To simplify tax audit meaning, it is an examination or reviewing of accounts of any business or profession that is carried out by taxpayers from the viewpoint of income tax. This is done to streamline the income computation process and make the Income Tax Return filing process easier. Several kinds of audits are conducted under different laws, like a company audit, a statutory audit conducted under company law provisions, cost audit, stock audit, etc. On similar lines, a tax audit is mandated by income tax law. Let’s now find out about the tax audit limit.
According to Section 44AB of the Income Tax Act of India, 1961, any individual who carries a business or profession is mandatorily required to get their accounts audited by an accountant and file a tax audit report if the total sales/turnover/gross receipts exceed the set tax audit limit. Such a tax audit limit has been set at ₹5 crore since last year.
With Finance Act 2020, it increased to ₹5 crore with effect from AY 2020-21 (FY 2019-20). This was primarily done to give some ease to the small taxpayers and promote cashless business transactions in the country. However, a few conditions are to be met for the same. They are as follows:
The accumulation of all cash receipts during the year should not exceed 5% of the total receipt amount
The aggregate of all cash payments during the year should not exceed 5% of total payments
The Finance Bill 2021 has further proposed that this limit of ₹5 crore should be increased to ₹10 crore. Accordingly, individuals carrying on business will not be required to file a tax audit report if their total sales or turnover or gross receipts do not exceed ₹10 crore, and cash receipts and cash payments during the year do not exceed 5% of total receipts or payments.
A tax audit report is conducted to make sure the following objectives are met. Here is a look at the tax audit objectives:
To make sure there is proper maintenance and accurateness of accounts and certification of the same by a tax auditor
To report any discrepancies or observations as noted by the tax auditor after a thorough and methodical examination of the books of account
To report any prescribed information, like compliance with various provisions of income tax law, tax depreciation, among others
To make it easier for the tax authorities to verify the correctness of the income tax returns filing done by taxpayers. The calculation and verification of total income, deduction claims, etc., also become easier
A taxpayer is mandatorily required to get the tax audit conducted if the sales, turnover or gross receipts of business are over the limit of ₹1 crore in a financial year. As mentioned above, this limit of ₹1 crore for a tax audit is proposed to be increased further to ₹5 crore from FY 2019-20.
This limit will be applicable if the cash receipts of a taxpayer are limited to 5% of the gross receipts or turnover and the cash payments of a taxpayer are limited to 5% of aggregate payments. However, taxpayers might also be required to have their accounts audited in various other circumstances. Given below are the various categories and the threshold for carrying out a tax audit report.
Category of Person |
Threshold |
Business |
|
Carrying on business (taxpayer not opting for presumptive taxation scheme) |
Total sales, turnover or gross receipts are above ₹1 crore in the FY |
Carrying on business. This business is eligible for presumptive taxation under Section 44AE, 44BB or 44BBB |
Claims profits or gains that are lower than the set limit under the presumptive taxation scheme of Section 44AE, 44BB or 44BBB |
An individual carrying on a business that is eligible for presumptive taxation under Section 44AD |
Declares taxable income less than the set limit under the presumptive tax scheme. Has income exceeding the basic threshold limit |
Carrying on the business and not eligible to claim presumptive taxation under Section 44AD, due to opting out for presumptive taxation in a financial year falling in the lock-in period of 5 consecutive years from when the presumptive tax scheme opted for the first time |
If income is above the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for |
Carrying on business that is declaring profits according to presumptive taxation scheme under Section 44AD |
If income is above the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for |
Carrying on business that is declaring profits as per presumptive taxation scheme under Section 44AD |
If the total sales, turnover or gross receipts is below ₹2 crore in the financial year, then tax audit will not apply to such businesses |
Profession |
|
Carrying on profession |
Total gross receipts exceed ₹50 lakh in the financial year |
Carrying on the profession and eligible for presumptive taxation under Section 44ADA |
Taxpayer claims profits or gains less than the set limit under the presumptive taxation scheme of 44ADA. Total income exceeds the maximum amount not chargeable to income tax |
Business loss |
|
In case of loss from carrying on business and not opting for presumptive taxation scheme |
Total sales, turnover or gross receipts exceed ₹1 crore |
If a taxpayer’s total income is more than the basic threshold limit but he/she has incurred a loss from carrying on a business. The taxpayer does not opt for a presumptive taxation scheme |
In case of loss from business when sales, turnover or gross receipts exceed 1 crore, the taxpayer is subject to tax audit under Section 44AB |
Carrying on business opting for presumptive taxation scheme under Section 44AD and having a business loss. The total income is below the basic threshold limit |
Tax audit not applicable |
Carrying on business (presumptive taxation scheme under Section 44AD applicable) and having a business loss but total income exceeds the basic threshold limit |
Declares taxable income below the set limit under the presumptive tax scheme and has income exceeding the basic income tax exemption limit |
A tax auditor has to furnish his tax audit report in a prescribed form. It could either be in Form 3CA or Form 3CB
In case a person carrying on business or profession has already been mandated to get their accounts audited under any other law, Form 3CA is furnished
When a person carrying on business or profession is not required to get accounts audited under any other law, Form 3CB is furnished
In the case of one of the aforementioned tax audit reports, the tax auditor must provide the information prescribed in Form No. 3CD, which is part of the audit report
The tax audit report shall be furnished by the tax auditor by using login details in the capacity of ‘Chartered Accountant’. A taxpayer should also add CA details in their login portal
Once the tax audit report is uploaded, it should be rejected/accepted on the login portal by the taxpayer. If it is rejected for any reason, all of the procedures should be followed again till the audit report is accepted by the taxpayer
The tax audit report has to be filed on or before the tax audit due date of filing the income tax returns. In case the taxpayer enters into an international transaction, the due date is November 30 of the subsequent year. For other taxpayers, it is September 30 of the subsequent year, which has been extended to November 30 for AY 2021-22.
If a taxpayer is required to do a tax audit report but fails to do so, they will be levied a penalty. The tax audit penalty will be the lower amount of the following:
0.5% of the total sales, turnover or gross receipts
₹1,50,000
However, under Section 271B, no penalty will be levied if there is a reasonable cause for failure of doing a tax audit. The reasonable causes that are accepted by tribunals or courts are:
Natural calamities
Resignation of tax auditor and consequent delay
Labour problems like a strike, lock-outs for an extended period
Loss of accounts caused by situations beyond the control of the assesses
Physical inability or death of the partner in charge of the accounts
FAQs
Who is eligible for a tax audit?
A taxpayer is mandatorily required to conduct a tax audit of his/her books of accounts if the sales, turnover, or gross receipts exceed ₹1 crore in a financial year. The threshold limit is proposed to be increased to ₹5 crore from ₹1 crore with effect from AY 2020-21.
How is tax audit done?
The tax audit report is filed by the Chartered Accountant to the Income Tax Department electronically.
What is a tax audit in India?
A tax audit is an inspection under the Income Tax Act of India, 1961, which helps the income tax authorities make sure that there are no discrepancies in Income Tax Returns filing.
What is the tax audit limit?
Through Finance Act 2020, the tax audit limit was increased from ₹1 crore to ₹5 crore. The Finance Bill 2021 has proposed that the limit of ₹5 crore should be further increased to ₹10 crore.
What is the penalty for a tax audit?
The tax audit penalty is 0.5% of the total sales, turnover, gross receipts, or ₹1,50,000. The lowest amount of these two is considered a tax audit penalty.
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