Tax Audit
Are you a business owner or a professional in India? Then, you might have heard about tax audits. In simple terms, a tax audit is a process of verifying and inspecting your accounts to ensure that you are adhering to the provisions of the Income Tax law. It is a necessary compliance requirement for certain category of persons, such as those carrying on a business or engaged in a profession, as per Section 44AB of the Income Tax Act 1961. But, what does it really mean? How can you prepare for it? And, what are the consequences of non-compliance? Read on to find out all you need to know about tax audits in India.
1. What is Tax Audit?
A tax audit is the process of verifying and inspecting the accounts of a taxpayer to confirm their adherence to the provisions of the Income Tax law. It is mandatory for certain categories of taxpayers carrying on a business or engaged in a profession as listed in Section 44AB of the Income Tax Act 1961. These taxpayers have to get their accounts audited by a Chartered Accountant. The objective of conducting a tax audit is to maintain and ensure the accuracy of books of accounts and verify compliance with various provisions of the Income Tax law.
“The purpose of tax audit in India is to maintain and ensure the accuracy of books of accounts and verify compliance with various provisions of the Income Tax law,” says Future Generali India Insurance. A tax audit is necessary to ensure that records reflect the actual income of the taxpayer and that the claims for deductions made are accurate. The outcome of the audit is an audit report drawn by the Chartered Accountant giving findings and observations about the compliance of the person under audit. Conducting a tax audit on time is essential to avoid penalties of up to Rs.1.5 lakh. [1][2]
2. Objectives of Tax Audit
A tax audit is a critical process that ensures the accuracy and completeness of a taxpayer’s financial records and compliance with tax laws. The objectives of tax audit in India are multifaceted and include verifying the accuracy of financial statements, detecting any discrepancies or irregularities, ensuring timely and correct filing of tax returns, and giving the tax authorities the confidence that taxpayers are complying with tax laws. As per section 44AB of the Income Tax Act 1961, tax audit is mandatory for individuals who carry on business or profession whose total turnover or receipts exceed Rs 1 crore. The tax audit not only detects errors and omissions but also provides an opportunity for taxpayers to correct them before the tax authorities initiate an investigation.
“A tax audit provides a layer of assurance to stakeholders of the taxpayer’s financial statements that there are no material misstatements that require adjustment and the tax returns have been prepared in accordance with the laws and regulations,” says Enterslice, a leading tax consultancy firm. Therefore, taxpayers must take the tax audit process seriously and engage a qualified chartered accountant to ensure their tax affairs are in order. [3][4]
3. Who is Mandatorily Subject?
In India, tax audit is mandatory for certain categories of taxpayers. As per the Income Tax Act 1961, companies, limited liability partnerships (LLPs), and individuals whose turnover exceeds a particular threshold limit are mandatorily subject to tax audit. The tax audit ensures that taxpayers have maintained their books of accounts and other records accurately and have complied with various requirements of income tax law. One of the main reasons for conducting a tax audit is to verify that the taxable income of an individual is reported accurately. As per the latest regulations, any individual carrying on a business whose sales turnover exceeds INR 10 million or any person carrying on a business whose income is determined on a presumptive basis under section 44AD and exceeds the maximum amount which is not chargeable as income tax are required to undergo a tax audit. Failure to comply with tax audit provisions can attract a penalty of 0.5 percent of total sales not exceeding INR 150000. It’s crucial for taxpayers falling under the purview of tax audit to seek the assistance of a practicing chartered accountant (CA) to avoid any non-compliance and penalties. [5][6]
4. Threshold Limit for Tax Audit
The threshold limit for tax audit in India is a crucial aspect that businesses and professionals need to keep in mind. Under Section 44AB of the Income Tax Act, every person carrying on business is required to get his accounts audited if his total turnover sales or gross receipts exceed INR 1 crore in any financial year. However, with effect from the above threshold limit for a person carrying on the business was increased from INR 1 crore to INR 5 crore in cases where the total receipts in cash during the previous year do not exceed 5% of such receipts and total payments in cash during the previous year do not exceed 5% of such payment. This change was made to reduce the compliance burden on MSME enterprises. Moreover, the Finance Bill 2021 has proposed to increase the tax audit limit from INR 5 crore to INR 10 crore, which can further ease the compliance burden for small and medium enterprises. It is suggested that this limit should be increased to encourage non-cash transactions, promote the digital economy, and reduce compliance burden. However, it is important to note that the threshold limit may vary based on the type of profession or scheme opted for. [7][8]
5. Business Eligible for Presumptive Taxation
Presumptive taxation is a simplified way of taxation under which the government assumes a certain percentage of profit based on the turnover declared by the assessee. This is applicable for eligible businesses whose turnover is less than Rs. 2 crores. Such businesses can opt for presumptive taxation under section 44AD of the Income Tax Act. The percentage of profit that will be taxed is 8% for non-digital transactions or 6% for digital transactions, whichever one is applicable. However, the following businesses are excluded from presumptive taxation – running the business of plying, hiring, or leasing of goods carriages.
“Presumptive taxation is a welcome relief for small businesses as it reduces compliance work and simplifies the taxation process. It is important to note that businesses eligible for presumptive taxation must declare their profits accurately, failing which they may have to face penalties. This option is not available for professionals such as doctors, lawyers, and engineers who will have to pay taxes based on their actual profit and loss statements. All eligible businesses must ensure that their turnover is less than Rs. 2 crores to be able to avail of this benefit.” [9][10]
6. When Tax Audit Does Not Apply
A tax audit is a process where the government reviews your financial records to ensure that they comply with tax laws. However, not everyone is subject to a tax audit in India. There are certain exemptions that taxpayers need to know. For instance, individuals with a total income of less than INR 50 lakhs are exempt from tax audits. Additionally, small businesses with a turnover of less than INR 2 crores are likely to be exempt as well.
Furthermore, there are other scenarios where a tax audit may not apply. For example, if an individual’s professional income is below the taxable limit, they may not require a tax audit. Additionally, people earning income from sources like agriculture, horticulture, or dairy farm are not subject to audit unless their income exceeds INR 5 lakhs. Lastly, salaried individuals who have no other sources of income are not required to undergo a tax audit.
It is important to note that tax laws are always changing, and these exemptions may change over time. Therefore, taxpayers should keep themselves updated with the latest laws and regulations to avoid any potential penalties or fines. As the saying goes, “Prevention is better than cure.” [11][12]