Basics of Business Taxation
This is the most favourite term for all businesses and professionals amongst the plethora of all income tax provisions. Yes, business taxation covers the taxation provisions for the profits and gains earned by business or profession. Since the terminology of the head is “Profits and gains”, it is a myth that this category covers only the profits and gains arising from business or profession. One must be aware that the term ‘profits and gains’ includes losses from business or profession. Now, what constitutes business and profession?
- Any trades, commerce, manufacture; or
- Any adventure or concern in the nature of trade, commerce or manufacture.
Have you noticed the term ‘adventure’ in the definition? What? Oh, yes. The term ‘adventure’ is included in the definition. So, do they mean to say that we earn profits whenever we do adventurous activities for which we have to pay tax? Actually, the term ‘business’ is characterized by some essential factors such as repetitive transactions, holding of stock-in-trade, dealing with the customers, etc. However, the insertion of the term ‘adventure’ in the definition of business had increased its scope. It implies that any activity which involves a pecuniary risk, commercial purpose and had been done with the motive to earn profit would be considered as business (other than for investment purposes). It is not necessary that it should be in the normal course of business or should be repetitive in nature.
Profession refers to professed attainment in special knowledge as distinguished from mere skill.
Another myth is that only legal income would be included as business income. However, both legal and illegal sources are included while calculating business income.This does not mean that the Government encourages illegal sources of income, too. This treatment of taxing income earned from illegal sources, does not restrict from punishing the person from other laws for earning illegal incomes, but just focuses on the collection of income tax, even on illegal income.
There are two ways of accounting the transactions of the business, namely, mercantile and cash basis of accounting. So, a question arises regarding the method of accounting to be adopted for business income as per income tax provisions. It shall be noted that the provisions encourage both the systems i.e. the same system of accounting adopted in the books of accounts can be adopted for the income tax provisions.
As it is said that what is taxed is profits from business and not income, one needs to understand the deduction of expenditure allowed against business income. There are separate provisions under income tax for claiming expenditures. There are even few sections which allow deducting more than the actual expenditure, if specified conditions are satisfied. Furthermore, there are certain sections which disallow some type of expenditures even though incurred by the business.
As it is a tedious process for small businesses to maintain books of accounts, follow the compliance procedures, while concentrating on increasing the operations of the business, special benefit is provided under income tax provisions if the turnover from their business does not exceed a prescribed limit. Instead of providing break-up of each and every expenditure and receipts, the small businesses can simply report a certain profit percentage in their return of income. Further, no questions would be asked on maintenance of books of account. However, it is pertinent to note that a specified percentage of profit has to be reported even though there would be losses arising from such businesses.