Tax Audit in India: Applicability, Types, Compliance, and Penalties

In India, tax audit is a crucial process designed to ensure transparency, accuracy, and compliance in the financial statements and tax returns of businesses. It is carried out by qualified professionals to examine the books of accounts and other financial records of an entity. This blog aims to provide comprehensive information about tax audits, their objectives, applicability, types, filing requirements, and potential penalties for non-compliance.

What is a Tax Audit?

A tax audit is a systematic examination of financial records and tax-related information of a business or individual to ascertain the accuracy and completeness of their tax returns. It ensures that the taxpayer has maintained proper books of accounts, adhered to applicable tax laws, and correctly calculated their tax liability.

Objectives of Tax Audit

Promote accuracy and transparency in financial reporting.
Detect tax evasion and non-compliance.
Facilitate efficient tax administration.
Assess the taxpayer’s compliance with tax laws.
Identify areas of potential tax planning and tax-saving opportunities.

Who is mandatorily subject to Tax Audit?

Applicability of Tax audit under Income tax is dependent upon turnover or business receipts of your business or profession.

For Professionals

If your gross receipts exceed 50 Lacs, you are liable for tax audit.

For Businesses (not opting for Presumptive taxation)

If your Turnover exceeds 10 Crores, you are liable for tax audit. The limit of 10 Cr is applicable if cash transactions are only upto 5% of total receipts and payments. Otherwise the limit is 1 CR. Those opting for and fulfilling the provisions of presumptive taxation schemes are exempt for this tax audit.

For Businesses (opting for presumptive taxation)

Any business which is eligible to adopt presumptive taxation is the one having turnover upto 2 CR, if such business declares the profit below the limit prescribed under presumptive tax , in that case such business must go for tax audit mandatorily.

Changes in Budget 2023 for presumptive tax adopters

The limit of presumptive taxation for businesses (Section 44AD) has been increased to 3 CR from the current limit of 2 CR. This increased limit is applicable from FY 23-24. But this increases limit of 3CR is applicable only if cash transactions are only up to 5% of total receipts and payments.

Similarly for professionals adopting for presumptive taxation scheme under section 44ADA the limit has been increased from current 50 Lacs to 75 Lacs. But this increases limit of 75 Lacs is applicable only if cash transactions are only up to 5% of total receipts and payments.

What constitutes an Audit Report?

An audit report is a formal document prepared by a tax auditor after conducting the tax audit. It includes the following information:

Basis and scope of Tax Audit

Observations, discrepancies, and exceptions found during the audit.
Compliance with accounting and tax laws.
Opinion on the accuracy of financial statements and tax returns.
Recommendations for rectification of errors, if any.

How and when tax audit reports shall be furnished?

Tax audit reports must be filed electronically using the prescribed forms on or before the due date of filing the tax return. The due date for filing tax audit reports is generally 30th September of the assessment year.

Penalty for non-filing or delay in filing tax audit report

If a taxpayer fails to furnish the tax audit report or files it after the due date, a penalty of 0.5% of the total turnover or gross receipts, subject to a maximum penalty of Rs. 1,50,000, may be levied under Section 271B of the Income Tax Act.

READ HERE if you want to know more about presumptive taxation scheme.

FAQs

The turnover of my business is Rs. 90 lakhs. Do I need to get an audit?

As per the current threshold, a tax audit is not mandatory for businesses with a turnover of Rs. 90 lakh. However, it is advisable to consult with a tax professional to understand any recent changes in the threshold.

Who is supposed to conduct the tax auditing process?

Tax audits must be conducted by qualified Chartered Accountants (CAs) or practicing professionals with relevant expertise and certification.

Can a tax audit report be revised?

Once the tax audit report has been filed, it cannot be revised. Therefore, it is essential to ensure accuracy and compliance during the audit process.

Does filing my taxes late increase the chance of auditing?

Late filing of taxes does not directly increase the chance of being audited. However, it is important to file taxes within the due dates to avoid penalties and other consequences.

Will a penalty be levied if I do not get a tax audit done?

If a taxpayer meets the applicable turnover threshold and fails to get a tax audit done, a penalty of 0.5% of total turnover or gross receipts, subject to a maximum of Rs. 1,50,000, may be imposed.

Can a tax audit be done voluntarily?

Yes, a taxpayer can opt for a voluntary tax audit even if they do not meet the mandatory turnover threshold. This can help ensure accurate reporting and mitigate the risk of non-compliance.

What are the stages of the tax auditing process?

The tax auditing process typically involves planning, gathering evidence and documentation, conducting the audit, analyzing the findings, preparing the audit report, and finally, filing the report with the tax authorities.

How long does a tax audit take?

The duration of a state tax audit can vary depending on the complexity of the case, volume of transactions, and the cooperation of the taxpayer. It can take days to a few weeks depending upon the nature and volume of your business.

I have loss from my F&O, do i need Tax Audit?

Yes, if you have loss then Tax Audit might be applicable in your case. In order to check tax audit applicability, one needs to check trading turnover. Method of calculating trading turnover is different in case of F&O, you must take help of professionals to get your tax audit applicability checked.

Conclusion

Tax audits play a vital role in promoting transparency, accuracy, and compliance in the Indian tax system. Businesses and professionals should be aware of the applicable thresholds, types of audits, and filing requirements to ensure they meet their obligations. By maintaining proper books of accounts, cooperating with auditors, and filing accurate tax audit reports, taxpayers can navigate the tax audit process smoothly and avoid penalties or legal consequences. Consulting with qualified professionals is highly recommended to ensure adherence to the evolving tax laws and regulations.

Tax Audit Advisory and Filing services can be availed at Tax Vic.

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