Tax Audit in India

Updated: 30-01-2023 07:32:32 AM

What is a Tax Audit?

Tax audit refers to the activity in which an auditor or tax agency examines or reviews the accounts of a business to check for tax compliance. Some companies are legally required to ensure that they carry out regular audits under Section 44AB of the Income Tax Act, 1961 and for them performing periodic tax audits is mandatory. This section lists all relevant requirements and provisions for carrying out an income tax audit according to the IT Act. The main goal of a tax audit is ensuring that the details related to the income, expenditure and tax deductible expenditure information are filed correctly by the business undergoing audit.

When is a Tax Audit Ordered?

Section 44AB of the Income Tax Act specifies groups of income tax assessees who need to mandatorily undergo an income tax audit. These groups include:

• An self-employed individual who is engaged in a business with an annual turnover of Rs. 1 crore and above
• A self-employed professional whose income receipts aggregate Rs. 50 lakhs or more in a financial year
• An individual who qualifies for the presumptive taxation scheme under Section 44AD but claims that the calculated profits are lower than the total tax paid for the financial year
• A self-employed individual whose recorded income for the fiscal is more than the amount that is tax-exempt or not chargeable for taxation
• If an assessee, who has qualified for taxation under the presumptive taxation scheme opts out of it after a specified period. After opting out of the presumptive taxation scheme, the assessee is not allowed to opt into the presumptive taxation scheme for a continuous period of 5 assessment years
• An individual who qualifies for the presumptive taxation scheme under Section 44AE but claims that the profits are lower than those calculated in accordance with the presumptive taxation scheme
• An individual who qualifies for the presumptive taxation scheme under Section 44BBB but claims that the profits are lower than those calculated with the presumptive taxation scheme

When is a Tax Audit Mandatory?

Here are the category of individuals and the cases in which tax audit is deemed mandatory:

Category of Person	Threshold limit for Tax Audit
Individual self-employed business person who has not opted for presumptive taxation Scheme	Total sales, turnover or gross receipts exceeding Rs. 1 crore.
Individual self-employed business person who has not opted for presumptive taxation scheme and posts a loss	Total sales, turnover or gross receipts exceeding Rs. 1 crore.
A self-employed Individual business owner who has not opted for presumptive taxation scheme and has income exceeding basic threshold limit but taxpayer incurs losses	Total sales, turnover or gross receipts exceed Rs. 1 crore even in case of loss from business
An individual-owned business opting for presumptive taxation scheme under section 44AD	Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the threshold limit
A self-employed business person opting for presumptive taxation scheme under Section 44AD and claiming a business loss	Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit
Self-employed professionals	Gross annual receipts exceeding Rs. 50 lakhs in a year
Operating a business eligible for presumptive taxation under Section 44AE	Claims profits lower than the prescribed limit under presumptive taxation scheme
Engaged in a profession eligible for presumptive taxation under Section 44ADA	Claims profits lower than the prescribed limit under presumptive taxation scheme and income exceeds maximum amount exempt from tax
Operating a business and not eligible to claim presumptive taxation under Section 44AD due to opting for presumptive taxation in one tax year and not opting for presumptive tax for any of the subsequent 5 consecutive years	If income exceeds tax exemption limit for 5 consecutive tax years from the tax year where presumptive taxation is not chosen.

What are the Goals and Objectives of a Tax Audit?

Tax audits in India are carried out with the following goals and objectives that have been specified in various sub-sections of Section 44 of the Income Tax Act, 1961:

• To make sure that even medium and small business owners maintain book of accounts, ledgers as well as receipts for revenue and expenses properly.
• To report observations or discrepancies after a methodical examination of the books of account of the business.
• To report prescribed information including compliance of different provisions of the Income Tax laws such as tax liability, tax paid, eligible refund amount, etc.
• To enable the tax authorities verify the correctness of income tax returns filed by the business owner.
• To make it easy for the tax assessing authorities engaged in carrying out routine verifications to calculate and verify information such as total income, claim for deductions, etc. furnished by the taxpayer.
• To identify and restrict any fraudulent practice by businesses.

Which are the Key Forms for Submission of a Tax Audit?

There are 3 key forms for tax audit submissions. These are:

• Form 3CA: This form is required to be furnished by a person who is carrying on a business or profession that requires that accounts are audited under any rule other than Section 44 and its subsections. 

• Form 3CB: This form is required to be furnished by a person who is carrying on business or profession which does not require that his accounts are audited under any rule except Section 44 and any of its subsections.
• Form 3CD: If either of the aforementioned audit reports is prepared, the tax auditor must furnish the required particulars using Form 3CD.

Who is a Tax Audit Report Submitted to and who prepares it?

In India, Tax audit reports under various subsections of 44 can only be prepared by qualified chartered accountants. Currently tax audit reports from chartered accountants are filed electronically with the Income Tax Department. Once the chartered accountant has filed the tax audit report, the taxpayer must approve the submitted reports using their Income Tax e-Filing account with the Income Tax department of India.

What is the Due Date for Filing Tax Audit Report?

Tax payers covered under the Section 44AB should get their accounts audited and obtain completed audit reports from the auditor on before 30th September for the preceding financial year. For instance, the tax audit in India report for FY 2018-19 ended 31st March 2019 and corresponding to the assessment year 2019-20 should be submitted on or before 30th September 2019.

What are the Penalties for Not Filing a Tax Audit in India?

If a taxpayer is mandatorily required to complete a tax audit but fails to do so in a timely manner, various penalties may be implemented. The following are the key penalties that may be levied:

• A lump sum fine of Rs. 1.5 lakh
• 0.5% of total sales, turnover or gross receipts for the current financial year

However, according to the Section 273B, no penalty would be imposed on the tax payer if a valid reason is provided with proof regarding why the tax audit was not completed in a timely manner.