Can someone explain in detail what's the issue with tax audit requirement for retail traders?

@nithin saw this tweet of yours

Can you please explain what exactly the issue is?

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Anyone who actively invests in the stock market has to file ITR3 showing trading as business income. The rules that apply to all normal businesses apply to the retail trader as well. Retail traders will have 100% of business in digital form and there aren’t any cash transactions.

The issues:

  1. If turnover more than Rs 2 crores (Rs 5 crores from this budget) a mandatory audit is required. But generating turnover when trading/investing is really easy and many traders generate a turnover of over Rs 2 crores in the year. This is even after considering turnover as per the guidelines of ICAI — sell value for equity delivery trades, gross P&L of every trade on all other types of transactions. This increase to Rs 5 crores helps, but maybe there should be a provision for this to be more for stock market traders or else a guideline that says that turnover can be considered as credit + debit on client ledger (which should be the right way in the first place).

  2. If turnover < Rs 2crores, Section 44AD requires a tax audit if profit is less than 6% of the turnover. When trading, the turnover can add up very easily, unlike in a normal business. Hence profit (or loss) is generally less than 6% of the turnover. This means that almost every single person who trades the market needs a tax audit.

This audit requirement means all retail traders need to consult a CA, maintain books of accounts, etc., which increases the cost of trading significantly. We have seen cases where traders with just Rs 1lk in the account end up having to pay Rs 20,000 as audit fees. This audit requirement is also the main reason for non-compliance by most traders. This, in turn, causes issues to the trader and to the IT department who end up spending time on scrutiny of small retail traders who most likely avoided filing ITR just to avoid paying audit fees and without having any income tax to pay.

We need to help fix this audit requirement issue, it is draconian for small retail traders. It seems like in this Budget 2020, the audit requirement is taken away if turnover less than Rs 5 crores even if profit is less than 6% (in case of all digital transactions). But it isn’t mentioned explicitly. It will help millions of active traders if the Ministry of Finance can put out a clarification on the same.

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So no change for retail traders as per the new budget.

I seriously doubt the FM has any time for small retail traders.

He will still have to get an audit.