The Tax Audit turnover threshold limit has been increased to Rs. 5 crores for business under section 44AB where at least 95 percent turnover is made on digital transactions. In order to boost less cash economy, the increased threshold limit for tax audit shall apply only to those businesses which carry out less than 5% of their business transactions in cash. Currently, businesses having turnover of more than Rs 1 crore are required to get their books of accounts audited by an accountant.
While presenting the Union Budget for 2020-21, the Finance Minister announced that currently, businesses having turnover of more than one crore rupees are required to get their books of accounts audited by an accountant. In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, she proposed to raise by five times the turnover threshold for audit from the existing Rs. 1 crore to Rs. 5 crore.
Further, in order to boost less cash economy, she proposed that the increased limit for mandatory tax audit shall apply only to those businesses which carry out less than 5% of their business transactions in cash.
For this purpose, section 44AB of the Income Tax Act, 1961 is amended vide clause 23 of the Finance Bill, 2020.
Clause 23 of the Bill seeks to amend section 44AB of the Income-tax Act relating to the audit of accounts of certain persons carrying on business or profession.
Amendment of section 44AB.
23. In section 44AB of the Income-tax Act,–
(A) in clause (a),–
(i) the word “or” occurring at the end shall be omitted;
(ii) the following proviso shall be inserted, namely:–
'Provided that in the case of a person whose–
(a) aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent. of the said amount; and
(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent. of the said payment,
this clause shall have effect as if for the words “one crore rupees”, the words “five crore rupees” had been substituted; or';
(B) in the Explanation, in clause (ii), after the word “means”, the words “date one month prior to” shall be inserted.
Clause (a) of the said section provides that every person carrying on business shall get his accounts of any previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year.
It is proposed to insert a proviso in the said clause so as to provide that in the case of a person whose aggregate of all amount received including amount received for sales, turnover or gross receipts during the previous years, in cash, does not exceed five per cent. of the said amount; and the aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent. of the said payment, this clause shall have effect as if for the words “one crore rupees”, the words “five crore rupees” had been substituted.
In order to reduce the compliance burden on small and medium enterprises, it is proposed to increase the threshold limit for a person carrying on business from one crore rupees to five crore rupees in cases where,-
(i) aggregate of all receipts in cash during the previous year does not exceed 5 percent of such receipt; and
(ii) aggregate of all payments in cash during the previous year does not exceed 5 percent of such payment.
In this context, the following points related to the amendment in the increase of threshold limit for tax audit under section 44AB-
1. The revised threshold limit of turnover for a tax audit is applicable for a business entity only and not for professionals. The threshold limit for the applicability of mandatory tax audits for a professional shall continue to be at Rs. 50 lakh even if he receives entire consideration in non-cash mode.
2. It is not provided that who will certify the margin of transactions in cash mode of 5 percent. It appears that the assessee is himself require to declare the percentage of receipt in cash mode and non-cash mode.
3. Even though it is announced in the Budget that the provision to increase the turnover limit for a mandatory tax audit is amended to benefit the MSME sector, it may be noted that under the Income Tax Act, 1961 the provision for mandatory tax audit shall apply to a business entity having the prescribed turnover limit whether registered as an MSME or not.
4. The amendment is carried out only in section 44AB. No amendment is made in section 44AD and thus the turnover limit of Rs. 2 crore shall continue.
5. The term 'aggregate of all receipts and aggregate of all payments' is very wide and covers not only the receipts and payments on account of turnover or sales but all other business transactions. Capital introduction, receipt and repayment of a loan, etc., partners' drawings, payment of freights, etc. Even payment of taxes made in cash will come within the purview of cash transactions.
6. The benefit intended seems to have less practical relevance.
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