Tax Audit – Meaning and Applicability
Tax Audit – Meaning and Applicability
A tax audit is an audit of books of accounts conducted for ensuring compliance with the provisions of the Income Tax Act. In the case of corporates, the Companies Act already mandates that an audit should be performed. Hence, the requirement for a tax audit arises only for businesses which are not required to undergo an audit as per the statute governing the particular form of business organisation. For instance, partnerships are not required to audit the books of accounts under the Partnership Act. Generally, the calculation of the amount of income tax payable by an assessee is carried out on the basis of self-assessment by the assessee. However, in the specified circumstances, such as crossing the threshold limit for turnover, the Act requires that the computation of the assessee’s income tax liability should be accompanied by proof. For the purpose of providing the proof to the Income Tax Department, assessees are required to submit the books of accounts for a tax audit.
The scope of a tax audit encompasses an examination or review of the books of accounts of any business or profession maintained by taxpayers, conducted by a Chartered Accountant (CA). The tax audit is performed from an income tax viewpoint. The purpose of the tax audit is to check whether the calculation of income tax liability is correct and according to the provisions of the Income Tax Act. The tax audit certification from a CA allows the Income Tax Department to place confidence in the information submitted by the assessee in the return of income.
Objectives of Tax Audit
The objectives of a tax audit are the following:
- To ensure accurate maintenance and correctness of the books of accounts by means of certification of the accounts by a CA and to facilitate the Income Tax Department to verify the truth and correctness of the information constituting the income tax returns filed by the taxpayer
- To report observations and discrepancies noted by the auditor after conducting a systematic examination of the books of account
- To make available to the Income Tax Department the relevant information required by the Act, including depreciation allowable under the Act and ensuring compliance with the various provisions of the Act
Applicability of Tax Audit
To determine whether Tax Audit is applicable to an assessee, various parametres should be evaluated, such as whether the assessee has opted for a presumptive taxation scheme, the turnover of the assessee and question of whether the assessee’s total income exceeds the basic exemption limit. The following table can be used to determine whether Tax Audit is applicable to an assessee:
Category of Taxpayer
Is Tax Audit necessary?
|The assessee is carrying on a business but has not opted for the presumptive income scheme under the Act.||Tax Audit is necessary if the total sales, turnover or gross receipts exceed one crore rupees.|
|The assessee is carrying on a business and has opted for the presumptive taxation scheme under Sections 44AE, 44BB or 44BBB.||Tax Audit is necessary if the assessee claims profits which are lower than the prescribed limit under the presumptive taxation scheme.|
|The assessee is carrying on a business and has opted for the presumptive taxation scheme under Section 44AD.||Tax Audit is necessary if the assessee claims profits which are lower than the prescribed limit under the presumptive taxation scheme and has a total income which is in excess of the basic exemption limit. Further, Tax Audit is necessary if the sales, turnover or gross receipts of the business is greater than two crore rupees.|
|The assessee is carrying on a business but the assessee not eligible to claim presumptive taxation under Section 44AD since the assessee has opted out of the presumptive taxation facility during the five year lock-in period commencing from the year in which the scheme was initially opted for.||Tax Audit is necessary if the assessee has a total income which is in excess of the basic exemption limit.|
|The assessee is carrying on a profession but has not opted for the presumptive income scheme under the Act.||Tax Audit is necessary in case the total gross receipts of the business exceed fifty lakh rupees.|
|The assessee is carrying on a profession and has opted for the presumptive taxation scheme under Section 44AD.||Tax Audit is necessary if the assessee claims profits which are lower than the prescribed limit under the presumptive taxation scheme and has a total income which is in excess of the basic exemption limit.|
|The assessee has incurred a loss from business, and the assessee wishes to carry forward the loss to future assessment years. Also, the assessee has not opted for any presumptive scheme under the Act.||Tax Audit is necessary if the total sales, turnover or gross receipts exceed one crore rupees and the taxable income of the assessee exceeds the basic exemption limit.|
|The assessee has incurred a loss from business, and the assessee wishes to carry forward the loss to future assessment years. However, the assessee has opted for a presumptive scheme under the Act under Sections 44AD, 44ADA, or 44AE.||Tax Audit is necessary if the total income of the assessee exceeds the basic exemption limit.|
Statutory Audit Vs. Tax Audit
Under various legislations, including the Companies Act and Societies Registration Act, the entity may face the requirement to undergo an audit of books of account. In case the assessee is already facing a statutory obligation to get the accounts audited under a law other than the Income Tax Act, then, in such cases, there is no need to once again undergo another audit to satisfy the requirement for audit under the Income Tax Act. Hence, it shall be sufficient if the assessee’s books of accounts are audited under the other law mandating audit. However, the audit under the other law should be completed before the due date of filing the return. The taxpayer can furnish a prescribed audit report under Income tax law stating that since the accounts have been audited already in accordance with the requirements of another law, an audit under the Income Tax Act is not necessary.
The assessee may be covered under the provisions of the Act which indicate mandatory applicability of tax audit. In such cases, the assessee is required to file the following forms together with the Income Tax return:
- Form 3CA– This form should be used when the books of the assessee have already been submitted for audit under other laws. The books may have been audited as per the Companies Act or the Societies Registration Act. In such cases, a second audit need not be performed for satisfying the requirement for audit under the Income Tax Act.
- Form 3CB– This form is used when the books of the assessee are audited exclusively to satisfy the requirements of the Income Tax Act.
E-submission of Tax Audit Report
The CA who audits the books of the assessee should furnish the tax audit report online by using the relevant login details. The taxpayer should also add the CA details in the login portal of the assessee. Once the tax auditor uploads the audit report, the report should be accepted by the assessee in the taxpayer’s login portal. If the report is not accepted within the prescribed time limit or if the report is rejected, the process of filing the report should be commenced by the auditor once again from the beginning.
Due Date for Filing Report
All taxpayers should file the tax audit report on or before the due date. The due date shall be 30th November in case the assessee has entered into an international transaction and 30th September in other cases.
Penalty for Delay
If a taxpayer who is required to get the tax audit done but does not comply with the requirement, the least of the following can be imposed as a penalty:
- One half per cent of the total sales, turnover or gross receipts
- One lakh and fifty thousand rupees
Tax Audit Limit
The Tax Audit limit is the amount of turnover which, if crossed, attracts the need for a tax audit under the Income Tax Act. The Tax Audit limit is ascertained differently for various categories of assesses, and the amount of the limit depends on whether the assessee is a sole proprietor, partnership firm, limited liability partnership (LLP) firm, or company. Also, to provide relief to MSMEs, Budget 2020 has enhanced the turnover limit for MSME assessees.
Limit for Proprietorship Concerns
Proprietorship firms are taxed as individuals under the Income Tax Act. Hence, in case of a proprietor running a business, a tax audit is mandatory, in case the sales turnover exceeds one crore rupees. If an individual is carrying on a profession with gross receipts of more than fifty lakh rupees, in such cases tax audit is mandatory.
Limit for Partnership Firms
Partnership firms involved in a profession with gross receipts of more than fifty lakh rupees must complete a tax audit. Partnership firm involved in doing business must complete a tax audit if the sales turnover exceeds one crore rupees.
Limit for LLPs
As per the regulations governing the LLP form of business organisation, LLPs with an annual turnover of more than forty lakh rupees or capital contribution of twenty-five lakh rupees are required to be audited by a CA. In case these criteria are not fulfilled, then it must additionally be seen whether the criteria as listed above for a partnership firm are satisfied.
Limit for Companies
All types of companies including private limited company and one person company are required to undergo an audit.
Limit for MSMEs
For MSMEs, a tax audit is required in case the turnover exceeds five crore rupees. The limit was earlier one crore rupees. However, the benefit of enhancement can only be availed by those MSMEs whose total cash transaction does not exceed 5% of the total transactions. The benefit was introduced by the Government as part of the budget announced on 01.02.2020.
To know about presumptive taxation in India, click here.