UnionBudget – 2020: Proposal to abolish Tax Audit under section 44AB

 

Amidst the struggling economy, there are lot of expectations by the industry for some major reforms that may be initiated on 1^st Feb.

 

Union Budget – 2020 is going to be presented by the Finance Minister Smt. Niramal Sitharaman on 1^st Feb at 11 am. It is expected to be a budget to boost the economy and to generate the demand in the market. Hon’ble PM Shri Narendra Modi has also now shifted its focus on the economy and have been personally involved in the economic decisions making process and have joined the meeting with the economist of the country.

 

It was after the last union Budget – 2019, in the middle of the year, that major change in the direct tax rate was announced and the concessional rate of corporate tax rate was introduced. The corporate tax rate is now reduced to 15% for most of the new companies whereas for all existing companies it continues to be at 22%. It is expected that the personal tax rate will be reduced for individuals/ HUF having income up to Rs. 50 Lakh and higher tax rate for HNI with income exceeding Rs. 1 Crore.

The housing loan interest deduction limit as well as deduction admissible u/s 80C is all set to rise by more than Rs. 1 Lakh and it is expected that the 5% tax rate will further be widened for income up to Rs. 7.50 Lakh.

With this, it is going to be a market booster for the economy.  There will be high thrust on the ease of doing business and it is expected that lot many tinkering may be done in the Income Tax Act – 1961 in line with the recommendation by the Akhilesh Ranjan committee report on new Direct tax code for simplifying the tax laws.

It is expected that the new direct tax code may not see the light of the day but all the simplifications measures will find the place in the existing Income Tax Act- 1961. This time, Income Tax Act is likely to witness the major changes as compared to earlier years where changes were not done keeping in view the possible implementation of the New Direct Tax Code which is pending since more than last 1 decade.

 

One of the beneficial amendments which is expected is the reduction of tax rate u/s 115BBE wherein effective tax rate of 75% was introduced during demonetization period as against normal tax rate of 30% for other income. It is expected that the rate would be reduced from 75% to slightly higher than the higher tax rate of 30%. It may be around 35% or 40%. It will further be coupled with the reduction in the penal rate for such income.

 

Another major change proposed may be on “Audit Provision” in section 44AB of the Income Tax Act -1961.  Audit presently is mandatory if the turnover exceeds Rs. 2 Crore for businessmen (Rs. 1 Crore for companies) and Rs. 50 Lakh for professionals. However, person having turnover lower than above limit are also required to mandatorily get their books of accounts audited if the income offered for taxation is lower than the specified percentage (6%, 8%, 50%)  of its turnover. With the presence of the presumptive taxation provision followed by mandatory audit if income is below specified percentage, it has added complications rather than simplifications. Further, 5 years period of mandatory audit if the persons opt out of the presumptive taxation scheme has added additional complications for the taxpayers. To overcome all this compliance burden, news suggests that Union Budget – 2020 may do away with the tax audit provision u/s 44AB. The justifications placed in the ministry for removal of section 44AB were as under:

1. The required information can be furnished by the assessee himself in the ITR. There are enough penal consequences if the taxpayers do not comply with the provisions of the Income Tax Act or submit the false or wrong information. Taking the information from the auditor can be compensated by the same information from the assessee himself.
2. The most of the column in the audit reports are just compilation of the information only which assessee is otherwise also required to furnish in the ITR.
3. Audit is an additional compliance burden on the assessee.
4. That the quality of audit reports have been degrading and section 271J was introduced to ensure that the audit report do not contain wrong information and errors.
5. Audit provision u/s 44AB was introduced when the accounting system was manual and the third party audit was ensuring the authenticity of the books of accounts and records thereto. Now, the books mostly are computerized and the third party information is also available in digitalized format.

 

If the tax audit provision u/s 44AB is taken away, it will be the biggest loss of revenue for the CA fraternity where major revenue chunk is expected from tax audit and GST Audit.

 

Another changes proposed in the Union Budget – 2020 are

1. Lowering of tax rate of partnership firm and LLP.
2. Investment incentives for new manufacturing units and start up.
3. Free set off & adjustment of loss provisions
4. Another tax disputes resolution scheme in line with the indirect tax resolution scheme – Sabka Vishwas (Legacy Disputes resolution) scheme-2019.
5. Rationalization of the Penal provision in the Income Tax Act – 1961.
6. Accountability on the Income Tax Authorities for abrupt tax terrorisms.

 

 With so much in the pipeline, Union Budget – 2020 is sure to witness remarkable changes. Let us hold on for 1^st FEB 2020 when Smt. Nirmala Sitharaman will be presenting its 2^nd consecutive budget.