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UNDERSTANDING OF TURNOVER & TAX AUDIT FOR MARKET TRADERS

EASY UNDERSTANDING OF TURNOVER & TAX AUDIT FOR TRADERS

1. When Tax Audit is Required?

Answer: Threshold Limit 5 Crores: If a person’s Gross receipt and payment in cash does not exceed 5% of total receipts and total payment then the limit of turnover for mandatory tax audit is Rs. 5 Crores.

Section 44 AD : If the turnover is less than Rs 2 crore, and if the Profit is less than 6% and the total income exceeds the original exemption ( ultimately when a person’s taxable income other than the loss from trading is more than the taxation slab this section applies).

Note 1 : If the turnover is less than Rs 5 crore, you are not required, but your total income is within the taxable limit of 2.5 Lakhs.

Note 2 : The limit of Rs. 5 crores is applicable from the financial year i.e. 2019-2020. This is the case with digital transactions, and stock market trading is 100% digital.

2 Tax liability will be affected by turnover / tax audit or not?

Answer: If an audit is Required, we should first determine the turnover of your trading business. Turnover calculation is required only when trading P&L is treated as a trading income (no audit is necessary if you only have capital gains income despite the turnover). Turnover is only to determine whether a tax audit is required. Your tax liability is not affected by your turnover.

Q.3 How to Calculate Turnover for Trading?

Answer: The method of calculation of turnover is an issue of debate and making it a Blank area that are no guidelines from the Income Tax department. With the help of a guidance note on tax audit under Section 44AB by ICAI (Institute of chartered accountants of India) we can easily determine turnover for trading. A para of this guidance note tell that how turnover can be calculated.

According to this turnover will calculated by following methods:

  • Speculative transactions (intraday equity trading)

For all speculative transactions: Aggregate or absolute sum of both positive and negative differences from trades is to be considered as a turnover.

Example: if you buy 200 shares of SBI at 300 at time of opening of market and sell at 320 by day closing, you make a profit or positive difference of Rs 4000, this Rs.4000 can be considered as turnover for this trade.

  • Delivery based transactions:

For all delivery-based transactions: where an investor or buyer hold his stock more than one day and then sell them any time, the total value of the sales (Consideration) is to be considered as turnover.

Example: if you bought 100 TATA shares at Rs 800 and sold them at Rs 820, the selling value of Rs 82000 (820 x 100) can be considered as turnover.

It is important that the above calculation of turnover for delivery trades applies only when you are equity-based delivery trades announced as a business income.

If assessee declaring them as capital gains or investments, then no need to calculate turnover on such transactions. Also, where capital gain arises there is no need for an audit if you have only capital gains irrespective of turnover or profitability.

  • Non-speculative transactions (Futures and options)

For Future Transactions turnover to be determined as follows –

  • The total of favourable and unfavourable differences shall be taken as turnover
  • In respect of any reverse trades entered, the difference thereon should also form part of the turnover.

Example: if you buy 1 lot (25 Units) of Nifty futures at 10200 and sell at 10300, And Buy 1 Another lot of Nifty future (25 Units ) at 10350 and sell at 10300 then Rs. 2500 (25 x 100) + 1250 (50 x 25) i.e. 3,750 the negative difference or loss on the trade is turnover.

For Option Transactions turnover to be determined as follows –

  • The total of favourable and unfavourable differences shall be taken as turnover
  • Premium received on sale of options is also to be included in turnover
  • In respect of any reverse trades entered, the difference thereon should also form part of the turnover.

Example: if you buy 100 or 4 lots of Nifty 10200 calls at Rs.25 and sell at Rs.28.

The favourable difference or profit of Rs 300 (3 x 100) is the turnover. Also, the premium received on sale also has to be considered turnover, which is Rs 28 x 100 = Rs 2800. So total turnover on this option trade = 300 +2800 = Rs 3100.

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