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Why you need Tax Auditors in India?

Written by gkkedia Dt. January 15th, 2024

1. Introduction
Tax auditors play a crucial role in ensuring compliance with tax regulations and maintaining the
integrity of the taxation system in India. This statement accurately emphasizes on the provisions related
to tax audit under Section 44AB of the Income Tax Act, 1961 in India. The primary objective of a tax
audit is to ensure that taxpayers, subject to this requirement comply with the various provisions of the
Income Tax Law. It is a mechanism to verify the accuracy of financial statements, adherence to
accounting standards, and the fulfilment of tax-related obligations. It also facilitates Income Tax
Officers in checking fraudulent activities and details of taxes paid whether correctly or not. It
emphasizes on saving time of the Assessing Officers so that it could be utilised for attending more
important and investigational aspects of the case.

2. Applicability under Section 44AB:

Section 44AB of the Act, specifies the class of taxpayers who are required to undergo a tax audit. The
following persons are compulsorily required to get their accounts audited:
i. If total sales, turnover or gross receipts (as the case may be) for the previous year exceed or exceeds Rs.1
crore of any person carrying on business. However, this provision is ​not applicable to the person, who
opts for presumptive taxation scheme under Section 44AD, 44ADA or 44AE of the Income Tax Act,
However, the threshold limit is increased from Rs. 1 crore to Rs. 10 crores in case where person carries business and cash receipt and payment made during the year do not exceed 5% of total receiptor payment.

ii. In case of profession, if the gross receipts for the previous year exceeds Rs. 50 lakhs of any person
carrying on professional services.
iii. If an assessee who declares profit for any previous year in accordance with the Section 44AD, 44ADA or
44AE of the Act and decreases profit for any of one 5 assessment year relevant to the previous year
succeeding such previous year lower than the profit computed as per section 44AD, 44ADA or 44AE
and his income exceeds the amount which is not chargeable to tax.
(Person here includes individuals, Hindu Undivided Families (HUFs), partnerships, companies, and
other entities meeting specified financial thresholds.)

3. Audit Report Forms:

Tax audits are conducted by Chartered Accountants who are authorized professionals with the expertise
to examine financial records and provide an independent assessment. The findings of the tax audit are
documented in the form of an audit report. The audit report is required to be submitted in Form Nos.
3CA/3CB and 3CD. These forms outline the various details and information that the Chartered
Accountant needs to include in the report, ensuring a comprehensive and standardized approach to
Form 3CA: This form is for audits conducted by or under any other law other than Income Tax Act.
Form 3CB: This form is for audits conducted under the provisions of the Income Tax Act.
Both Form 3CA and Form 3CB are accompanied by Form 3CD, which is a statement of particulars
required to be furnished under Section 44AB.

4. Contents of the Audit Report (Form 3CD):

The audit report, as per Form 3CD annexed with 44 clauses, includes detail such as:
1. Background information about the taxpayer.
2. Details of tax computation and payments.
3. Compliance with Accounting Standards.
4. Specific disclosures and observations related to various sections of the Income Tax Act.
In summary, the tax audit process, as outlined in Section 44AB, serves as a critical tool for ensuring ransparency, accuracy, and compliance with the Income Tax Act, 1961 in India. The involvement of Chartered Accountants and the prescribed forms for audit reports contribute to the standardization and reliability of the audit process. A tax auditor is indeed a financial professional with specialized knowledge in taxation. Their primary responsibility is to examine and assess financial records to ensure compliance with relevant income tax laws and regulations. They thoroughly examine financial records, including balance sheets, income statements, and supporting documentation, to verify the accuracy of reported information. Tax auditors adhere to ethical standards in their profession, maintaining objectivity and integrity throughout the audit process. Here are some reasons why tax auditors are needed:

a) Verification of Financial Records & Compliances:
Tax auditors examine financial records of businesses and individuals to verify the accuracy and completeness of the information provided in their tax returns. This helps in ensuring that taxpayers report their income and expenses correctly in accordance with the Income Tax Act, 1961 and other relevant tax laws. This includes adherence to filing deadlines, proper disclosure of income, and adherence to various tax regulations.

b) Prevention of Tax Evasion:
Tax evasion is a serious concern for governments as it leads to a loss of revenue. Tax Auditors help in identifying instances of tax evasion and take appropriate actions to rectify the situation. This contributes to the overall fairness and effectiveness of the tax system. The existence of a tax audit system acts as a deterrent against potential tax evasion. Knowing that there is a possibility of being audited encourages taxpayers to comply with tax laws, thereby promoting voluntary compliance.

c) Risk Assessment & Reviewing Complex Transactions:
Businesses and individuals engage in various financial transactions that may have tax implications. Tax auditors are trained to review complex financial transactions to ensure that they are accurately reflected in the tax returns and comply with the applicable tax laws. Auditors assess the risk of non-compliance by examining the financial activities and transactions of taxpayers. This risk assessment helps tax authorities prioritize their audit efforts, focusing on areas where the likelihood of non-compliance is higher.

d) Improving Tax Administration & ensuring fairness:
The presence of tax auditors contributes to the overall efficiency and effectiveness of tax administration. It elps in identifying areas for improvement in tax policies and procedures, leading to a more robust and responsive tax system. Tax auditors contribute to ensuring that the tax burden is distributed fairly and equitably among axpayers. This fairness is crucial for maintaining public trust in the taxation system. By conducting audits, tax authorities can identify cases where taxpayers may be involved in underreporting/misreporting of income or engaged in tax evasion, which, if left unchecked, could lead to an uneven distribution of the tax burden.

By addressing non-compliance, tax auditors contribute to maximizing revenue collection, which is crucial for funding public services and infrastructure development, and hence contribute to the overall financial health of the country. Tax Auditors not only contributes to revenue collection but also ensures that the benefits and responsibilities of citizenship are shared equitably among all taxpayers. In short, the requirement for tax auditors in India is multifaceted, encompassing legal mandates, the need for compliance verification, and the broader goals of maintaining fairness, transparency, and public trust in the taxation system. The role of tax auditors is integral to the effective functioning of the Indian Tax regime.

5. Due date for compliance of Tax Audit:
The eligible person covered under Section 44AB should get his accounts audited and obtain the audit report on or before 30 th September of the relevant assessment year before filing of the returns, e.g., Tax audit report for the financial year 2023-24 corresponding to the assessment year 2024-25 should be obtained on or before 30th September, 2024.

6. Penalty for non-compliance
According to Section 271B of the Act, if the eligible person fails to comply with Section 44AB in respect of any year or years, the Assessing officer may impose a penalty, which shall be lower of the following amounts:
(a) 0.5% of the total turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such year or years.
(b) Rs. 1,50,000.
However, no penalty shall be imposed if reasonable cause for such failure is proved.

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