Increase in Tax Audit Limit as per Budget 2021

In Budget 2020 Finance Minister Nirmala Sitaraman announced a change in the turnover limit for tax audit from 1 Cr. to 5 Cr. In Budget 2021, the turnover limit for Tax Audit changes again. This time FM announced to increase the turnover limit for tax audit from 5 Cr. to 10 Cr. (where 95% transactions are done digitally) to reduce the compliance burden on taxpayers.

Applicability of Tax Audit Changes

The increased limit for tax audit is applicable to:

1. Retailers, traders, shopkeepers, etc. who earn Business Income and,
2. Digital transaction of 95% or more during the year.

Factors to Keep in Mind for Tax Audit

The following factors play a vital role:

1. Turnover from Business/ Trading.
2. Profit/Loss incurred during the year.
3. The conditions of section 44AB read with the conditions of section 44AD.

Tax Audit Applicability as per New Changes

Turnover upto 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.

Turnover between INR. 1 Cr. 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.

Turnover between INR. 2 Cr. to INR. 10 Cr.

Tax Audit is not applicable irrespective of profits/losses. The turnover limit in Sec 44AD is INR. 2 Cr. or less and the turnover limit of Sec 44AB has been increased to INR. 10 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. Clarification form CBDT is awaited.

Turnover more than INR. 10 Cr.

Tax Audit is applicable irrespective of profits/losses. A taxpayer needs to maintain books of accounts and file ITR-3.

🥳Rejoice, Traders!!! The tax audit threshold has been increased to INR 10 crore this #Budget2021. pic.twitter.com/5AU7qdkiLD

— Quicko (@HowToQuicko) February 1, 2021

The compliances when tax audit is applicable make tax filing a cumbersome process. Hence, the update in the tax audit limit announced in Budget 2021 was a relief, welcomed by capital market participants.