Section 44AB Amendments on 2020 and Their Impacts in Businesses
Presenting her first budget in 2020, Finance Minister Nirmala Sitharaman has proposed a bunchful of amendments in Section 44AB of IT Act 1961 that are especially meant to stimulate the MSMEs and StartUps.
An amendment declared in Budget 2020 prescribed revision in threshold value that is required to classify those businesses/professionals for whom it is mandatory to do Auditing of their Books by Chartered Accountant and submit it to IT Department accordingly within a deadline. This amendment will serve two major purposes:
- Reduction of compliance burden in MSME
- Promoting the cashless economy
The amendment is aimed to nourish the backbone of Indian Economy that consists of small retailers/small traders/shopkeepers under Micro, Small and Medium Enterprises (MSMEs). First, we take a look on the rules actually stated in Section 44AB under IT Act 1961.
Audit Accounts of Certain Persons Carrying on Business or Profession u/s 44AB
Under Section 44AB, the entities as mentioned in the following clauses, should mandatorily get their Books audited by a Chartered Accountant and submit the report within a deadline (usually, September 30 of an AY) to IT Department duly signed and verified by the accountant.
- Businesses, where total sales/turnover/gross receipts is more than INR 1 Crore in the last FY.
- Professionals, where the gross receipts in profession is more than INR 50 lakh in the last FY.
- Businesses, where the profits and gains are deemed to be the profits and gains permitted in Section 44AE/44BB/44BBB, whatever is applicable, claim less income than the permissible value received in last FY
- Professionals, where the profits and gains are deemed to be the profits and gains permitted in Section 44ADA, claim less income than the permissible value received in last FY but higher than the threshold tax exempted amount (INR 2.5 lakh)
- Businesses, where the profits and gains are deemed to be the profits and gains permitted in Section 44AD, claim less income than the permissible value received in last FY but higher than the threshold tax exempted amount (INR 2.5 lakh)
- Businesses/Professions that are included in Presumptive Tax Scheme u/s 44AD/44ADA/44AE are exempted of this obligation.
- Any entity that is liable to get its Account audited by any other law and submit its report to the IT Department within the deadline as specified by that other law, shall automatically come under the compliance of 44AB with no added
Conditions of Proposed Amendment 2020 budget in Section 44AB of IT Act, 1961
In Finance Bill 2020, a proviso is proposed to be inserted in the first clause (as stated above) of Section 44AB, where the Tax Audit turnover threshold increases from INR 1 Crore to INR 5 Crore, for those businesses that satisfy the following two conditions:
Total cash amount received during the last FY is not more than 5% of the net amount received. (including the amount received out of sales/turnover/gross receipts)
The net cash payment in last FY is not more than 5% of the net expenses. (including amount spent in all business expenditure)
44AB. Every person, —( as per income tax act 1961)
- carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year; Or
- ‘Provided that in the case of a person whose–
(a) aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent. of the said amount; and
(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent. of the said payment, this clause shall have effect as if for the words “one crore rupees”, the words “five crore rupees” had been substituted; or’;
This implies that, businesses should include the e-payment option to avail the 44AB amendment provisions. They should use the option and also encourage the customers to choose digital payment option over cash payment to make any purchase.
Note: GST Audit is applicable for the businesses registered under GST Rule (Threshold value applicable for GST Audit is INR 2 Crore)
Auditing for Businesses/Professionals that cannot Avail 44AD/44ADA/44AE
Some exceptions exist in 2020 amendments of 44AB. As per the original 44AB guidelines, businesses/professionals that are availing Presumptive Tax Scheme 44AD (with gross turnover not more than INR 2 Crore), 44ADA (with gross turnover not more than INR 50 lakh) and 44AE need not have to get their Accounts audited, unless their taxable income is less than the income permissible in the Scheme and are more than the threshold tax exempted value. In that case, these entities should compulsorily make their Accounts audited by a Chartered Accountant, when:
- For businesses (gross turnover up to INR 2 Crore) under the provision of Scheme 44AD,
- if their income is less than 8% of the net cash turnover
- and (or) 6% of the net electronic receipts turnover
but more than the threshold tax exempted amount of INR 2.5 lakh, then book keeping and audit is mandatory.
- For Professionals (gross turnover up to INR 50 lakh) under the provision of Scheme 44ADA,
if the income is less than 50% of the net turnover receipts of the professional, but more than the threshold tax exempted amount of INR 2.5 lakh, then book keeping and audit is mandatory.
- For businesses under the provision of Scheme 44AE, if
- The gross income is a lesser rate than INR 1000 per ton of gross vehicle weight/unladen weight (For Heavy Vehicle)
- In case of Other Vehicle, gross income is a lesser rate than INR 7500 for every month/or part of the month as owned by the assessee in a FY.