Tax Audit Applicability for Traders

Tax Audit has always been a matter of confusion especially when it comes to investors and trader audiences. Under a Tax audit, a practicing Chartered Accountant examines and reviews books of accounts of a taxpayer and reports the required information in the Tax Audit Report.

The auditor then submits the tax audit report to the Income Tax Department.

Let’s understand tax audit applicability in more detail:

Conditions for Tax Audit

Taxpayers having income from trading in equity intraday, equity F&O, commodity F&O, and currency F&O must report it as business income in the Income Tax Return. Since all the transactions are digital in nature, the limit for turnover to determine Tax Audit as per Section 44AB is INR 10 Cr from FY 2020-21 onwards.

Turnover exceeds INR 10 Cr

The limit of turnover as per Section 44AB is INR 10 Cr if at least 95% of the total payments and at least 95% of the total receipts are digital in nature.

If the trading turnover exceeds INR 10 Cr, Tax Audit is applicable as per Section 44AB(a) of the Income Tax Act.

Turnover is between INR 2 Cr and INR 10 Cr

When turnover is between INR 2Cr and INR 10Cr, neither Section 44AB (or any of its subsections) nor Section 44AD (presumptive taxation scheme) is applicable. Therefore, Tax Audit is not applicable irrespective of profit or loss.

Trust us, even experts don’t have any logical explanation for this loophole and clarification is awaited from the CBDT.

Turnover is upto INR 2 Cr

Tax Audit is applicable under Section 44AB(e) if all the below conditions are satisfied:

• Incurred loss or profit is less than 6% of turnover
• Total income is more than basic exemption limit
• Taxpayer has opted out of presumptive taxation scheme in any of the previous 5 financial years

Tax Audit Applicability as per QUICKO

On Quicko, we recommend Tax Audit on the basis of turnover, profit/loss and total income. Since it is difficult to determine whether the taxpayer has opted out of presumptive taxation in any of the 5 previous financial years, this condition is not considered to determine the recommendation of tax audit. On basis of our experience with the income tax notices issued by the ITD, we recommend the safest option for the taxpayer.

Quicko is not a CA Firm but a platform that enables taxpayers and CAs to furnish Income Tax Returns. Using algorithms that interpret the Income Tax Act, our product recommends Tax Audit. However, the final choice to opt-in/out of Tax Audit lies with the taxpayer or CA filing on behalf of the taxpayer.

Notices from Income Tax Department

There is often a misconception on when should a trader opt for tax audit.

• Tax Audit is mandatory when turnover exceeds INR 10Cr
• If Turnover is less than INR 2 Cr, applicabilty of section 44AB applied
  • Profit less than 6% of the turnover
  • Total income exceeds basic exemption limit.
  • Taxpayer has opted out of presumptive taxation scheme in any of the 5 previous years

In the past, the Income Tax Department has issued notices to taxpayers who had incurred losses, turnover was less than INR 2 Cr, total income was more than the basic exemption limit, and did not opt for Tax Audit. Let us take a look at one of those cases:

Turnover = 53 lacs
Profit= -4.3 lacs
Total Income > Basic Exemption Limit
The taxpayer filed the ITR without opting for Tax Audit
Tax Notice issued with the below error.

The Income Tax Department has not specified a specific business code in the case of stock traders. In general practice, the nature of business code is either adopted as 09028 – Retail Others or 13018 – Other financial intermediation services.

With the increased participation in capital markets, official clarification by the Income Tax Department around the applicability of tax audit, nature of business code, calculation of turnover, etc. would help clear the confusion around income tax compliances.