Exemption from Audit for Companies with Turnover up to ₹1 Crore: Benefits May Exist, but the Risks Are Far Greater
It has been reported that the Ministry of Corporate Affairs is considering a proposal to amend Section 139 of the Companies Act, 2013, to exempt companies with an annual turnover of up to ₹1 crore from mandatory statutory audit. A similar approach was earlier adopted under the GST law, where all audit requirements were removed. The consequences of that decision are now visible and clearly indicate a shift towards a “low compliance, high risk” model.
At present, under the Income-tax Act, tax audit limits are ₹1 crore for business entities and ₹50 lakh for professionals. These thresholds are set by the Finance Ministry after careful consideration. Internationally, however, the trend in developed economies has been the opposite—gradually expanding audit requirements from large entities to smaller ones to strengthen financial discipline. Against this background, a blanket exemption from audit is a risky policy choice.
Although the stated objective of this proposal is to improve “Ease of Doing Business” and reduce compliance burden on small entrepreneurs, compromising financial discipline and public interest in the name of convenience is neither prudent nor sustainable. When viewed holistically, the potential damage from this proposal is likely to far outweigh its benefits. For many small companies, an annual audit by a Chartered Accountant is the only structured financial health check they undergo. Removing it is like cancelling preventive medical check-ups before illness strikes.
Key Risks and Consequences
1. Erosion of Financial Discipline
Audit is not merely a tax formality. It ensures proper accounting, correct recording of income and expenditure, and compliance with laws. Audited financial statements provide reliable information to business owners for planning future growth. Without audit, many small companies may prepare accounts only on estimates or when absolutely necessary, increasing the likelihood of errors, misstatements and financial confusion.
2. Creation of a “Compliance Vacuum”
If this proposal is implemented, certain companies may not be required to undergo audit under either the Companies Act or the Income-tax Act. This means there would be no independent professional verification of their financial statements throughout the year. Such a situation creates a dangerous “compliance vacuum”. Professional bodies like the Institute of Chartered Accountants of India (ICAI) have warned that this may encourage income suppression, false entries and tax evasion. Several European countries experienced similar issues and later reintroduced limited reviews or stricter checks in high-risk sectors.
3. Increased Risk of Shell Companies and Money Laundering
Audit exemption may encourage businesses to artificially keep turnover below ₹1 crore or split operations into multiple small entities. This can lead to a rise in shell companies existing only on paper. While banks and Financial Intelligence Units monitor suspicious transactions, audit reports often serve as the first warning signal. Removing this safeguard would make tracking money trails far more difficult.
4. Practical Sector-Specific Risks
In sectors such as real estate, construction and cash-intensive trades, risks of manipulation in cash transactions, labour payments and subcontracting are high. Without audit, such businesses may remain completely outside the system. Small trading companies could misuse client funds without detection for long periods. Entrepreneurs may believe they are saving audit fees, but the long-term costs in the form of penalties, interest, incorrect tax filings and loan defaults can be substantial.
5. Impact on Finance, Investment and Governance
Even in countries where audit exemption exists, banks often insist on audited or certified accounts. Therefore, the cost saving is largely illusory, while the statutory framework becomes weaker. Companies planning future expansion, private equity investment or partnerships face serious disadvantages if they lack a reliable audit track record of 3–5 years. European studies show that many companies later opted for voluntary audits due to investor demand.
6. Difficulty in Accessing Bank Credit
Banks and financial institutions rely heavily on audited financial statements while granting loans. Absence of audit may result in higher interest rates, stricter conditions, or outright rejection of credit applications.
7. Saving Audit Fees Is Not Real Support
Avoiding audit fees does not truly help businesses. The absence of professional financial guidance can lead to poor structuring and costly mistakes. Financial statements are the mirror of a business, and only a qualified professional can ensure they reflect the true picture.
8. Obstacles During Future Growth
A company that is small today may grow tomorrow. If its early-year accounts are unaudited, future investors, lenders or partners may question its credibility. Lack of reliable historical records can seriously hinder expansion, mergers or restructuring.
9. Turnover Alone Is an Inadequate Criterion
Low turnover does not necessarily mean low risk. Related-party transactions, cash dealings, foreign transactions or sector-specific risks may exist even at lower turnover levels. After removal of GST audit, large-scale frauds came to light, highlighting the dangers of relying solely on turnover as a benchmark.
In the European Union, audit exemption is granted only when at least two out of three criteria—turnover, balance sheet size and number of employees—are satisfied. The UK also considers asset size and employee strength, and excludes public interest and financial entities from audit exemption.
A Balanced Way Forward for India
Instead of a blanket exemption, more practical and safer alternatives include:
1. Making limited review or review engagements (similar to SAE 2400) mandatory instead of full exemption.
2. Retaining full audits for high-risk sectors through risk-based classification.
3. Providing tax or credit incentives for companies opting for voluntary audits.
4. Making audit mandatory for the first three years of a company’s existence, with conditional relaxation thereafter.
Conclusion
Supporting small businesses is essential, but granting a blanket exemption from statutory audit to companies with turnover up to ₹1 crore is a hurried and risky policy decision. From the perspective of governance, transparency and financial stability, a system of limited but mandatory checks, risk-based audits and multi-criteria thresholds would be far more balanced and forward-looking.
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