Tax Audit Applicability - Post Budget 2020

An examination and assessment of books of accounts of an entity/ organization carrying on business or profession are termed as ‘Tax Audit’. Section 44AB of the Income Tax Act contains provisions relating to a mandatory requirement of audit of accounts of certain specified persons carrying on business or profession. Recently, the Finance Bill 2020 has proposed to amend the provisions of Section 44AB. The bill has proposed to increase the turnover limit for the tax audit from INR 1 Crore to INR 5 Crore for satisfying certain conditions. The said amendment is targeting the achievement of two significant aims, namely, reduction of compliance burden amongst MSME and promoting the cashless economy. Going through the Finance Minister's budget speech, it is noted that the amendment will benefit the small retailers / small traders / shopkeepers comprising of the

Micro, Small and Medium Enterprises (MSME). In the present article, we would try and analyze the effect of the proposed amendment in the audit applicability.

The proposed amendment and its effect post the Finance Bill 2020

The Finance Bill 2020 has proposed to insert a proviso in clause (a) of Section 44AB. As per the new proviso, the tax audit turnover limit would be INR 5 Crores in case the following two conditions are satisfied:

Condition-1: the total of all the amount received (including the amount received towards sales or turnover or gross receipts) in cash during the previous year doesn’t exceed 5% of such amounts; and Condition-2: the total of all the payments (including amount incurred for expenditure) in cash during the previous year does not exceed 5% of such payments Thus, in case the person satisfies both the above conditions, then the person is not required to gets the books of accounts audited till the sales or turnover or gross receipts of the person exceeds INR 5 Crores. The following picture would emerge on a combined reading of provisions of Section 44AB and Section 44AD:

Particulars	Tax Audit Turnover Limit
As per Section 44AB, every person (carrying on a business) whose total sales or gross receipts or total turnover does not exceed INR 1 Crore.	INR 1 Crore
As per Section 44AD, an eligible assessee (an individual or HUF or partnership firm but not LLP) engaged in an eligible business (any business except business referred under Section 44AE) has reflected profit of 8% or 6% as applicable.	INR 2 Crore
As per the proposed amendment to Section 44AB, every person whose: Total amount received in cash during the previous year is less than 5% of such amount and Total amount paid in cash during the previous year is less than 5% of such payment	INR 5 Crore

Back to Learn

Frequently Asked Questions

Common questions about Tax Audit Applicability Post Budget 2020 for MSMEs.

A Tax Audit is an examination and assessment of books of accounts of an entity or organization carrying on business or profession. It is a mandatory requirement for certain specified persons as per Section 44AB of the Income Tax Act.

Currently, the turnover limit for Tax Audit applicability is INR 1 Crore for persons carrying on business or profession.

The Finance Bill 2020 has proposed to increase the turnover limit for Tax Audit from INR 1 Crore to INR 5 Crore, subject to certain conditions related to cash transactions.

The proposed conditions are: (1) The total cash receipts during the previous year should not exceed 5% of the total receipts, and (2) The total cash payments during the previous year should not exceed 5% of the total payments.

The proposed amendment aims to reduce compliance burdens for Micro, Small, and Medium Enterprises (MSMEs) and promote the adoption of cashless transactions in the economy.

For eligible assessees under Section 44AD (individuals, HUFs, and partnership firms engaged in eligible businesses), the Tax Audit turnover limit remains at INR 2 Crore.

The proposed amendment is expected to benefit small retailers, traders, and shopkeepers, who often operate as MSMEs, by reducing their compliance burden and encouraging cashless transactions.

By incentivizing cashless transactions, the proposed amendment aligns with the government's efforts to promote digital transactions and move towards a less-cash economy.

No, the proposed amendment does not impact the applicability of presumptive taxation under Section 44AD, which remains applicable for eligible assessees with turnover up to INR 2 Crore.

The proposed amendment will come into effect after the Finance Bill 2020 is passed by the Parliament and receives the President's assent, and the corresponding changes are made to the Income Tax Act.