Tax Audit

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As per section 44AB of Income tax Act,1961, every Person in the previous year

Income tax audit is required for businesses with turnover exceeding ₹1 crore if cash transactions exceed 5% of total receipts and payments, or ₹10 crores if cash transactions are 5% or less.

Professionals must undergo an audit if gross receipts exceed ₹75 lakhs annually.

Businesses under Section 44AD with turnover above ₹3 crores must undergo an income tax audit.

Business/profession covered under presumptive taxation who has claimed his income to be lower than the profit and gains deemed to be the profits and gain of business/ profession covered under the section 44AD (4) of the Income tax Act,1961.

PURPOSE

As India follows self-assessment method to assess income and taxes payable by a person, it is the responsibility of the person to follow all the rules prescribed under the Act. Tax Audit Service is a mechanism by which the Income Tax department would enforce the law effectively through an independent agency by ensuring that income declared in the return is accurate

A tax audit is the careful analysis of an individual or business entity's financial and tax records to ensure compliance with tax laws and regulations. The purpose of a tax audit is to verify that the tax returns filed by the taxpayer are accurate and complete and that the taxpayer has paid the appropriate amount of tax owed.

ELIGIBILITY AND APPLICABILITY

Criteria for Eligibility of Tax Audit

Gross receipts

The gross receipts of a business may be used as a criterion for tax audit eligibility. This is often used for smaller businesses or self-employed individuals.

Profits

The Budget 2023 amended Sec 44AD and Sec 44ADA and revised presumptive taxation limits for FY 2023-24 (AY 2024-25) as follows:

Category	Previous limits	Revised limits
Sec 44AD: For small businesses	Rs. 2 crore	Rs. 3 crore*
Sec 44ADA: For professionals like doctors, lawyers, engineers, etc.	Rs. 50 lakh	Rs. 75 lakh*

*The increase in limits is subject to the condition that 95% of the receipts must be through online modes.

If the cash transactions are up to 5% of the total gross payments and receipts, then the threshold limit is increased up to Rs 10 Cr from FY 2021-22.

The proviso raises the threshold limit for individuals conducting business from Rs. 1 crore to Rs. 10 crore, provided that:

(i) the aggregate of all receipts in cash during the previous year does not exceed five percent of such receipts; and

(ii) the aggregate of all payments in cash during the previous year does not exceed five percent of such payment.

Type of business

Certain types of businesses are more likely to undergo a tax audit. For example, businesses that deal in cash transactions or have a high rate of non-compliance are subject to more frequent audits.

Applicability of Tax Audit as per Income Tax Act, 1961
Business Turnover An income tax audit is mandatory if a business opts for presumptive taxation under 44AD and has yearly turnover more than Rs. 2 Cr. Also, if a business entity which is covered under 44AD, 44AE, 44AF, 44BB, 44BBB declares its profit as a certain percentage of turnover, which is below the prescribed limit and its income exceeds the basic exemption limit , it is applicable for tax audit. If any business that does not opt for a presumptive taxation scheme and its sales and turnover exceed more than Rs. 1 Cr, it is applicable for tax audit. If the cash transactions are up to 5% of the total gross payments, then the threshold limit is increased up to Rs 10 Cr from FY 2021-22. If a business entity declares profit as per presumptive taxation scheme under 44AD and its income is within maximum non taxable amount for 5 consecutive years, then the entity is eligible for income tax audit. If a business incurs loss with a sale of above 1 Cr and does not go for presumptive taxation scheme, then it should be audited. When a business incurs a loss with an income which is more than the income declared in presumptive taxation scheme 44AD , it must also be audited.
Profits The penalty for non-compliance with tax audit rules is 0.5% of the turnover or gross receipts Failure to comply with a tax audit can result in legal action against the taxpayer, which may include fines, penalties, and in some cases, imprisonment. Late filing penalty is applied for filing tax returns after the due date. The penalty amount varies based on the number of days late. Who is eligible for a tax audit? A tax audit is required by: 1. Businesses whose total turnover exceeds the prescribed limit (e.g., Rs. 1 crore or Rs. 10 crore, depending on the type of business). 2. Professionals whose gross receipts exceed the specified threshold, usually Rs. 75 lakh. 3. Individuals, Hindu Undivided Families (HUFs), and Firms who meet the criteria of income or turnover as defined by the Income Tax Act. 4. Companies or other entities that are mandated by law to conduct a tax audit regardless of turnover. Eligibility criteria may vary based on the specific provisions in the Income Tax Act and any updates from the government.
Type of business Certain types of businesses are more likely to undergo a tax audit. For example, businesses that deal in cash transactions or have a high rate of non-compliance are subject to more frequent audits.

Applicability of Tax Audit as per Income Tax Act, 1961

Business Turnover

An income tax audit is mandatory if a business opts for presumptive taxation under 44AD and has yearly turnover more than Rs. 2 Cr.

Also, if a business entity which is covered under 44AD, 44AE, 44AF, 44BB, 44BBB declares its profit as a certain percentage of turnover, which is below the prescribed limit and its income exceeds the basic exemption limit , it is applicable for tax audit.

If any business that does not opt for a presumptive taxation scheme and its sales and turnover exceed more than Rs. 1 Cr, it is applicable for tax audit. If the cash transactions are up to 5% of the total gross payments, then the threshold limit is increased up to Rs 10 Cr from FY 2021-22.

If a business entity declares profit as per presumptive taxation scheme under 44AD and its income is within maximum non taxable amount for 5 consecutive years, then the entity is eligible for income tax audit.

If a business incurs loss with a sale of above 1 Cr and does not go for presumptive taxation scheme, then it should be audited. When a business incurs a loss with an income which is more than the income declared in presumptive taxation scheme 44AD , it must also be audited.

Profits

The penalty for non-compliance with tax audit rules is 0.5% of the turnover or gross receipts

Failure to comply with a tax audit can result in legal action against the taxpayer, which may include fines, penalties, and in some cases, imprisonment.

Late filing penalty is applied for filing tax returns after the due date. The penalty amount varies based on the number of days late.

Who is eligible for a tax audit?

A tax audit is required by:

1. Businesses whose total turnover exceeds the prescribed limit (e.g., Rs. 1 crore or Rs. 10 crore, depending on the type of business).

2. Professionals whose gross receipts exceed the specified threshold, usually Rs. 75 lakh.

3. Individuals, Hindu Undivided Families (HUFs), and Firms who meet the criteria of income or turnover as defined by the Income Tax Act.

4. Companies or other entities that are mandated by law to conduct a tax audit regardless of turnover.

Eligibility criteria may vary based on the specific provisions in the Income Tax Act and any updates from the government.

Type of business

Certain types of businesses are more likely to undergo a tax audit. For example, businesses that deal in cash transactions or have a high rate of non-compliance are subject to more frequent audits.

Changes in Tax Audit Rules & Its Impact

Section 11 Trusts

The threshold limit for tax audits has increased from Rs. 5 crores to Rs. 10 crores for businesses with less than 5% cash transactions.

Penalty

The penalty for non - compliance with tax audit rules has been increased from 0.5% to 0.75% of the turnover or gross receipts.

Extension of due date

The due date for tax audits has been extended to 31st January of the assessment year.

Reporting requirements

The tax audit report must now include additional information such as details of international transactions, tax demands and refunds.

Business compliance changes illustration

PENALTY FOR NON - COMPLIANCE

Consequences of Non - Compliance with Tax Audit
Prosecution TFailure to comply with a tax audit can result in legal action against the taxpayer, which may include fines and penalties, and in some cases, imprisonment.
Increased scrutiny Non-compliance with a tax audit can also result in increased scrutiny from tax authorities in the future. This may result in more frequent audits, investigations, and penalties.
Damage to reputation Tax audit non-compliance can also damage the taxpayer's reputation and credibility in the eyes of tax authorities and the public.
Interest on unpaid taxes If the audit reveals that the taxpayer owes additional taxes, interest on the unpaid taxes may be imposed, resulting in additional costs to the taxpayer.

Consequences of Non - Compliance with Tax Audit

Prosecution

TFailure to comply with a tax audit can result in legal action against the taxpayer, which may include fines and penalties, and in some cases, imprisonment.

Increased scrutiny

Non-compliance with a tax audit can also result in increased scrutiny from tax authorities in the future. This may result in more frequent audits, investigations, and penalties.

Damage to reputation

Tax audit non-compliance can also damage the taxpayer's reputation and credibility in the eyes of tax authorities and the public.

Interest on unpaid taxes

If the audit reveals that the taxpayer owes additional taxes, interest on the unpaid taxes may be imposed, resulting in additional costs to the taxpayer.

Penalty for Non - Compliance
Late Filing Penalty ate filing penalty is applied for filing tax returns after the due date. The penalty amount varies based on the number of days late.
Late Payment Penalty This is a penalty for not paying the tax owed by the due date. The penalty amount is usually a percentage of the unpaid tax.
Fraud Penalty A fraud penalty is a penalty for intentionally failing to report income or claiming false deductions. The penalty amount can be up to 75% of the underpaid tax.
Criminal Penalties In some cases, non-compliance with tax audits can result in criminal charges, including fines and imprisonment.

Penalty for Non - Compliance

Late Filing Penalty

ate filing penalty is applied for filing tax returns after the due date. The penalty amount varies based on the number of days late.

Late Payment Penalty

This is a penalty for not paying the tax owed by the due date. The penalty amount is usually a percentage of the unpaid tax.

Fraud Penalty

A fraud penalty is a penalty for intentionally failing to report income or claiming false deductions. The penalty amount can be up to 75% of the underpaid tax.

Criminal Penalties

In some cases, non-compliance with tax audits can result in criminal charges, including fines and imprisonment.

Business objectives planning illustration

Objectives of Tax Audit

Verification of Tax Returns

One of the primary objectives of tax audit services is to verify the accuracy of tax returns filed by taxpayers so that they do not have to face any legal consequences.

Identification of Discrepancies

Another important objective of a tax audit is to identify any discrepancies or inconsistencies in the taxpayer's financial statements or tax returns and rectify them on time.

Detection of Tax Evasion

A tax audit is also aimed at detecting any attempts by the taxpayer to evade or avoid paying taxes. This can include examining the taxpayer's business operations, transactions, etc.

Improvement of Internal Controls

A tax audit can help identify weaknesses in the taxpayer's internal controls and accounting systems. This can allow the taxpayer to ensure future compliance with tax laws and regulations.

Why BC Shetty & Co CA Professionals For Conducting Tax Audit

BC Shetty & Co has been offering tax audit consulting services to customers for quite a while now. We are now a part of the International Accounting Association and follow all the quality standards while offering our services to the customers. You can also contact us for bookkeeping services.

We only hire qualified accountants who are highly experienced atm llp registration and other accounting services and they will offer you the exact services as per your requirements. All our files are peer-reviewed by our partners to reduce the chances of any kind of errors. We will also provide you with a standard audit report per your requirements.

Why Choose BC Shetty & Co?

Customer Care - Dedicated point of contact with quick response

Accuracy-3 Layered Quality Review and external Peer review

Expertise Chartered Accountants with years of experience

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AFFILIATIONS

Frequently Asked Questions

1. Who is eligible for a tax audit?

A tax audit is required by:

a. Business taxpayers with a turnover of more than Rs. 1 crore

b. Professionals with gross receipts of more than Rs. 50 lakh

2. Can a tax audit report be revised?

Yes, a tax audit report can be revised under certain circumstances. An experienced chartered accountant can help you revise your audit report.

3. What is the purpose of a tax audit?

The purpose of a tax audit is to ensure that taxpayers maintain proper books of accounts and comply with the Income Tax Act provisions.

4. How to file a tax audit report?

The tax audit report needs to be filed electronically using the Income Tax Department's online portal.

5. What is the Due Date for Tax Audit as per Section 44AB?

The due date for filing the tax audit report as per Section 44AB is September 30th of the relevant assessment year.

6. What is the penalty for a tax audit?

If taxpayers fail to get their accounts audited or submit the tax audit report by the due date, they may be liable to pay the penalty. The penalty equals 0.5% of the taxpayer's turnover or gross receipts.