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Change in Turnover Calculation for Options Traders

The ICAI has issued the 8th edition of Guidance Notes which recommends changes in the way turnover is calculated to determine tax audit for options traders.

Tax Audit has been a contentious issue, especially for investors and traders. To put it very simply, under tax audit a practising 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.

Conditions for Tax Audit for Traders

Let’s quickly check out the conditions under which Tax Audit will be applicable for traders u/s 44AB

Turnover above INR 10 crore

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 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.
This is a grey area and we are still awaiting an explanation for the same from CBDT.

Turnover is below INR 2 crore

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

What has changed after the new guidance note issued by ICAI?

The conditions for Tax Audit remain the same.  However, what has changed is the calculation of turnover for Options Traders.

As per the 7th edition of Guidance Notes issued in 2014, premium received on the sale of options was to be included in the turnover. However, there was no further clarification given.

So generally while calculating the turnover for trading in options, along with the absolute profit, the premium received was also included.

However, the 8th edition of Guidance Notes issued in August 2022, makes the calculation of options turnover much more clear. It states that Premium received on the sale of options was to be included in the turnover.

However, if that premium has already been included while calculating the net profit, it doesn’t have to be included separately. So now, your absolute profit will be your turnover for Options.

To put it simply,
As per the 7th edition of Guidance note of ICAI
Options Turnover = Absolute profit + premium on sale of options

As per the 8th edition of Guidance note
Options Turnover = Absolute profit

How will it impact Tax Audit applicability?

The new guideline will reduce the turnover calculation for many options traders and consequently bring down the need for getting tax audit as well.

Let’s take an example.

Suppose you made the following trades:

So, as you can see, your turnover will be much less as per the new guidelines of ICAI. This will definitely ease tax audit requirements for options traders.

It is not difficult to see how one’s turnover could surpass INR 10 crore when adding sell value to absolute profit. Once your turnover exceeds INR 10 crore, tax audit will be applicable to you irrespective of profit and loss.

However, upon not including the sell value, there’s a good chance that the turnover of many traders would come under INR 10 crore, which previously would have exceeded INR 10 crore and the new turnover might not mandate tax audit. 

This will definitely reduce the burden of compliance on options traders and it will encourage more and more traders to be transparent while declaring their turnover while filing ITR

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