ACCOUNTING & TAX
INCOME TAX AUDIT
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OVERVIEW
INCOME TAX AUDIT
The term “tax audit” refers to the inspection and verification of the taxpayer’s financial records to determine if they comply with the terms of the Income Tax Act of 1961. According to the government, every taxpayer in India must now comply with tax audits. If the amount paid in taxes surpasses a certain threshold, tax audits on yearly gross revenues and turnover are now required under the Income Tax Act of 1961. A chartered accountant performs the tax audit by Section 44AB of the Income Tax Act of 1961.
SCOPE
SCOPE
For the following assesse, a tax audit is required under Section 44AB:
Business Gross Turnover – 10 Crore per Annum
According to Section 44AB of the Income Tax Act, an assesse is required to submit to an audit if their gross yearly revenue exceeds ten crore.
Annual Gross Income from Profession – 50 lakhs
The Assesse is qualified for this procedure if their profession’s annual gross income exceeds INR 50 lacs.
Outcomes of a Tax Audit
- It ensures that the books of accounts are kept up-to-date and accurate and that the tax auditor has verified them.
- It could be profitable for a company.
- An audit lends credibility to information that has been made public for use by workers, clients, vendors, investors, and tax authorities.
- The audit reassures stockholders that the data in the accounts reflect a true and fair picture.
- After the tax auditor has thoroughly checked the books of accounts, any observations or inconsistencies must be reported.
- The main goal of this audit is to provide a report in accordance with the specifications of forms 3CA, 3CB, and 3CD. Additionally, a proper tax audit is also necessary to ensure that the books of accounts and records are up to date, accurately reflect the taxpayer's revenue, and are being used to claim deductions as they should be.
- An annual audit requires a lot of time and resources. Every qualifying Assessee must undergo a tax audit, which is required by the Income Tax Act of India and is carried out by a tax consultant (a Chartered Accountant).
Income Tax audits completely depends on annual turnover irrespective to Individual/Proprietorship, Company, Partnership Firm, Association of Person, Hindu Undivided Family and Local Authority.
SUBJECT TO A TAX AUDIT
WHO IN INDIA IS SUBJECT TO A TAX AUDIT?
In accordance with the law, certain groups of people are required to take part in an income tax audit.
- Any company in India that has annual total sales, turnover, or receipts of more than INR 1 crore is required to have a tax audit. If you earn more than INR 50 lakhs as a professional, you may be subject to a tax audit. An engineer, an architect, a designer of interior spaces, a lawyer, and a doctor are examples of professions in this context. You can refer to Rule 6F of the Income Tax Rules, 1962 for a complete list of professionals.
- You must conduct a tax audit if you have chosen one of the presumptive taxation schemes as a professional or businessperson and your total sales / turnover exceed INR 2 crore. Similar to this, if you discover that your profits are lower than those predicted by the presumptive taxation scheme, you must conduct a tax audit to verify this.
- If it is required that you have a tax audit performed and you didn’t, then you will be penalized with a fine of 0.5% of your gross revenue, up to INR 1.5 lakhs. However, as per section 273B, there are several circumstances in which failing to file or submitting a tax audit report after the deadline is acceptable. Natural disasters and strikes or lock outs, theft of documents or resignation of the auditor.
ESSENTIAL DOCUMENTS
ESSENTIAL DOCUMENTS REQUIRED FOR TAX AUDIT
Documents Required for Preparation of Tax Audit Report
- Name of the Assessee
- Address Proof of Assessee
- PAN / Aadhar Card of the Assessee
- GST Registration Number or any other document which proves the payment of indirect taxes
- Status of the Assessee as a person under section 2 ( 31 ) of the Income-tax Act 1961
- Previous Year and Assessment Year
- Sum referred under section 43B
- Depreciation or loss brought forward.
- Tax distributed on profit
- Tax summary
- TDS
- Ratio of Turnover
- Relevant Clause of section 44AB
- Nature of Business and Change in Nature of Business, if any
- If the Assessee has opted for taxation and taxation regime under 115BA/115BAA/115BAB and submitted form 10-IB / 10-IC /10-ID
- Details of Partnership Firm or AOP
- Books of Accounts as per Section 44AA
- Whether the P&L have and profit or gain under the presumptive scheme 44AD, 44ADA, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, Chapter XII-G, First Schedule or any other relevant section).
- Method of accounting in the previous year and change in the method, if any
- Whether there is a need for adjustment in the P&L account to comply with ICDs U/s 145 (2)
- Method of valuation of closing stock on the previous year
- Details regarding the capital asset converted to stock, if any
- Capital receipt
- Particulars of Depreciation
- Amount admissible under sections 32,33 and 35 on the ITA 1961
- The amount received or paid to employees.
- The amount debited in the Profit and Loss Account.
- Amount of interest under Section 23 of MSME Act 2006
- Any payment made to persons u/s 40A 2 (b)
- Profit chargeable on tax
- Deemed to be a profit
- Profit Chargeable to tax
- The sum referred to under section 43 B
- Details of Loan/amount deposited along with a certificate from Assessee declaring the same
Documents Required for Tax Audit
- Management Representation Letter
- Appointment Letter for Defining Scope
- Trial balance
- List of related parties and Transactions
- Statutory Compliances
- Liabilities, including Contingent liability Estimation
- Notes on the nature of business
- Depreciation Calculation Statement
- Proof of revenue expenditure capitalized and assets purchased
- Extraordinary items Nature and Disclosure
- Financial Statements duly signed by Owners
- Bank balance confirmation
- Bank balance Statements
- Major sundry debtors and creditor balance confirmation
- Valuation of Inventories and for the total year quantitative inflow, outflow statement
- Notes on accounts and Disclosure of accounting policies
- Sample Purchase and sales bills
- Analytical Ratio analysis
PROCEDURE
PROCEDURE OF TAX AUDIT
Choosing a tax auditor
The choice of a Tax auditor is the initial stage. The business’s chartered accountant or any IRS employee can serve as the auditor.
Submission of the Form and Documents to the Auditor
The required form must then be submitted together with the mandatory paperwork to the tax auditor.
Document verification by Auditor
After the taxpayer provides the required documentation, the auditor checks all the pertinent specifics and conducts vouching verification of all documents. The auditor can also request for a sample testing or further documentation to clarify the taxpayer’s transaction.
Preparing an audit report
The auditor then creates an audit report after checking all the papers. The audit report serves as evidence of the taxpayer’s compliance with tax legislation.
SCHEME
SCHEME
Scheme of Presumptive Taxation—Section 44AD
- Businesses that have an annual revenue under Rs 2 crore are eligible for this scheme.
- An estimated 8% of your overall revenue should be your net income.
- Gross receipts are collected via a digital payment method.
- Net income is determined by multiplying gross revenue by 6% and 8%.
- The assesse must adhere to the same audit section for the next five fiscal years if he elects to proceed with presumed taxes under Section 44AD.
Scheme of Presumptive Taxation—Section 44ADA
- Professionals with a gross annual salary of less than INR 50 lakhs are eligible for this scheme.
- The taxpayer must adhere to the same audit section for the next five fiscal years if he chooses Presumptive taxation under Section 44ADA.
- Under Section 44ADA, keeping books of accounts is not required.
- The taxpayer's net income is estimated to be equal to 50% of gross receipts.
TAXKEY ASSIST WITH TAX AUDIT
HOW CAN TAXKEY ASSIST YOU WITH A TAX AUDIT?
Choosing a tax auditor
The complete Tax Audit will be assisted and carried out by a team of knowledgeable and experienced consultants. By offering services like proper analysis of laws and accounts and answering any questions regarding tax audits, Taxkey assists its customer in executing the tax audit.
We will create appropriate documentation and analyzing assertions and reports.We ensure that the business adheres to the relevant tax standards and conducts an analysis of its working procedures.
Assisting you during the Tax Audit process are skilled specialists that Taxkey has on staff. Our Experts will help you throughout the audit process and other associated services. We will also ensure your job is completed efficiently and on schedule. Don’t hesitate to get in touch with our knowledgeable and qualified staff at Taxkey with any questions about Tax Audits and related services.
FAQS
FAQS
- In a fiscal year, duty drawbacks obtained following export sales are included in turnover.
- It is considered a part of turnover in a financial year, or Advance received and forfeited from customers, and if excise duty is included in turnover, it should be debited in the profit and loss account.
- Income earned out of interest from income by money lenders or through foreign fluctuation income by an exporter is also considered a part of turnover in a financial year.
- Purchase or Sale of Fixed Assets
- Rental revenue
- Residential or commercial property income
- Interest income, and receipts for the repayment of expenditures obtained by selling the assets kept as investments.
The tax auditor submits their report in the designated format, which will be Form 3CA or Form 3CB, and includes the following information:
- When a person engaged in business or profession is already required to have their accounts audited under any other legislation, Form 3CA is provided.
- When a person is engaged in business or profession and is not required to have his accounts audited by any other legislation, Form 3CB is provided.
Anyone who is covered by section 44AB must have their accounts audited and acquire the audit reports on or by September 30 of that specific year, which is the deadline for filing the income tax return.
Note: For International transactions, the due date will be November 30 of the specific year.
Any taxpayer who refuses to have their taxes audited will be subject to the following penalty:
- INR 1,50,000
- 0.5% of total sales, revenue, or gross income
Note: If the reasons are acceptable, there are chances for non-levying penalty.
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