MSMEs turnover threshold for Audit increased 5 times to ₹ 5 Crore

Increased limit to apply only to Businesses carring out less than 5% of their business transactions in cash

Significant tax relief to start-ups

In order to reduce the compliance burden on small retailers, traders, shop keepers who comprise the Medium, Small and Micro Enterprise (MSME) sector, the Union Budget proposed to raise by five times the turnover threshold for audit from the existing ₹ 1 crore to ₹ 5 crore. While presenting the Union Budget 2020-21 in Parliament today, the Union Minister for Finance & Corporate Affairs, Smt Nirmala Sitharaman said that in order to boost less cash economy, the increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash.   Currently, businesses having turnover of more than ₹ 1 crore are required to get their books of accounts audited by an accountant.

In order to give a boost to the start-up ecosystem, the Union Budget has proposed to ease the burden of taxation on the employees by deferring the tax payment on ESOPs by five years or till they leave the company or when they sell their shares, whichever is earlier.

The Finance Minister said that Start-ups have emerged as engines of growth for Indian economy. Over the past year, the Government has taken several measures to handhold them and support their growth. During their formative years, Start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term.

Further, an eligible Start-up having turnover upto ₹ 25 crores is allowed  deduction of 100% of its profits for three consecutive assessment years out of seven years if the total turnover  does not exceed ₹ 25 crores. In order to extend this benefit to larger start-ups, the Budget has proposed to extend the turnover limit from existing ₹ 25 crores to ₹ 100 crores. Moreover considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, the Budget proposes to extend the period of eligibility for claim of deduction from the existing 7 years to 10 years.

MSME audit threshold raised with a cash transaction condition, easing compliance while targeting cash heavy businesses. The Budget increases the MSME audit turnover threshold fivefold but limits the benefit to businesses with less than five percent of transactions in cash, aiming to reduce audit compliance for small retailers and traders while maintaining audit obligations for significant cash operators. It also defers taxation on ESOP perquisites for start up employees for up to five years or until exit/sale, and expands the start up profit deduction by raising the turnover ceiling and extending the claim period.