Well, this was the question lingering in the minds of traders when the Finance Minister Nirmala Sitaraman announced her 2nd budget on 1st February 2020. The budget created a lot of confusion for taxpayers. One of many is the increase in threshold limit for Tax Audit turnover from INR. 1 Cr. to INR. 5 Cr. for a tax audit applicability. Let’s try and understand it.
The Three Raging Confusions…
First Confusion
Whether this limit is only increased for MSMEs just like FM said in her speech. The answer is No. The increased limit is applicable to small retailers, traders and shopkeepers who earn Business Income….Rejoice, not.
Second Confusion
There’s a catch here…Increased audit limit applicable for those whose Cash Sales/receipts and Cash purchases/payments are less than 5%.
Otherwise limit will remain INR. 1 Cr. Also, worth keeping in mind that the words used are sales/receipts and purchase/payments. Hence professionals are confused about whether to take into account 5 % of total sales or 5% of total receipts.
Because in normal business practice a lot of times it happens that your sales are not the same as your receipts (duh…)
Our Opinion: The condition should be 5% of total receipts and payments and not 5% of total sales and purchase. Hence a clarification is awaited from CBDT on the same.
Third Confusion
The impact of this change is given in the new finance bill by amending Section 44AB of the Income Tax Act. FinMin left a loophole while doing so, causing more confusion. Let’s try and understand Section 44AB of the Income Tax Act with examples.
This section specifies the conditions for the applicability of audit. For applicability of tax audit in case of Individual/HUF, the following factors play a vital role:
- Turnover from Business/ Trading.
- Profit/Loss incurred during the year.
- The conditions of section 44AB read with the conditions of section 44AD.
Having made that clear, let us understand how Tax Audit was applicable up to FY 19–20 and how the applicability of Tax Audits have changed since FY 20–21.
Tax Audit Applicability Up to FY 19–20 :
Situation 1: Total Trading Turnover is less than or equal to INR.1 Cr.
In case of losses = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is less than 6% of turnover = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is more than or equal to 6% of turnover = Tax Audit Not applicable and can file ITR-4.
Situation 2: Total Trading Turnover is more than INR. 1 Cr. but less than or equal to INR.2 Cr.
In case of losses = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is less than 6% of turnover = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is more than or equal to 6% of turnover = Taxpayer has two options
- A taxpayer opts for the Presumptive Taxation Scheme = Tax Audit not applicable and can file ITR-4.
- A taxpayer doesn’t opt for the Presumptive Taxation Scheme = Tax Audit is applicable, need to maintain books of accounts and file ITR-3.
Situation 3: Total Trading Turnover is more than INR. 2 Cr. Tax Audit is applicable irrespective of profits/losses. A taxpayer needs to maintain books of accounts and file ITR-3.
Changes in Tax Audit Applicability from FY 20–21:
Keeping in mind the turnover limit of INR. 5 Cr. and total sales/receipts and total purchase/payments in cash are less than 5%. Following are the possible scenarios:
Situation 1: Total Trading Turnover is less than or equal to INR. 1 Cr.
In case of losses = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is less than 6% of turnover = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is more than or equal to 6% of turnover = Tax Audit not Applicable and a taxpayer can file ITR-4.
Situation 2: Total Trading Turnover is more than INR. 1 Cr. but less than or equal to INR.2 Cr.
In case of losses = Tax Audit Applicable
If the profit is less than 6% of turnover = Tax Audit Applicable
If the profit is more than or equal to 6% of turnover = Taxpayer has two options
- A taxpayer opts for the Presumptive Taxation Scheme = Tax Audit not applicable and can file ITR-4.
- A taxpayer doesn’t opt for the Presumptive Taxation Scheme = Tax Audit is applicable, need to maintain books of accounts and file ITR-3.
Situation 3: Total Trading Turnover is more than INR. 2 Cr. but less than or equal to INR. 5 Cr.
Tax Audit is Not Applicable irrespective of profits/losses. Since the turnover limit in Sec 44AD is INR. 2 Cr. or less. And the turnover limit of Sec 44AB has been increased from INR. 1 Cr. to INR. 5 Cr.
Note: This is an anomaly, where neither Sec 44AB nor Sec 44AD gets hit. Hence under this turnover limit, a tax audit is not applicable to taxpayer/trader irrespective of profits/losses. Here a taxpayer will not be able to file ITR-4. But will have to file ITR-3 without audit. Hence an amendment in the turnover limit of section 44AD is expected from INR. 2 Cr. to INR. 5 Cr. from CBDT.
Situation 4: Total Trading Turnover is more than INR. 5 Cr. Tax Audit is applicable irrespective of profits/losses. A taxpayer needs to maintain books of accounts and file ITR-3.
To wrap it up, as per the Budget 2020, CBDT is yet to clarify the confusion around tax audit applicability.
Its time to rid traders/proprietors off tax audit burden when cash transactions do not exceed 5% of purchases(payments)/sales(receipts). If goverment really wants to encourage digital economoy, it needs to start appreciating the agents of change. Its highly likely that CBDT will issue clarification amending sections 44AD(Presumptive Business) & 44ADA (Presumptive Profession)increasing limit.
Hi @saik,
Tax audit is applicable when your turnover is above the threshold or you have losses and your total income is above the basic exemption limit.
If your total income is below the basic exemption limit of INR 2.5 lakh and your turnover is below the threshold - Tax audit is not applicable. You can carry forward the losses by reporting them when filing your ITR.
You can use this tool to determine if tax audit is applicable to you.
Learn more about tax audit
Hope this helps
Thanks for the reply, few more doubts…
So I can carry forward as much loss as I want till the time turnover is less than threshold without going through audit?(salary income less than 2.5L )
Is there a way on the e filing website where I can just declare my losses in the above case without wanting to carry them forward?
I’m asking this because this is going to be my first time
Hey @saik
You can carry forward the losses by filing ITR within due date without going through tax audit when your total income from all sources is below 2.5 lakhs and total turnover from trading activities does not cross the threshold limit of 5 crore.
No other way except filing ITR. If you do not want to carry forward the losses while filing ITR, you can make the losses to be carried forward as 0 in “Schedule CFL”, but there is no way to report losses to ITD except filing ITR.
Hope this helps!
Hi @saik,
In case of Income Tax on Trading, since all the trading transactions are digital, the prescribed rate under Sec 44AD would be 6% of the turnover to determine the applicability of tax audit.
And,
You can use this tool to determine if tax audit is applicable to you or not
Hi
For FY 2020-2021
I have made a loss of 2,36,532 with Turnover of 4,56,545 in option Trading
I have a salary income of 1,30,000
Should i pay tax
which ITR should i file
whether Audit is required.
Please help.