The Ministry of Corporate Affairs (MCA) is considering a landmark proposal to exempt companies having annual turnover up to ₹1 crore from the mandatory statutory audit requirement under Section 139 of the Companies Act, 2013. This contemplated relief comes amid ongoing efforts to ease compliance burdens on smaller companies and promote a conducive business environment. The significant move, if approved, would mark a first-ever turnover-based audit exemption in Indian corporate law, profoundly impacting micro and small enterprises.
Under the current legal framework, every company registered under the Companies Act is mandated to appoint an auditor and conduct a statutory audit of its financial statements annually, irrespective of the size or turnover. This principle is enshrined in Section 139(1) of the Companies Act, 2013, which states that every company shall, at the first Annual General Meeting (AGM), appoint an individual or firm as auditor who shall hold office till the conclusion of the sixth AGM.
The MCA’s draft proposal for audit exemption of firms with turnover up to ₹1 crore aims to recalibrate this blanket requirement by introducing a threshold grounded in company turnover — a progressive step aligned with easing regulatory burdens on micro and small-sized companies. It acknowledges the disproportionate cost and compliance effort borne by very small firms relative to their business scale. The rationale is to allow these smaller entities to redirect resources towards growth and innovation rather than regulatory compliance alone.
This potential exemption would take effect by amending Rule 10 of the Companies (Audit and Auditors) Rules, 2014, specifying turnover-based criteria for statutory audit applicability. It is important to note the exemption will not apply to public companies or companies in sectors where statutory auditors serve a critical role for investor and creditor protection. Also, companies covered under other Acts mandating audit requirements, such as banking and insurance companies, will remain unaffected.
Separately, the MCA has already revised the definition of “small companies” under Section 2(85) of the Companies Act by raising the paid-up capital threshold from ₹2 crore to ₹4 crore and the turnover limit from ₹20 crore to ₹40 crore. These enhanced thresholds, notified officially by the Ministry, widen the ambit for compliance relaxation, thereby categorizing a larger number of companies under the “small companies” regime which enjoy several regulatory concessions including simpler board meeting requirements and less stringent financial disclosure norms.
To contextualize, the present audit exemption, if introduced, complements existing tax audit provisions under Section 44AB of the Income Tax Act, where businesses with turnover up to ₹1 crore are not mandatorily subject to tax audit unless specified conditions apply, and aligns with India’s policy push for minimizing compliance costs for MSMEs.
From a technical standpoint, CA professionals advising clients must carefully evaluate compliance under the Companies Act and Income Tax Act distinctly. Companies exempted from statutory audit under the Companies Act may still be required to undergo tax audits subject to the turnover and profit criteria prescribed under the Income Tax Act, as per Sections 44AB and 44ADA.
Deeper jurisprudential insight from precedents and rulings indicates that audit exemptions enhance ease of doing business but also raise concerns regarding reduced financial scrutiny and potential risks of misstatements or fraud. Hence, while legislative easing benefits legitimate small enterprises, auditors and professionals should continue emphasizing internal controls and voluntary assurance mechanisms for these companies.
In summary, the MCA’s considered step to exempt firms up to ₹1 crore turnover from statutory audits reflects a nuanced balance between regulatory prudence and growth facilitation. CAs play a pivotal role in interpreting, implementing, and guiding companies through this evolving statutory landscape by blending deep domain knowledge of corporate laws, auditing standards (SA 200 on Overall Objectives of the Independent Auditor and Conducting an Audit in Accordance with Standards on Auditing), and compliance frameworks. This development heralds a significant compliance milestone for Indian micro-enterprises, promising lowered costs and increased focus on business sustainability and governance.
For complete reference:
- Section 139, Companies Act, 2013
- Companies (Audit and Auditors) Rules, 2014 – Rule 10 (draft amendment under consideration)
- Section 2(85), Companies Act—Definition of Small Company
- MCA official notification on revised paid-up capital and turnover thresholds
- Section 44AB, Income Tax Act, 1961
Readers and professionals must keep abreast of Official Gazette notifications by MCA and further clarifications from regulatory authorities as this proposal advances. This will enable informed advisory and strategic decisions backed by precise legal framework interpretation.
This article strives to offer a comprehensive and referenced understanding of the cutting-edge changes shaping corporate audit requirements in India today.
FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)
Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.