Let’s decode and simplify some common misconceptions about tax audits by CFO angle.
What is a Tax Audit?
The audit conducted by the qualified CA passed under the ICAI Act for the taxpayer’s books of account in pursuance of the requirement of section 44AB is called a Tax Audit. During the Tax Audit, the CA must give his observations, findings, and other requirements in a detailed audit report.
How is it different from a Statutory Audit?
The basic principles of accounting prudence work both in Statutory and Tax Audits, but the governance and reporting are based on the Companies Act 2013 in the case of Statutory Audit and Income Tax Act Section 44 AB for a Tax Audit. The governance changes how we look at the books in specific ways and report to the authorities.
What are the Tax Audit applicability and Tax Audit Limit criteria?
- Business Criteria:
- For a business that is not a profession, the limit for applicability starts when the company’s turnover increases above 1 Cr.
- If the company doesn’t do any expenses or receipts less in Cash or less than 5% of the activity in the year, then the Tax Audit limit is 10 Cr. Businesses that avoid doing transactions in Cash can avoid Tax Audits.
- 10(23C) An educational institution existing solely for educational purposes and not for purposes of Profit and wholly or substantially financed by the government was exempt from the tax levy when the proceeds increased more than 5 Cr must engage the services of a Tax Auditor for Tax Audit.
- Profession Criteria:
- Tax Audit is applicable on Professional Income when it crosses beyond 50 Lakh in any year. Increased to 75 Lakhs from AY 23-24
- Income Criteria under Presumptive Taxation:
- If the business Turnover is up to 2 Cr and the Profit is higher than 8% of the revenue, then a tax audit is not applicable.
- But when the turnover increases more than 2 Cr, a tax audit is applicable
- In this situation, the Profit is less than 8%, but the turnover is more than 1 Cr, but less than 2 Cr tax audit is still applicable because the profit % is less than the threshold
- For example, ABC Limited has a turnover of 2 Cr and declared a profit of 16 Lakhs for that year; in this situation, there is no applicable tax audit.
- A Tax Audit is mandatory if the business incurs losses and the turnover exceeds 1 Cr.
- Once you fall in this section, the applicability continues to the next five continuous assessment years till you don’t exceed the turnover beyond 2 Cr.
- A tax audit is applicable for any income less than what is declared in 44DA for a profession.
- Other Terms:
- Turnover here is gross receipts, sales, and turnover.
- Any entity covered under 44AD, 44AE, 44AF, 44BB, 44BBB, be it a Proprietor, Partnership, HUF (Hindu Undivided Family) LLP (Limited Liability Partnership), Company (Private or Public Limited) tax audit is applicable.
- Cooperative societies whose Income crosses the basic exemption limits
- Income and Cash criteria also apply to entities covered under 44AD, 44AE, 44AF, 44BB, and 44BBB.
- Financial year here is the year of the transaction, starting from April to March
- The assessment Year is a year after the Financial Year.
- The threshold limit for tax audit was 5 Cr, but it is now increased to 10 Cr if the overall cash transaction for receipts and payments is less than 5%
Tax Audit Applicability for Trust opened under section 12 A
- All organisations must file the Tax Audit Report under section 10B
- It is compulsory to file if the receipts exceed 5 Crores in a Financial Year
- Once the trust the year receives any amount from the foreign funding, then irrespective of the amount exceeds 5 Cr, a Tax Audit report shall be filed under section 10B
- Also, the same is applicable when any income is earned outside India.
Tax Audit Due Dates and last dates are:
- The Tax Audit due date for all is September 30th, after the close of the financial year.
- Private limited companies have a due date for filing a Statutory Audit, which is October 31st.
Tax Audit Penalty:
- For late filing of tax audit reports, 0.5% (increased to 0.75%) of the total Turnover or Rs 1.5 lakh, whichever is lower, is applied at the time of filing.
Tax Audit Extensions:
- Only the Central Board of Direct Taxes or CBDT can extend Tax Audit for any Assessment Year and for how many months.
- The Assesse cannot request CBDT and has to compulsorily pay it before the due date of paying the penalty up to January of the following year.
Tax Audit Non-Compliance Consequences
- The prosecution is the first step where non-filing leads to multiple issues, including fines imposed in the form of penalties and further prosecution can lead to imprisonment.
- Continuous non-filing can lead to notice and scrutiny imposed by the income tax department, which troubles some responding. It also spoils the reputation of the tax department as a habitual offender.
- Anytime during the assessment process, if the Income tax department feels any skip in the Income, they will demand the original money and additional interest on the unpaid dues. Any interest paid is an expense that is not allowed.
- A fixed fee can be imposed as Late Filing fees, which generally come as notice received after the filings are completed.
- A late payment penalty is usually a fixed % charge on the total amount due to the government. Sometimes, it comes as the filing is completed, and sometimes it is after a few years.
- Any additional audit or investigation, if done by the Income tax department and results in fraudulent activities in books and transactions, an extra 75% of the underpaid tax can be levied as a penalty.
Activities done and things covered in the Tax Audit Report
- Verification of Cash transaction and implication of addition in the Income of the assessee
- Identify financial transactions and other activity discrepancies that can lead to income additions and penalties and either report or reverse.
- The tax audit report also has to comment on the organisation’s internal controls to ensure the flow of data and the process of recording transactions is in line with industry standards and is seamless.
- Inadvertently, if any entries are missed or intentionally, something is mentioned that leads to any Tax Evasion that must also be reported in the Tax Audit Report.
What is the need for a Professional Audit Firm for Tax Audits?
- Experience partners who have conducted multiple tax audits can bring much value to the companies having the tax audit.
- Experience in various businesses helps to undertake complex transactions that can be complex and not viewed comfortably by the Tax department. Experienced firms can share their knowledge with clients to make the process robust.
- Sharing knowledge with clients to avoid repeating mistakes, helping bring solutions to issues, and assisting in tax planning is better than firefighting when problems arise. An experienced firm like CFO Angle can help plan better.