Tax Audit
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A tax audit examines financial statements and other supporting documents to ensure the information is accurate and compliant with tax laws and regulations to file the Income Tax Return. Tax audits are conducted to verify the correctness of the information provided and to detect any potential underreporting of income, overclaiming of deductions, or other inaccuracies. The auditor’s goal is to provide reasonable assurance to the organization’s management, shareholders, and stakeholders that the financial information presented in the tax returns is trustworthy and compliant with applicable tax regulations. The audit process helps enhance transparency, accountability, and confidence in the organization’s financial reporting and tax compliance practices.
The objective of Tax Audit
The focus of tax audits is to provide reasonable assurance that the financial information presented in the tax returns is accurate and by applicable tax laws. Below are the main objectives of a tax audit:
- Accuracy and Completeness: This involves examining the organization’s accounting records, supporting documents, and financial transactions to ensure that all the relevant income, expenses, deductions, and credits have been properly reported.
- Compliance with tax laws: This includes determining whether the organization has correctly applied tax codes, rates, and rules to calculate its tax liability.
- Detection of Errors: The auditor’s role is to identify any errors, discrepancies, or inconsistencies in the financial information presented on the tax returns.
- Risk Assessment: They identify areas where the organization might have a higher risk of non-compliance and provide recommendations to mitigate those risks.
- Documentation and Support: Auditors verify that the organization has appropriate documentation and supporting evidence for the information presented on the tax returns.
- Ethical Consideration: The auditor must also consider ethical considerations, such as independence and objectivity. Their objective is to provide an unbiased assessment of the organization’s tax compliance and financial reporting.
- Reporting: Based on their findings, auditors provide a report that outlines the results of the tax audit. This report communicates whether the organization’s financial information is reliable, accurate, and compliant with tax laws, or if there are areas of concern that need to be addressed.
Income Tax Audit Limits (Section 44AB):
- Businesses:
- Tax Audit is required If the turnover/gross receipts exceed INR 1 Crore (100 Lakhs), during the financial year.
- If the turnover/gross receipts exceed the prescribed limit (1 Crore) but less than 10 Crore, and cash transactions are less than 5%, then a tax audit is not required.
- If the turnover/gross receipts exceed INR 10 Crores, irrespective of the percentage of cash transactions, then a tax audit is required.
- Professionals:
- Tax Audit is required if the turnover/gross receipts exceed INR 50 Lakhs.
Presumptive Taxation Scheme (Section 44AD/44ADA)
- Business (Section 44AD)
- Any assesses (i.e., an individual, HUF, or Partnership Firm other than LLP), who carry eligible business and have turnover/gross receipts up to INR 2 Crores or less can opt for a presumptive taxation scheme. Under this scheme, the assessee’s profit or gains from business shall be deemed to be 8% of turnover/gross receipts. However, if the receipts are through any electronic means or by account payee cheque/draft, in such cases, the assessee has the option to compute his income at 6%.
- Profession (Section 44ADA)
- Any assesses (i.e., an individual, HUF, or Partnership Firm other than LLP), who carry an eligible profession and have turnover/gross receipts up to INR 50 Lakhs or less can opt for a presumptive taxation scheme. Under this scheme, the assessee’s profit or gains from business shall be deemed to be 50% of turnover/gross receipts.
Note: – As per the Budget 2023, In the case of the presumptive taxation scheme, the threshold limit in section 44AD be increased from INR 2 Crores to INR 3 Crores, and under section 44ADA, the limit is increased from 50 Lakhs to 75 Lakhs. Provided, cash receipts during the year are less than 5% of total gross receipts.
Tax Audit Report
A tax Audit Report is prepared by the Practicing Chartered Accountant after the audit of the Books of Accounts of a Business. Tax Audit Report is filed in Form No. 3CA-CD or 3CB-CD.
Applicability of Form 3CA-CD or 3CB-CD:
Form 3CA: Where a person carrying on Business or Profession is mandated to get his accounts audited under any other law.
Form 3CB: Where a person carrying on Business or Profession is not required to get his accounts audited under any other law.
Form 3CD: It is a part of the Audit Report that includes the information relating to business and transactions for the relevant financial year.
