TAX Savings on Digital Transactions for Retailers

TAX Savings on Digital Transactions for Retailers

On recent notification given by Central Board of Direct Taxes, has sent cheer waves among small businesses. The reason being that, if any person with turnover less than Rs 2 crores will pay lower tax if they accept payments through digital means and banking. The government’s decision to tweak the presumptive income norms would reduce the tax liability by up to 30 per cent for those small traders opting for digital transactions.

In budget 2016-17, small traders and businessman with turnover up to Rs 2 crores who did not maintain proper books of accounts, were presumed to have earned 8% income or profit for tax purposes. But if they use digital mode of payments, their income will now be presumed to be 6% of the turnover and not 8% of turnover.

The objects of doing transaction through digital mode are that we get tax incentives to support the digitization of the economy. Some traders would get over 30 per cent advantage if he transacts through digital mode. Under the present section 44AD in case of certain assesses individual, Hindu Undivided Family, or a partnership firm not an Hindu Undivided Family carrying on business (other than transportation, agency, brokerage and commission) having turnover of Rs 2 crores or less, the profit is deemed to be 8% of turnover for taxation. This existing rate of 8% is applicable to payments received in cash.

The benefit of lower rate of tax is of huge benefit for small businessmen for promoting banking and digital transaction.

  • Benefits:-

Suppose a trader makes his transaction in cash for turnover of Rs 2 crores then under present presumptive income scheme his taxable income under section 44AD will be Rs 16 lakhs @8% of the turnover. After availing of Rs 1.5 lakhs 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 Rs 12 lakhs @6% of turnover, after availing deduction of Rs 1.5 lakhs under section 80C, his tax liability will be only Rs 1,44,200/-. Here, digital transaction includes payment received by cheque or through any other means. In following example, the benefit is explained in three different scenarios.


100%Cash-turnover (Rs)

60%Digital Turnover(Rs)

100%Digital Turnover(Rs)

Total turnover

2 crore

2 crore

2 crore

Cash turnover

2 crore

0.80 crore


Digital turnover


1.2 crore

2 crore

Profit on Cash turnover @ 8%

16 lakhs

6.40 lakhs


Profit on Digital turnover @6%


7.20 Lakhs

12 lakhs

Total Profit

16 lakhs

13.60 lakhs

12 lakhs

Deduction u/s 80C

1.5 lakhs

1.5 lakhs

1.5 lakhs

Taxable Income

14.50 lakhs

12.10 lakhs

10.50 lakhs

Tax Payable




Tax Saving




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 help them to get bank loans easily. Also, if transactions are carried out through banking channels then anybody having annual turnover up to Rs 66 Lakhs will end up having ZERO TAX liability after having a benefit under section 80C, after amendment of this structure.

These decisions have been taken by government’s mission of moving towards a cashless economy and also incentive small traders and businesses to proactively accept digital payments.

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