In order to rationalisation and to reduce compliance burden on small and medium enterprises in India, the Finance Act 2020 has brought major amendments to the Income Tax Act, 1961 related to the applicability of the Tax Audit.
Under section 44AB of the Income Tax Act, 1961, every person carrying on business is required to get his accounts audited, if his total sales, turnover or gross receipts in business exceeds Rs. 1 crore in the previous year. Similarly in case of a person carrying on profession, tax audit is required if his gross receipts in profession exceeds Rs. 50 lakhs in the previous year.
The Income Tax Act has been amended w.e.f. 01/04/2020, i.e. from assessment year 2020-21 as below:
The threshold limit for turnover of Rs. 1 crore for a person carrying on business has been increased to Rs. 5 crore provided the following conditions are satisfied
1. His aggregate of all receipts in cash during the previous year does not exceeds 5 % of such receipts.
2. His aggregate of all payments in cash during the previous year does not exceeds 5 % of such payments.
| Turnover limit for the previous year | Amount of profit with respect to turnover (in %) | Whether cash receipts less than 5% of the Total receipts | Whether cash payment less than 5% of the total payment | Is Tax Audit Applicable? | Type of Assessee to whom Applicable |
| More than 5 Crores | Not applicable | Not applicable | Not applicable | Yes | All Assesses |
| More than 1crore but upto 5 Crore | Not applicable | Yes | Yes | No | All Assesses except Individual, HUFs & Partnership Firms |
| No | No | Yes | |||
| Yes | No | Yes | |||
| No | Yes | Yes | |||
| Less than 1 Crore | Not applicable | Not applicable | Not applicable | No | All Assesses except Individual, HUFs & Partnership Firms |
| More than 2crore but upto 5 Crore | Not applicable | Yes | Yes | No | Individual, HUFs & Partnership Firms |
| No | No | Yes | |||
| Yes | No | Yes | |||
| No | Yes | Yes | |||
| Less than 2 Crore | More than 8% or 6% of Turnover | Not applicable | Not applicable | No | Individual, HUFs & Partnership Firms |
| Less than 2 Crore | Less than 8% or 6% of Turnover | Not applicable | Not applicable | Yes** | Individual, HUFs & Partnership Firms |
For practical purposes, section 44AB should be read along with section 44AD, as there can be various combinations and permutations to identify applicability of the Tax Audit to an assessee under the Income Tax Act, 1961. In order to make it easy for understanding, we have compiled the below summary for a ready reference (Only relating to assessees carrying on Business, assesses carrying on profession are not covered here).
If turnover is less than 1 crore and total income is less than maximum amount which is not chargeable to tax in any previous year, then audit will not be applicable. (44AB(a) read with Section 44AB(e))
**If income has been declared u/s 44AD in any five assessment year beginning from AY 2017-18 before relevant previous year, then audit will be applicable under Section 44AB(e) read with section 44AD(4).
From the above table it is clear that the government has tried to reduce the compliance burden of various small and medium enterprises, however the Tax Audit compliance burden on small enterprises is still not completely ruled out. There may be cases where the small enterprises will be required to get audit conducted whereas in the similar case a medium enterprise (turnover of 2-5crore) is not required to get the books of accounts audited. We expect that the CBDT should come out with a clarification on the above mismatches in applicability of Audit between small and medium enterprises.
Disclaimer:
The above information has been compiled by HSCo in order to make it easy for the reader to understand the provisions of the Income Law regarding applicability of the Tax Audit. The information has been compiled from Finance Act, 2020 & Income tax Act, 1961 and data available on various portals and other sources. While we believe that the above information is accurate, we request the readers to kindly check the provisions from Finance Act 2020 and The Income tax Act, 1961 before actually implementing it.
