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 (to come into effect from AY 2021-22). This time FM announced to increase the turnover limit for tax audit from 5 Cr. to 10 Cr. (where 95% of 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:
- Retailers, traders, shopkeepers, etc. who earn Business Income and,
- Digital transaction of 95% or more during the year.
Factors to Keep in Mind for Tax Audit
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.
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.
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.