Under Income tax Act, 1961, Tax audit is done to check whether all the compliances are being done by the entity as required by provisions of Income tax law. Income Tax Audit is governed by section 44AB of Income tax act, 1961. As per section 44AB, tax audit is applicable to following class of persons-
- In case of Business, if turnover exceeds Rs. 1 Crore during Previous year.
- In case of Profession, if turnover exceeds Rs. 50 Lakhs during Previous year.
- Where the person opt out from the Presumptive Taxation scheme.
- In case of Business covered under Presumptive taxation scheme of section 44AD, assesse has claimed income less than 8% (in case of full receipts in Cash)/ 6% (Other cases) of Turnover and Total Income is more than Basic exemption limit.
- In case of Professions covered under Presumptive taxation scheme of section 44ADA of Income Tax Act, assesse has claimed income less than 50% of Gross Receipt and total income is more than Basic exemption limit.
- Assessee under Presumptive taxation scheme of section 44AE (Presumptive taxation for Transporter), section 44BB (Non Resident in supplying Service or hiring Plant and Machinery), section 44BBB (Foreign Co in Turnkey Projects) and claiming Income less than deemed PGBP under those sections.
So, for instance, if you are doing a business of trading of garments and it’s turnover let’s say Rs. 1.01 Crore during the financial year, then as per section 44AB, audit would become applicable to you and you need to get audited books of accounts of your business. Same situation applies in case of Profession with only difference i.e. once Gross Receipt crosses Rs. 50 Lakh. The important thing to note here is that the limit provided is for the “TURNOVER/ GROSS RECEIPT” which means it is the amount for which sales are effected or services are rendered and include following:
- Sale of scrap/ By Product
- Commission allowed to thrid person
- GST/ VAT/ Excise if following Inclusive method and tax is going to be expensed out.
- Cash discounts except for that allowed in Invoice.
However, definition of turnover excludes the following:
- GST/ VAT/ Excise if following Exclusive method and tax is not going to be expensed out.
- Sales Return/Price Adjustments/Special Discounts
- Other Income such as Sales of Fixed asset, Investments, shares etc.
- Ancillary charges such as Packing, Freight etc.
Whereas, Gross Receipts shall include following:
- Commission, Interest, Brokerage Incomes
- Reimbursement of Expenses, Hire charges
- Finance Income in case of lessor
- Liquidated damages, duty drawback, Export incentives, etc.
In the year 2020-21, some changes were made in Income tax laws to give relaxations to business for applicability of tax audit through Budget 2020. The relaxations for applicability of tax audit was given to Business by increasing the limit from Rs. 1 crore to Rs. 5 Crore so as to reduce the compliance for small taxpayers and to promote digital and Non-cash transactions subject to following conditions:
- The aggregate of all cash receipts shall not be more than 5% of total receipts; AND
- The aggregate of all cash payments shall not be more than 5% of total payments.
Let us understand this with an example. BabaTax has a turnover of Rs. 3 Crore during the year and his total cash receipts amounted to 10% of total receipts whereas total cash payments amounted to 3% of total payments. Thus, in such case the turnover is below the threshold limit of Rs. 5 Crore and cash payment is also below the limit of 5% but because the cash receipt is more than the limit of 5%, BabaTax is required to get the tax audit done for that financial year. However, In case his total cash receipts amounted to 4% of total receipts, all other data being same, then he would not required to go for tax audit.
Read Also: GST Turnover v/s Income Tax Turnover
As per recent changes in tax laws through Budget 2021, there is again a relaxation given to small-medium taxpayers, who carry out substantially all the transactions digitally i.e. at least 95% transactions, by increasing the limit from Rs. 5 Crore to Rs. 10 Crore. So for an instance, if Turnover/ Gross receipts of BabaTax is 7 Crore during the financial year and the cash payments and cash receipts are 3% each to total Cash payments and cash receipts respectively, then BabaTax would get exempted from applicability of tax audit for that financial year.
Accordingly, this amendment will take effect from 1st April, 2021 and will apply for the assessment year 2021-22 and subsequent assessment years. Therefore, Tax Audit Requirement on the basis of turnover is as follows-
|Turnover exceeds in
|Aggregate Cash transactions less than 5%
|Aggregate Cash transactions more than 5%
|1 Crore / 50 Lakh*
|1 Crore / 50 Lakh*
|1 Crore / 50 Lakh*
|1 Crore / 50 Lakh*
*Note- For businesses the limit is 1 crore and for specified professionals the limit is Rs 50 Lakh. However, One can opt for presumptive taxation scheme without going for Tax Audit.
However, this relaxation does not cover major taxpayers as in small to medium entities many transactions are carried out through Cash mode. Thus, this relaxation has hardly benefited to the taxpayers. The main purpose for such change is to digitize the transactions and make it cashless as at present such cash transactions are being done at larger scale in small-medium entities. But, it is going to be a tough tasks for such small-medium entities as they route many transactions through Cash and they are less likely to move to digitization.
For any questions, you may reach us at Discussion Forum
The author of the above article is CA Rahul Gaur.
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