13/02/2016
Reiterating – the requirement of calculating turnover arises only when treating trading P&L as a business income (An audit is not required if you only have capital gains income irrespective of the turnover). Turnover is only to determine if a tax audit is required or not. Your tax liability does not get affected by your turnover.
An audit is required if –
• 1 Crore mark – Turnover for the year crosses the Rs 1 crore mark
• Section 44AD – If the turnover is less than 1 crore, and if profit less than 8% of turnover
The first thing that came to our mind after reading turnover is contract turnover, i.e
• Nifty is at 8000, you buy 100 Nifty
• Buy side value = 8000 * 100 = Rs.800,000/-
• Nifty goes to 8100, you square off the 100 Nifty
• Sell side value = 8100 * 100 = Rs,810,000/-
• Turnover = Buy side value + Sell side value = 800,000 + 810,000 = 1,610,000/-
But it is not the contract turnover the IT department is interested in; they are interested in your business turnover.
HOW BUSINESS TURNOVER CAN BE CALCULATED –
The method of calculating turnover is a debatable issue and what makes it a grey area is that there is no guideline as such from the IT department. One article of great help though is the guidance note on tax audit under Section 44AB by ICAI (Institute of Chartered accountants of India, the governing body for CA’s). The article on Page 23, Section 5.12 of this guidance note has a guideline on how turnover can be calculated. It says:
• Delivery based transactions
For all delivery based transactions, where you buy stocks and hold it more than 1 day and sell them, total value of the sales is to be considered as turnover. So if you bought 100 Reliance shares at Rs 800 and sold them at Rs 820, the selling value of Rs 82000 (820 x 100) can be considered as turnover.
But remember that the above calculation of turnover for delivery trades is only applicable if you are declaring equity delivery based trades also as a business income. If you are declaring them as capital gains or investments, there is no need to calculate turnover on such transactions. Also, there is no need of an audit if you have only capital gains irrespective of turnover or profitability.
• 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. So if you buy 100 share of Reliance at 800 in the morning and sell at 820 by afternoon, you make a profit or positive difference of Rs 2000, this Rs.2000 can be considered as turnover for this trade.
• Non-speculative transactions (Futures and options)
For all non-speculative transactions, the article says that turnover to be determined as follows –
- The total of favorable and unfavorable 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.
So if you buy 25 units or 1 lot of Nifty futures at 8000 and sell at 7900, Rs.2500 (25 x 100) the negative difference or loss on the trade is turnover.
In options, if you buy 100 or 4 lots of Nifty 8200 calls at Rs.20 and sell at Rs.30. Firstly, the favorable difference or profit of Rs 1000 (10 x 100) is the turnover. But premium received on sale also has to be considered turnover, which is Rs 30 x 100 = Rs 3000. So total turnover on this option trade = 1000 +3000 = Rs 4000.
The above calculations (points 1 to 3) are fairly straight forward; the next important thing to decide though is if you want to calculate turnover scrip wise or trade wise.
Scrip wise is when you calculate the turnover by collating all trades on the particular contract/scrip for the financial year, find average buy/sell value, and then determine the turnover using the above 3 rules with the total profit/loss or favorable/unfavorable difference on this average price.
Trade wise is when you calculate the turnover by summing up the absolute value of profit and loss of every trade done during the year, and following the above rules.
LET US EXPLAIN BOTH WITH SOME EXAMPLES –
1. 100 Nifty Jan future bought at 8000 and sold at 8100 on 1st Another 100 Nifty Jan future bought at 8100 and sold at 8050 on 10thJan. Determine turnover
Using scrip wise:
Average Nifty Jan Fut buy: 200 Nifty Buy at 8050
Average Nifty Jan Fut sell: 200 Nifty Sell at 8075
Total profit/loss = 200 x Rs 25 = Profit of Rs 5000 = Turnover of Nifty Jan Futures
Using trade wise:
100 Nifty Buy at 8000, Sell at 8100, Profit = Rs 10,000
100 Nifty Buy at 8100, Sell at 8050, Loss = Rs 5000
Turnover of Nifty Jan futures = Rs 10,000 + Rs 5000 (absolute sum of the loss) = Rs 15000
2. 100 Nifty Dec 8000 puts bought at 100 and sold at 50 on Dec 3rd. Another 100 Nifty Dec 8000 puts bought at 50 and sold at 30. Determine turnover
Using scripwise:
Average of Nifty Dec 8000 puts buy: 200 puts at 75
Average of Nifty Dec 8000 puts sell: 200 puts at 40
Total profit/loss = 200 x Rs 35 = Loss of Rs 7000
Total Selling value of options = 200 x Rs 40 = Rs 8000
Total Turnover for Dec 8000 puts = Rs 7000 + Rs 8000 = Rs 15000
Using tradewise:
Trade 1
100 Nifty Dec puts bought at 100 and sold at 50, Loss = Rs 5000
Selling value of options =100 x Rs 50 = Rs 5000
Turnover = Rs 10000
Trade 2
100 Nifty Dec puts bought at 50 and sold at 30, Loss = Rs 2000
Selling value of options = 100 x Rs 30 = Rs 3000
Turnover = Rs 5000
Total turnover = turnover of (trade 1+trade2) = Rs 15000
Once you determine the turnover, you will know if you need an audit or not, that is if a visit to a CA and have him verify your balance sheet and P&L statements is compulsory or not.
