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Tax Audit
Understanding Tax Audit
A Tax Audit involves the examination and verification of an entity’s financial records to ensure compliance with the provisions of the Income Tax Act, 1961. The primary objective is to confirm that the income, deductions, and taxes reported are accurate and in accordance with the law.
Applicability of Tax Audit
The applicability of a tax audit varies based on the nature and scale of the taxpayer’s activities. Below are the criteria as per the latest amendments up to the Finance (No. 2) Act, 2024:
1. For Businesses
General Threshold: Businesses with total sales, turnover, or gross receipts exceeding ₹1 crore in a financial year are required to undergo a tax audit.
Increased Threshold for Non-Cash Transactions: To promote digital transactions and reduce cash dealings, the threshold for tax audit has been raised to ₹10 crore if the following conditions are met:
Aggregate of all cash receipts during the year does not exceed 5% of total receipts.
Aggregate of all cash payments during the year does not exceed 5% of total payments.
This means that if a business’s cash transactions are minimal (not exceeding 5% of total transactions), the tax audit requirement applies only if turnover surpasses ₹10 crore.
2. For Professions
Professionals with gross receipts exceeding ₹50 lakh in a financial year are mandated to have their accounts audited under Section 44AB of the Income Tax Act.
3. For Taxpayers under Presumptive Taxation Scheme
Businesses under Section 44AD: Eligible businesses opting for presumptive taxation under Section 44AD declare income at a prescribed rate. However, if such a taxpayer’s claimed income is lower than the deemed profits under the scheme and exceeds the basic exemption limit, a tax audit becomes mandatory.
Professionals under Section 44ADA: Professionals availing presumptive taxation under Section 44ADA must declare income at the prescribed rate. If the declared income is less than the deemed income and exceeds the basic exemption limit, they are required to undergo a tax audit.
Transporters under Section 44AE: Taxpayers in the business of plying, hiring, or leasing goods carriages declaring income as per the presumptive scheme of Section 44AE are generally exempt from tax audit, provided they adhere to the scheme’s provisions.
Tax Audit Forms: 3CA, 3CB, and 3CD
The Income Tax Act prescribes specific forms for reporting the findings of a tax audit:
Form 3CA: Applicable to taxpayers whose accounts have already been audited under any other law (e.g., statutory audit under the Companies Act). This form is accompanied by Form 3CD, which details the particulars of the tax audit.
Form 3CB: Used when the taxpayer’s accounts are not required to be audited under any other law. It is also accompanied by Form 3CD. Income Tax Department
Form 3CD: A comprehensive statement containing detailed information about various aspects of the business or profession, including declarations related to deductions, loans, compliances, and more.
Due Date for Filing Tax Audit Report
The tax audit report must be filed one month prior to the due date for filing the income tax return. For taxpayers requiring a tax audit, the typical due date for filing the income tax return is 31st October of the assessment year. Consequently, the tax audit report should be submitted by 30th September of the assessment year.
Consequences of Non-Compliance
Failure to comply with tax audit requirements can lead to penalties under Section 271B of the Income Tax Act, amounting to 0.5% of turnover or gross receipts, subject to a maximum of ₹1,50,000.
Frequently Asked Questions
An audit ensures financial transparency, regulatory compliance, and accurate financial reporting. It also helps in risk management and enhances investor confidence.
An internal audit is conducted voluntarily to improve internal controls and operational efficiency, while a statutory audit is legally mandated to ensure compliance with financial regulations.
Businesses and professionals whose turnover or receipts exceed specified thresholds under the Income Tax Act must undergo a tax audit.
Financial statements, bank statements, invoices, ledgers, tax filings, and other relevant financial documents are necessary for a statutory audit.
A stock audit should be conducted at least once a year to reconcile physical stock with accounting records and prevent discrepancies.
GST due diligence is a comprehensive review of a company’s GST compliance, ensuring accuracy in tax filings and adherence to GST laws to avoid penalties.
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