Why increasing threshold limit Under Section 44AB of the Income Tax Act, 1961 is not a good move
In the recent union budget our Honorable Union Finance Minister increased the threshold limit for mandatory audit Under Section 44AB of the Income Tax Act, 1961 to Rs 10 Crores in cases where 95% or more transactions are done in digital mode. The main objective behind this move has been to reduce the burden of compliances on small businesses and to promote ease of doing business. However, this increase in threshold limit has certain shortcomings which we will discuss in this article.
Audit report Under Section 44AB of The Income Tax Act has over the years served as the basic document for the income tax department for choosing cases for scrutiny under various provisions of the Income Tax. A simple example of this can be reporting Under Section 269SS and 269ST. These two sections deals with receipts and payments of unsecured loans. In the audit report Under Section 44AB there are various clauses where compliances with these two sections are required to be reported. Another example can be reporting of compliance with the ESIC and PF laws, calculation of depreciation etc. All these compliances are basic in nature but are part of criteria for selecting cases for scrutiny assessments.
Not only income tax but officers in TDS department also rely very much on the audit report Under Section 44AB for ensuring whether a particular deductorhas complied with the applicable TDS laws or not. However, since now the requirement for mandatory audit has been increased many small and medium size businesses will not get covered in the new provision and hence will not get their accounts audited. Hence, both income tax and TDS departments have to change their methods for choosing cases of scrutiny.
In cases where audit report Under Section 44AB is available the questions in the scrutiny notices revolve around the reporting done in it. However, now since the same will not be available the range of questions in the scrutiny notices will widen and this will in turn bring more burden on the assessee.
Now one will argue that Companies are still required to get their accounts audited and hence the reporting gap created due to the changes in Section 44AB will be taken care of by the Independent Auditor’s Report under companies act. But thing is that companies act does not apply to entities other than companies. Hence reporting gaps in those entities will not get fixed.
One will argue that the even though there will not be audit report Under Section 44AB of the Income Tax Act, 1961 but there are enough provisions made in the Income Tax Return forms where compliances with various provisions of the Income Tax Act is required to be mentioned and hence reporting of non -compliances will be ensured in the income tax return forms.
Reporting in income tax return forms are done by the tax payer himself and it depends upon the morality of the tax payer. If a particular reporting will bring additional tax burden on the tax payer then there are chances that he may avoid reporting that in the income tax returns and since audit report Under Section 44AB is not applicable there won’t be any tool to verify the contents reported by the tax payer.In such cases taxpayers will get away with non-compliances and even end up getting more refund amount then what he is entitled to.
Over the years Income tax assesees have been ensuring compliance with the various provisions of the income tax laws so that they can avoid getting qualifications in the audit report Under Section 44AB. However, now since not many small and medium size businesses will be required to get their accounts audited their commitment towards compliances will not be as high as it used to be when their accounts were getting audited.
The basic example of such non-compliances can be adherence to the TDS provisions. Earlier business owners used to strictly abide with the TDS provisions since audit report Under Section 44AB extensively covered such compliances and non-adherence to them used to get qualifications. This decline in commitment towards the non-compliance can lead to loss of revenue to the ex-chequer.
Doing away with the mandatory requirement of getting accounts audited will not only affect the revenue of the state but it will also decrease the confidence of the users of the financial statements who heavily rely on the financial statements to understand the position of the business.
Business owners regularly requires capital for running their businesses. This requirement can be working capital or for long term funding. Whenever any business entity approaches lender for capital requirements the first thing that the lender ask for is the audited financial statements of the entity. The main reason behind asking for the audited financial statements is that it ensures the lender that the entity has been doing a legitimate business and the funds given by the lender will put to use for a legitimate purpose.
Now, since the audited financial statements will not be available the lenders will get more suspicious about the business of the entity and will require them to submit additional details so that they can satisfy themselves about the legitimacy of the entity’s business and its funds requirements. This will create more hurdles for the business owners and will delay their funding.
Further, the government departments are also among the users of the financial statements. In case of any enquiry they rely upon the audited financial statements to get a basic picture of the entity’s transactions. However, due to non-availability of audited financial statements there will be suspicion on the accounts of the entity and to cast away such suspicions the investigative officers will have to dig deeper which put more strain on the machinery of the department.
Though intention of the government behind increasing the limit Under Section 44AB of the Income Tax Act, 1961 has been to reduce the burden of compliance and to provide the ease of doing business but whether it is able to achieve its objective or not will be seen in the coming years.
Further, the said relaxation will work only if both the taxpayers and taxmen fulfill their duties with utmost honesty without being prejudiced towards each other.