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Income Tax Audit in India: All You Need to Know

  • Highlights

  • A tax audit is an inspection under the Income Tax Act

  • It helps authorities ensure there are no tax discrepancies

  • Professional income over Rs.50 lakh necessitates tax audit

  • Not doing a tax audit can lead to penalties up to Rs.1.5 lakh

An audit is nothing but an official inspection, and as per the Income Tax Act of 1961, under Section 44AB, certain categories of individuals as well as certain businesses, must have their books of accounts audited. For businesses and people, a tax audit is necessary once you do business over and above a specific amount. Here’s all that you need to know about tax audit in India.

Why is a tax audit conducted?

Its core purpose is to ensure that you or your business is abiding by the tax laws put in place by the Income Tax Act of India. Once complete, the tax audit makes it easy for you to file tax returns. By looking into your books of accounts, a tax audit catches any errors or discrepancies early on and ensures that you’re disclosing the information that you’re supposed to. Also, once you carry out a tax audit, it is easy for the tax authorities to go through your income tax returns.

Who is supposed to have a tax audit in India?

It is compulsory for certain people to have an income tax audit and as per the law, these are the categories that must participate in a tax audit.

Any business where the total sales, turnover or receipts is in excess of Rs.1 crore in a year.

As a professional, receipts over Rs.50 lakh makes you eligible for a tax audit. Here a professional includes the likes of an engineer, architect, interior decorator, legal and medical professional. For the complete list of professionals, you must refer to Rule 6F of the Income Tax Rules, 1962.

If you have opted for the presumptive taxation scheme as a professional or businessperson, and your total sales/turnover is more than Rs.2 crore, you are required to carry out a tax audit. Similarly, if you find that your profits are lesser than what was determined by the presumptive taxation scheme, you have to carry out a tax audit to confirm this.


If it’s stipulated that you are to get a tax audit done and you don’t, you will have to pay a penalty of 0.5% of turnover/gross receipts, up to Rs.1.5 lakh. However, as per Section 273B, there are certain situations where not filing your tax audit report or doing so late, is allowed. Examples of this are natural calamities, strikes or lock-outs, theft of documents or resignation of the auditor.

Who conducts a tax audit?

A chartered accountant or a firm of CAs conduct this audit. However, the tax audit limit rests at 60 audits per CA. In case of a firm, the tax audit limit is applicable to each of the firm’s partners.

What are the types of audits in India?

When it comes to the type of audits or classification of audits, you’ll find that there are 3 main types:

1. Field audit: This is conducted at your office, typically. In the off-chance that it’s to be conducted at your representative’s place of work, you will have to provide the necessary documents to them.

2. Office audit: This is conducted at an IRS office and you are supposed to visit the office with the necessary documents in tow. Typically, a letter will be sent to you stating the documents you must carry.

3. Correspondence audit: In this type of audit, the IRS sends you a letter requesting documents that will provide clarity/missing information with regards to your tax returns. Basis the instructions, you are required to simply mail the documents across.

 

How to do tax audit in India?

To successfully complete the tax audit in India, you are required to submit the necessary forms. The 4 most commonly required ones are as follows.

Form 3CA: This is for companies or professionals who have to mandatorily carry out a tax audit.

Form 3CB: This is for a business or profession that isn’t mandated by any other law to have a tax audit carried out.

Form 3CD: This form is best viewed as a detailed statement of particulars. It comprises various details of the business and its transactions.

Form 3CE: This form is for NRIs and foreign companies. You are required to submit it if you receive fees/royalty from any Indian concern or the government in lieu of rendering technical services.

 

The Direct Taxes committee of the ICAI regularly issues guidance note on tax audits to keep tax auditors abreast with the latest changes in the tax audit report requirements. This may be with regards to changes in the information that is to be disclosed, contribution of the auditor(s), as well as amendments to forms, as was the case with Form 3CD in 2018.

By when should you have the tax audit report?

The auditor will hand over the tax audit report to you electronically, which you can approve and then file. Note that you do have the option to reject the tax audit report in which case it will have to be carried out again, from scratch. The tax audit due date is 30 September of the assessment year, and for Form 3CE it’s 30 November of the assessment year.

Although understanding tax audits in India is the biggest tax return tip, knowing how to calculate taxable income and how to reduce tax liability will help you as well.

How to calculate taxable income for your business?

As mentioned before, you are required to have a tax audit done if your total income from all businesses is over Rs.1 crore and that from all professions is over Rs.50 lakh. However, if you are a businessowner and a professional, your audit is not basis your cumulative income. This means if your total turnover from the business is Rs.95 lakh and that from your profession is Rs.48 lakh, you don’t require to get a tax audit done.

In addition, if you’re wondering how to calculate taxable income in India, remember that if the amount is below the threshold, your earnings from the sale of an asset will also not be considered as a profit. This is applicable to fixed assets such as machinery or cars, assets held as investments such as in the form of stocks, expenses reimbursed by a client, rental income, etc.

How to reduce tax liability as a businessowner or professional?

- Make purchases in your company’s name. This is because on the basis of what you have purchased, be it computers, vehicles or smartphones, you can claim depreciation on such capital expenses.

- Consider utilities to be business expenses. Paying for electricity, internet connections, air conditioning, etc. can be written off, thereby lowering your taxable income.

- File your taxes on, or before the due date. Apart from ensuring that you’re a law-abiding entity, this tip for filing taxes also helps you in other ways. This is because as you can carry forward a loss from your business for up to 8 consecutive years.

- Keep abreast of the changes instated by the government. There are revisions instated by the government from time to time to help businesses, especially small and medium enterprises. Familiarising yourself with these changes will ensure that you’re making the most of every deduction possible to lower your taxable income.

- Write-off all business expenses. Be it travelling for work or entertaining clients, all of these are counted as business expenses, and you can use them to lower your taxable income. However, to do so, you must keep a detailed record of all such expenses. This means preserving bills and receipts meticulously.

- Make the most of start-up expenses. Also known as preliminary expenses, these give you tax benefits as well under Section 35D of the Income Tax Act. Typically comprising expenses that you incur prior to commencement of your business, these can be written off over a period of 5 consecutive years as per the provisions of the law.

So, keep pointers in mind to reduce your tax liability and carry out your tax audit on time. Remember that if you don’t, you will have a penalty of up to Rs.1.5 lakh to pay.

Additional Read: Income Tax Audit under Section 44

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