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- Conditions for a Mandatory Tax Audit - Section 44AB
- Regulations Around Maintaining Books of Accounts for an Audit - Section 44AA
- Presumptive Taxation - Section 44AD
- Presumptive Taxation - Section 44AE
- Presumptive Taxation - Section 44ADA
- Presumptive Taxation - Section 44AF
- Presumptive Taxation - Section 44BB
- Presumptive Taxation - Section 44BBB
- Penalty on Not Completing a Tax Audit
- Benefits of a Tax Audit
- FAQS - FREQUENTLY ASKED QUESTIONS
Income Tax regulations were put in place to ensure economic parity between citizens of the nation. Income tax is higher for taxpayers with a higher income. The tax collected is used for the collective welfare of the nation.However, to ensure that taxpayers pay taxes correctly and disclose their income in the proper manner, the income tax regulations have mandated an audit of the books of accounts of certain taxpayers that cross the threshold. An Income Tax Audit is the assessment of the books of the accounts of a business to calculate the income tax payable by the business correctly.An independent third party usually conducts an audit at consistent periodic intervals. If mandated, an income tax audit is conducted every year before the due date of filing income tax returns . In some instances, the income tax regulations mandate a regular audit of the entire books of accounts of the business as well. This is to ensure that the financial reporting is also done correctly, not just the tax reporting.Various sections of the Income Tax Act cover the income tax regulations around tax audits. Based on the eligibility criteria of the section, a business or profession will have to comply with the regulations under that section.
Conditions for a Mandatory Tax Audit - Section 44AB
This section states the threshold limit for a mandatory tax audit. If a business or profession crosses this threshold, it becomes mandatory for them to conduct a tax audit. It is integral to note that for taxpayers with more than one business or profession, the aggregate turnover will have to be above the threshold limit for a tax audit to become mandatory.This section states that if the gross turnover of a business in the preceding year crosses Rs. 1 crore, the business will have to get a tax audit done. Here, the preceding year means the year before the financial year in which the tax audit is required. If the cash transactions are less than 5%, then the threshold is Rs. 10 crores.This section also states that if the gross receipts from a taxpayer’s profession cross Rs. 50 lakhs in the preceding year, an audit of the taxpayer’s profession becomes mandatory.Section 44AB also states that if a business or profession has opted for presumptive taxation as per Section 44ADA, Section 44AE, Section 44BB or Section 44BBB and the profit declared is less than the specified limit, a tax audit becomes mandatory.The due date for completion of tax audit and filing returns is 30 September of the assessment year. The tax audit report is filed through Form 3CA and Form 3CD.
Regulations Around Maintaining Books of Accounts for an Audit - Section 44AA
This section states how different businesses or professions should maintain their books of account upon crossing a certain threshold. This will help maintain transparency and facilitate a smooth tax audit or tax assessment if the need arises. The following are the regulations as per this section.
- A taxpaying professional in the fields of medicine, law, architecture or any other form of consultancy or industry-specific expertise will have to maintain a cash book, ledgers, journals, and stock registers if their gross income is less than Rs. 1,50,000 in 3 preceding years before the current financial year.
- Suppose the taxpayer’s profession is not one of the specified professions, and the gross receipts are more than Rs. 10,00,000 in any one of the 3 preceding years before the current financial year. In that case, the taxpayer will have to maintain adequate books of accounts that will assist an assessing officer in verifying the tax.
- If the taxpayer has opted for presumptive income but is not subject to a tax audit, the taxpayer may choose to maintain supporting documents corresponding to the books of accounts. Presumptive income was introduced to allow small businesses to carry on their business without too much hassle with compliances. As per Section 44AD and Section 44AE, taxpayers can opt for presumptive income and pay income tax on the basis of an estimated income at a set rate. However, if a taxpayer opts out of taxation as per presumptive income, they cannot opt back in for 5 years.
Also Read: Avoid The 5 Common Mistakes While Planning Tax Savings For A Secure Tomorrow
Presumptive Taxation - Section 44AD
Under this section, tax is calculated at a flat rate of 8% on the gross turnover if the total gross turnover of the business is less than Rs. 1 crore in that year. For professionals, the taxable income will be 50% of the total receipts, but only if the total income of that year does not exceed Rs. 50 lakhs.A taxpayer can opt for this only if the annual turnover or gross receipts in the previous year did not cross Rs. 2 crores. The 8% (or 6% in some cases) will be considered the profit component, upon which tax will be calculated as per regular slab rates. The taxpayers cannot claim any depreciation or any other deduction if they opt for this presumptive taxation scheme.The following people are eligible to opt for this tax scheme:
- Individual who is a resident
- Partnership Firm
- Hindu Undivided Family (HUF)
The following taxpayers cannot opt for presumptive taxation under Section 44AD.
- Businesses indulging in plying of vehicles and leasing or renting of products.
- Those carrying out a specific profession, as mentioned under Section 44AA.
- Those who do not qualify as residents of the country.
- Limited liability partnerships.
- Those who opted out of the presumptive tax scheme - for 5 years
If a taxpayer feels that the profit from the business or profession is less than 8% which will reduce the tax liability, the books of accounts will have to be audited.
Presumptive Taxation - Section 44AE
This section is applicable only to taxpayers in the business of plying, leasing, or renting vehicles carrying goods. However, the taxpayer’s business should not own more than 10 carriages at any time during the previous year. To this section, a carriage is divided into two sections - heavy goods vehicles and goods vehicles that are not heavy goods vehicles. A good vehicle weighing more than 12,000 kilograms is considered a heavy goods vehicle.Under Section 44AE, the profits of the business are calculated in the following manner:
- Rs. 1,000 per ton of the weight of the heavy goods vehicle for every month or part of the month in which the taxpayer owned the vehicle or the amount that the taxpayer declares to have earned from the vehicle.
- Rs. 7,500 per ton for every month or part of the month during which the taxpayer owns vehicles that are not heavy goods vehicles.
Presumptive Taxation - Section 44ADA
The following taxpayers are eligible to opt for this scheme.
- Individual who is a resident
- Partnership Firm
- Hindu Undivided Family (HUF)
The taxpayer should be indulged in the following businesses:
- Interiors
- Technical Consultant
- Engineer
- Legal
- Architecture
- Medical
- Accountancy
- Specific sports-related persons
- Film artists
- Company secretaries
- Authorized representatives
Taxpayers can opt for Section 44ADA whenever they wish, and they will not have to wait for 5 years to opt for this section. The taxpayers will have to declare a taxable income of 50% of the total receipts, but only if the total income of that year does not exceed Rs. 50 lakhs.
Presumptive Taxation - Section 44AF
This section is specifically for retail businesses. The taxpayer can declare 5% of the total turnover to be subjected to taxation. This section is only applicable if the total turnover was less than Rs. 40 lakhs in the financial year.
Presumptive Taxation - Section 44BB
This section is specifically for the business of exploration, like the exploration of mineral oils. This would include supplying machinery for the production or extraction of mineral oils like petroleum or natural gas as well. Here, 10% of the amount earned (whether received or to be received) against the services rendered will be subjected to tax.
Presumptive Taxation - Section 44BBB
This section is specifically for the business of civil construction in turnkey power projects. Here, 10% of the amount earned (whether received or to be received) against the services rendered will be subjected to tax. Also Read: Income Below Taxable Limit? Here is What You Should Do
Penalty on Not Completing a Tax Audit
Failure to comply with the regulations of completing a tax audit, a taxpayer may be subjected to the following as a penalty:
- 0.5% of the gross sales or gross turnover, or gross receipts of the year.
- Rs. 1,50,000
The lower of the two will be the penalty payable.However, in certain specific situations, this penalty may be waived. These circumstances could include the following:
- Natural disasters
- Delay on account of the tax auditor resigning.
- Labor strikes
- Loss of books of account due to genuine reasons
- Partner in charge of books of account becomes physically incapacitated.
Benefits of a Tax Audit
Conducting a tax audit might be beneficial for the business or profession in the following ways:
- A tax audit acts as a certificate or proof that a competent external party has verified that the books of accounts of the business or profession are correctly maintained.
- In case the business or profession is not complying with important regulations, an audit can help catch this in time, reducing the penalty burden for the business or profession and ensuring that any transacting businesses or customers also don’t get negatively impacted.
- Helps maintain transparency in the business or profession and avoid unnecessary compliance issues.
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FAQS - FREQUENTLY ASKED QUESTIONS
Is tax audit mandatory in case the business or profession is making losses ?
A tax audit becomes mandatory in the following if the business or profession has made losses in the financial year.
When a business is making losses, but the taxpayer has not opted for a presumptive taxation scheme, a tax audit is mandatory only if the turnover exceeds Rs. 1 crore.
When a profession is making losses, but the taxpayer has not opted for a presumptive taxation scheme, a tax audit is mandatory only if the gross receipts are more than Rs. 1 crore.
In case the taxpayer’s business or profession falls above the basic threshold limit for conducting a tax audit, but the business or profession made a loss, the books of account don’t have to be subjected to a tax audit unless then gross receipts or turnover is more than Rs. 1 crore. The business or profession should not have opted for any presumptive taxation scheme here.
Suppose the taxpayer of a business or profession has opted for presumptive taxation and made losses but falls within the threshold limit of conducting a tax audit. In that case, the taxpayer will not have to subject the books of accounts to any tax audit.
Suppose the taxpayer carrying on a business or profession has opted for presumptive taxation and made losses but crosses the threshold limit. In this case, a tax audit will be mandatory only if the taxpayer declares income less than the income which should be declared as per the regulations of the presumptive taxation scheme.
What are the components of antax audit report ?
A tax auditor creates and submits an audit report after the completion of the tax audit of a taxpayer. This report must be filled in as per the format of Form 3CA or Form 3CB, depending on the circumstances.
If the taxpayer is conducting a business or profession where a tax audit has been made mandatory under any other law, the tax auditor must fill in Form 3CA.
If the taxpayer is conducting a business or profession where a tax audit is not mandatory as per any other law, the tax auditor must fill in Form 3CB.
In addition to these forms, the tax auditor also must fill in Form 3CD, which also forms a part of the audit report.
How should a tax audit report should be submitted ?
The tax auditor has to tax audit report before the due date of filing the return of income. A tax auditor is required to submit a tax audit report containing details of the tax audit. This can be done online by using the login credentials of the certifying Chartered Accountant. The taxpayers are required to add the details of the certifying Chartered Accountant on their login portal as well. Once the tax auditor has uploaded the tax audit report, the taxpayer will be able to view the details. The taxpayer can then accept or reject the tax audit report on the portal. If the taxpayer has rejected the tax audit report for any reason, the tax auditor must follow the necessary procedures again till the audit report is accepted by the taxpayer.
What if a taxpayer has undergone a statutory audit ?
Suppose the taxpayer’s books of accounts have undergone a statutory audit. In that case, they do not have to make their books of accounts undergo a tax audit specifically for the purpose of income tax. However, the statutory audit must be completed before the due date of filing the income tax return. The taxpayer will then have to upload the audit report from the statutory audit instead of a tax audit report.
What is the due date for filing income tax returns for a business that has international transactions ?
For companies indulging in international transactions, the due date for filing income tax returns through a tax audit report is 30th November of the assessment year. The assessment year is the year immediately following the financial year. In all other cases, the due date for filing income tax returns through a tax audit report is 30 September of the assessment year. Therefore, companies have about 6 (or 7) months to complete the tax audit after the end of the financial year.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
