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Tax Audit Limit - Budget 2020 Implications

Sec 44AB, the governing section for Income Tax Audit has been in existence since the Finance Act, 1984. Over the years, the threshold limit for applicability of Tax Audit has changed and prior to Budget 2020 the same stood at Rs. 1 Crore. Let's focus on the relevant Clause a) and understand what has the Budget 2020 proposed to change.


Essentially the Clause a) of Sec 44 AB prior to Budget 2020 was as follows -
a)  Every person - 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 Now, Budget 2020 In section 44AB of the Income-tax Act, has bought in the following change -
(i) the word “or” occurring at the end shall be omitted;
(ii) the following proviso shall be inserted, namely:
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'; Now, let's understand whether the limit has changed from a Business Owner's perspective.


The enhanced limit of Rs.5 Crore applies to only those set of taxpayers whose total annual Cash receipts as a percentage to their Sales turnover or Gross Receipts does not exceed 5% along with Cash Payments as a percentage to all expenses Paid stands at less than 5% of the respective total Expense of the business in that relevant previous year.
It is important to note that both Income and Expense test needs to be satisfied simultaneously to take advantage of the higher Rs. 5 Crore turnover threshold mentioned in Clause a).
Simply put, if either the Cash Receipts