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Tax Audit Meaning:
A Tax Audit is an audit, made compulsory by the Income Tax Act, if the annual gross turnover/receipts of the assesse exceed the specified limit. Tax audit is conducted in Sec 44AB of the Income Tax Act,1961 by a Chartered Accountant.Simply Tax Audit means, an audit of matters related to tax.
Tax Audit Applicability:
The Following persons need to be liable for tax audit Us 44 AB
Business: Rs. 1 Crore. It means an assesse need to be audited under Sec.44AB if his annual gross turnover/receipts in business exceeds Rs. 1 Crore.Profession: Rs. 50 Lakh. It means an assesse need to be audited under Sec 44AB if his annual gross receipts in profession exceeds Rs. 50 Lakh.
Applicability of Section 44AB
A Person who is carrying on business, and whose total sales/turnover/gross receipts from business exceeds Rs. 1 crore. Exception – The above provision is not applicable to the person, who opts for presumptive taxation scheme under section 44AD and his total sales/turnover does not exceeds Rs. 2 crores.(Previously this limit was Rs. 1 Crore before 2016 Budget) A person who is eligible to opt for the presumptive taxation scheme of section 44AD but claims the profits or gains for such business under non – presumptive scheme which is lower than the profits and gains computed as per the presumptive taxation scheme of section 44AD and his income exceeds the amount which is not chargeable to tax.
Amendments in Budget 2020-2021
⇓ Example – A company having turnover Rs. 4.5 crores in F.Y 2020-21, then that company is not liable for tax audit. ⇓ Example – A company having turnover Rs. 1.5 crores in F.Y 2020-21 and more than 5% of business transaction is in cash will be liable to Tax Audit if the assessee does not show Profits at least 6% or 8% as per section 44AD.
Presumptive Taxation Scheme – Sec 44AD
Businesses, whose annual gross turnover/receipt does not exceeds Rs. 2 Crore are eligible for this scheme.Sec 44AD provides special provision for computing profits and gains of business on presumptive basis.U/s 44AD need not maintain books of Accounts.Net income is estimated to be @8% of your gross receipt/turnover.If Gross receipts are received through digital mode of payments, Net income can be calculated as @6% and @ 8% of gross receipts are received through cash. If Assesse opt for Presumptive taxation u/s 44AD, then he should be follow same section of audit for next 5 Financial years.You need to file ITR 4 (previously ITR4S) to avail these scheme.
Presumptive Taxation Scheme – Sec 44ADA
A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA:-
LegalMedicalEngineering or architecturalAccountancyTechnical consultancyInterior decorationAny other profession as notified by CBDT
Manner of computation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA: In case of a person adopting the provisions of section 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person can declare income higher than 50%. In other words, in case of a person adopting the provisions of section 44ADA, A person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. You need to file ITR 4 (previously ITR4S) to avail these scheme.
Tax Audit for others u/s 44AB
Tax Audit will be applicable for the following businesses also, with respect to specified limit as per section 44AB:
44AE- Business of plying, hiring or leasing goods carriages.44B- Shipping business of non-residents. @ 7.5%44BB- Business of exploration of mineral oils. @ 10%44BBA- Operation of Aircraft by non-resident. @ 5%44BBB- Foreign companies engaged in civil construction, etc. in turnkey power projects. @ 10%
Amendments of Clauses in 3CD report from FY 2017-18 w.e.f 20.08.2018
Tax Audit Report Forms U/s 44AB
There are 3 forms for reporting under section 44AB as follows:
Form 3CAForm 3CBForm 3CD
Form 3CA: This is the report given by Chartered Accountant with Audit Observation related to Tax audit.
3CA Report will be applicable for only Companies.
Form 3CB: This is the report given by Chartered Accountant with Audit Observation related to Tax audit.
3CB Report will be applicable for Assesses other than companies.
Form 3CD: This is the summary of Tax audit work and related annexures, will be discussed in later slides.
This is applicable for all Assesees.
Step By Step Guide To Tax Audit
We understand, it is a high time for all CA’s & also for their article trainees. So, here is a step by step guide on how to do a Tax Audit. Step 1: Get all the books of accounts of your client for the previous year whose audit is being conducted. Step 2: Read the form 3CD & try to keep in mind or make a separate checklist of the details which are required to completely fill up the form 3CD. Some of this information can be about – the details of fixed asset, details of inventory, previous report data, payments made to related persons, payments exceeding Rs. 20,000/- made during this previous year, etc. Also, Don’t forget to take the details about TDS deducted by the assessee and also the details of Indirect Taxes paid by the assessee. Step 3: Check the opening balances from the previous report. This is an important step & if any of the opening balances do no tally with the previous year’s report, we will face difficulty in making the Balance Sheet of the current year.
Step 4: VOUCHING
. This is one of the most important steps in doing a Tax Audit. Vouching involves the complete checking of all the vouchers of the enterprise. Detecting the possibility of any misrepresentation or fraud done by the client is very probable at this step. Utmost care should be taken & all the vouchers should be thoroughly checked. Commonly we do cash expenses vouching, bank expenses vouching, purchase vouching, sales vouching, etc.
Step 5: Bank Reconciliation.
In order to verify whether all the transactions related to bank have been duly accounted, we verify the bank book with the bank statements. If there is a mismatch of some transactions, we prepare a BRS i.e., a Bank Reconciliation Statement. Step 6: Check whether payments exceeding Rs. 20,000/- in cash have been made? If the same are done, they need to be reported in our report. Also, we should make sure that cash is not going negative in the books of accounts in any part of the year.
Step 7: Prepare the Balance Sheet & the Profit & Loss Account.
As we have to upload the scanned copies of the financial statements with our Tax audit report, make sure we make CA certified Financial Statements first & get scanned copies of the same ready.
Step 8: Ledger Scrutiny.
Make sure all the ledgers of your client have been carefully overlooked by you. The general nature of the ledger & the transactions present in the ledger do not show anything unusual or exceptional. In case, it does, make sure you receive satisfactory explanation of the same from your client. Otherwise, the auditor should appropriately classify his report.
Step 9: Proper Notes & Disclosures.
If you find anything worth mentioning in Step 8 or non – compliance of any of the Accounting Standards, the same should be properly reported by you, the auditor. Step 10: You need to fill up the form 3CA-3CD or 3CB-3CD, as required and generate .xml to be uploaded. Also, make sure you have up to date DSC of the auditing CA as well as of the client assessee. Step 11: Go to https://incometaxindiaefiling.gov.in/e-Filing/UserLogin/LoginHome.html. Sign in from your client’s profile & Go to ADD CA option from My Account drop down menu. After Adding your CA, the auditor needs to sign in from his profile made for uploading the report & upload the tax audit report along with the scanned copies of financial statements. After this done, we need to again go the client’s profile & approve the tax audit report. With this, we complete the submission of the Tax Audit Report with the CBDT.
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