An audit is nothing but an official inspection. As per the Income Tax audit under section 44AB,specific categories of individuals and certain businesses, must have their books of accounts audited. A tax audit is necessary for businesses and people once you do business over and above a specific amount. Here is all that you need to know about tax audits in India.
What is tax audit?
A tax audit involves a thorough inspection of financial records by taxpayers, ensuring compliance with income tax regulations. It simplifies income computation for filing tax returns, enhancing transparency and accountability in business and professional financial operations.
Objectives of tax audit
- Verify that books of accounts are maintained accurately and certified by a Chartered Accountant (tax auditor).
- Identify and report any discrepancies or observations found during the systematic examination of books of accounts.
- Provide information required by tax authorities, such as tax depreciation and compliance with income tax provisions.
- Enable tax authorities to verify the correctness of income tax returns filed by ensuring accurate calculation of total income, deductions claimed, and compliance with tax laws.
Who is mandatorily subject to tax audit?
A taxpayer is mandatorily subject to tax audit if their business's total sales, turnover, or gross receipts exceed Rs. 1 crore in the financial year. For professionals, this threshold is Rs 50 lakh, unless 95% of receipts are in digital mode, where the threshold is Rs. 75 lakh. Additionally, specific conditions under presumptive taxation schemes apply, such as declaring profits below prescribed limits or opting out of such schemes. Amendments under the Finance Act 2021 raised the turnover threshold to Rs. 10 crore if cash transactions are within 5% of total transactions, providing relief to certain businesses from mandatory audits.
Why is a tax audit conducted?
Its core purpose is to ensure that your business abides by the tax laws put in place by the Income Tax Act of India. Once completed, the tax audit makes it easy for you to file tax returns. A tax audit catches any errors or discrepancies early on by looking into your books of accounts and ensures that you are disclosing the information you are supposed to. Also, once you carry out a tax audit, it is easy for the tax authorities to go through your Income Tax Returns.
Who is supposed to have a tax audit in India?
Certain people must have an income tax audit, and as per the law, these are the categories that must participate in a tax audit.
Any business where the total sales, turnover, or receipts exceed Rs. 1 crore in a year should have a tax audit in India. As a professional, receipts over Rs. 50 lakh makes you eligible for a tax audit. Here, a professional includes the likes of an engineer, architect, interior decorator, legal and medical professional. For the complete list of professionals, you must refer to Rule 6F of the income tax rules, 1962.
If you have opted for the presumptive taxation scheme as a professional or businessperson, and your total sales/ turnover is more than Rs. 2 crore, you must carry out a tax audit. Similarly, if you find that your profits are lesser than what was determined by the presumptive taxation scheme, you have to carry out a tax audit to confirm this.
If it is stipulated that you are to get a tax audit done and you do not, you will have to pay a penalty. However, as per section 273B, there are certain situations where not filing your tax audit report or doing so late is allowed. Examples of this are natural calamities, strikes or lock-outs, theft of documents or the resignation of the auditor.
Who conducts a tax audit?
A chartered accountant or a firm of CA conducts this audit. However, the tax audit limit rests at 60 audits per CA. In the case of a firm, the tax audit limit applies to each firm’s partners.
What are the types of audits in India?
When it comes to the type of audits or classification of audits, you will find that there are three main types:
- Field audit:This is conducted at your office typically. On the off-chance that it is to be conducted at your representative’s place of work, you will have to provide the necessary documents to them.
- Office audit:This is conducted at an IRS office, and you are supposed to visit the office with the necessary documents in tow. Typically, a letter will be sent to you stating the documents you must carry.
- Correspondence audit:In this type of audit, the IRS sends you a letter requesting documents that will provide clarity/ missing information regarding your tax returns. Basis the instructions, you are required to mail the documents in simply.
How to do a tax audit in India?
To complete the tax audit in India, you are required to submit the necessary forms. The four most commonly required ones are as follows.
- Form 3CA:This is for companies or professionals who have to carry out a tax audit mandatorily.
- Form 3CB:This is for a business or profession that is not mandated by any other law to have a tax audit carried out.
- Form 3CD:This form is best viewed as a detailed statement of particulars. It comprises various details of the business and its transactions.
- Form 3CE:This form is for NRIs and foreign companies. You are required to submit it if you receive fees/ royalty from any Indian concern or the government instead of rendering technical services.
The direct taxes committee of the ICAI regularly issues guidance notes on tax audits to keep tax auditors abreast with the latest changes in the tax audit report requirements. This may be with regard to changes in the information that is to be disclosed, the contribution of the auditors, and amendments to forms, as was the case with form 3CD in 2018.
By when should you have the tax audit report?
The auditor will hand over the tax audit report to you electronically to approve and then file. Note that you do have the option to reject the tax audit report, in which case it will have to be carried out again from scratch. The tax audit due date is 30 September of the assessment year, and for form 3CE, it is 30 November of the assessment year.
Although understanding tax audits in India is the biggest tax return trip, knowing how to calculate taxable income and reduce tax liability will help you.
How to calculate taxable income for your business?
As mentioned before, you are required to have a tax audit done if your total income from all businesses is over Rs. 1 crore and that from all professions are over Rs. 50 lakh. However, if you are a business owner and a professional, your audit is not on the basis of your cumulative income. This means if your total turnover from the business is Rs. 95 lakh and that from your profession is Rs. 48 lakh, you do not require a tax audit done.
In addition, if you are wondering how to calculate taxable income in India, remember that if the amount is below the threshold, your earnings from the sale of an asset will also not be considered a profit. This applies to fixed assets such as machinery or cars, assets held as investments such as stocks, expenses reimbursed by a client, rental income, etc.
How to reduce your tax liability as a business owner or professional?
- Make purchases in your company’s name. This is because based on what you have purchased, computers, vehicles, or smartphones; you can claim depreciation on such capital expenses.
- Consider utilities to be business expenses. Paying for electricity, internet connections, air conditioning, etc. can be written off, lowering your taxable income.
- File your taxes on or before the due date. Apart from ensuring that you are a law-abiding entity, this tip for filing taxes also helps you in other ways. This is because as you can carry forward a loss from your business for up to 8 consecutive years.
- Stay abreast of the changes instated by the government. The government revises the policies from time to time to help businesses, especially small and medium enterprises.Familiarising yourself with these changes will ensure that you are making the most of every deduction possible to lower your taxable income.
- Write off business expenses. Whether travelling for work or entertaining clients, they are counted as business expenses, and you can use them to lower your taxable income. However, to do so, you must keep a detailed record of all such expenses. This means preserving bills and receipts meticulously.
- Make the most of start-up expenses. Also known as preliminary expenses, these give you tax benefits under section 35D of the Income Tax Act. Typically comprising expenses that you incur before the commencement of your business, these can be written off over five consecutive years as per the provisions of the law.
- So, keep pointers in mind to reduce your tax liability and carry out your tax audit on time. Remember that if you do not, you will have a penalty of up to Rs. 1.5 lakh to pay.
What are the objectives of the income tax audit?
- Verify that books of accounts are maintained accurately and certified by an auditor, ensuring transparency and preventing fraudulent activities.
- Provide necessary information such as tax depreciation and compliance with income tax provisions, aiding tax authorities in assessing tax liabilities.
- Report any discrepancies found during the thorough examination of the books of accounts, ensuring compliance with income tax regulations.
- Simplify the calculation of taxable income, deductions, and tax liabilities for accurate filing of income tax returns.
- Verify the accuracy of income, tax, and deductions declared by the taxpayer in their income tax return, ensuring compliance and preventing tax evasion.
Penalty of non-filing or delay in filing tax audit report
Failure to comply with tax audit requirements can result in penalties for taxpayers. If a taxpayer is obligated to conduct a tax audit but fails to do so or submits the audit report after the deadline, they may face a penalty. This penalty is calculated as the lesser of 0.5% of their total sales, turnover, or gross receipts, or Rs 1,50,000. The objective of this penalty is to ensure timely and accurate reporting of financial information, facilitating transparency and compliance with tax laws.
However, there are exemptions to this penalty under certain circ*mstances. If there is a valid reason for the delay in filing the tax audit report, such as natural calamities affecting business operations, sudden resignation of the tax auditor, prolonged strikes or lockouts, loss of accounting records due to unforeseen events, or physical incapacity or death of the person responsible for maintaining accounts, no penalty will be levied. These exemptions recognise situations beyond the taxpayer's control that hinder compliance with audit requirements, thereby providing relief in genuine cases of unavoidable delays.
