Tax-Audit-Applicability–Post-Budget-2020

Tax Audit Applicability – Post Budget 2020

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:

ParticularsTax 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

 

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Post by Arnold Thomas

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