In a landmark regulatory development, the Government of India has introduced a mandatory audit requirement for partnership firms under the newly enacted Business Compliance and Financial Transparency Act, 2025, aimed at increasing accountability, curbing tax evasion, and aligning non-corporate business structures with evolving financial governance norms.

Effective from the current financial year, the Act stipulates that all registered partnership firms with a turnover exceeding ₹1 crore, or capital contributions above ₹50 lakh, must undergo an annual statutory audit conducted by a chartered accountant. The audit report must be submitted along with the firm’s income tax return and will be subject to review by both the Income Tax Department and the Registrar of Firms.

The Ministry of Finance stated that the new audit requirement is part of a broader push to formalize financial reporting among India’s micro and small business segment, which has traditionally operated with minimal scrutiny under the Indian Partnership Act, 1932.

“While partnership firms enjoy regulatory simplicity, the lack of standardized financial review has led to underreporting and inconsistencies,” said a senior official from the Central Board of Direct Taxes (CBDT). “This audit mandate ensures transparency and builds confidence among lenders, investors, and regulatory authorities.”

The Act also includes provisions for penalties in case of non-compliance, including monetary fines and temporary suspension of registration for repeated violations. However, certain exemptions have been made for partnership firms operating in notified backward regions or sectors under startup incubation programs.

Industry responses have been mixed. While legal and financial professionals welcomed the move as a step toward improved governance, small business owners have expressed concern about the cost and complexity of audits, particularly for firms with informal accounting practices.

To support implementation, the government plans to launch a nationwide awareness campaign, release simplified audit templates, and offer onboarding support through district MSME facilitation centres.

The new mandate is expected to bring nearly 1.2 million partnership firms under formal financial scrutiny by the end of the fiscal year, strengthening India’s efforts to improve financial discipline and reduce informal economic activity.