Running a Small Restaurant or Cafe? How Income Is Taxed and When Presumptive Taxation Applies

Presumptive Taxation Under Section 44AD

For eligible businesses below the applicable turnover threshold, Section 44AD allows income to be presumed at a specified percentage of turnover, rather than requiring a detailed profit-and-loss computation with itemised expenses. For a smaller restaurant or cafe operation that qualifies, this can substantially simplify annual compliance, the business declares income based on the presumptive percentage applied to its turnover, without needing to maintain the same level of detailed expense documentation that a regular computation would require (though basic records of turnover remain important).

Worked Example

Delivery Aggregator Commissions

Restaurants that take orders through food delivery aggregator platforms receive payouts net of the platform's commission (which can be a substantial percentage of the order value). For actual-profit computation, the gross order value (before the aggregator's commission) is generally the relevant revenue figure, with the aggregator's commission claimed as a deductible expense, this matters for accurately computing turnover (relevant for threshold checks like GST registration and presumptive taxation eligibility) as well as profit.

GST on Restaurant Services

Restaurant services have their own specific GST rate structure (which can differ based on factors like whether the establishment is air-conditioned, located within a hotel above a certain room tariff, and so on, an area that has seen specific rate notifications over time), separate from the income tax treatment discussed here. GST registration would also be required once turnover crosses the applicable threshold, regardless of whether the business opts for presumptive income tax computation.

Stock and Inventory

For a food business, raw material inventory (ingredients on hand) at the start and end of the year is relevant to computing the cost of materials actually consumed during the year for actual-profit computation; under presumptive taxation, this level of detailed inventory accounting is not required for income tax purposes, one of the simplification benefits of the scheme for eligible smaller establishments.