Fixing the tax audit requirement anomaly for trades
You need to get a CA to validate IT returns (ITR) or get a tax audit if profit when trading is< than 6% of turnover or if the turnover is> Rs 10 crores. This is an anomaly that needs to be fixed as the markets grow. Here is why it should be fixed. It may be easy too.
If you trade stocks intraday, F&O, or trade equity delivery very actively, you need to declare any P&L as business income using ITR3. For those with a salary>2.5lk + trading business P&L, filing using ITR3 becomes mandatory even in losses. BTW, losses can be carried forward.
Exchanges share data with IT Dept. Failing to declare trading income(losses too) on ITR can lead to automated notices (exchange reports gross trading value) & penalties. Considering the user growth last 18 months, number of notices are bound to go up exponentially next year.
The issue with ITR3 is that it’s meant for normal businesses & the definition of turnover can’t really be the same for those trading the markets. When trading, generating turnover doesn’t mean profits and you can have a large turnover with a small amount of money.
A tax audit by a CA is mandatory if profit is <6% of turnover or if turnover is > Rs 10 crores. Since salary income can’t be set off against trading or business losses, any trader with a salary>2.5lk who has a tax liability will most likely need to use ITR3 & need an audit.
Turnover isn’t trading volume—it’s the gross sum of profits & losses per scrip. Even then, almost every active trader’s profit or loss will typically be less than 6% of turnover. Here is the link to the Varsity chapter on Turnover for more.
A tax audit can cost > Rs 5000/Yr when the average size of a trading account is < Rs 1lk, making it extremely expensive—not to mention the potential risk of customers getting mis-sold when notices are sent. Also, traders in tier 2/3 towns don’t even have access to many CAs.
There are around 1.5lk CAs in India. So even if all CA’s just did tax audits for traders, it won’t be enough to cover for tens of lakhs of traders who might need a tax audit last FY. So it’s anyway impossible to comply if all traders decide to reach out to CA’s for help.
IT Dept has access to all trading activity, P&L, & accounts linked to a bank. Requiring all traders to get an audit is maybe an overkill & is against the idea of ease of doing business. Also, making it easy will mean a lot more traders will start filing income tax returns.
An easy fix is to introduce a new ITR business code for those whose business income is only from trading the markets. Exempt everyone who uses this code from tax audits. If done, many online platforms can give a 1 click option to file ITR 3, similar to ITR 1 for salary.
Also, exempt those using this new ITR business code from GST registration to avoid getting automated GST notices as well. For a detailed explanation on taxation when trading, turnover definition, and help to file ITR, check this module on Varsity.