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INCOME TAX AUDIT AN OVERVIEW

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Consultaxx Income Tax Audit

Introduction:

The term audit generally implies auditing of financial statements. In such an Audit, the Auditor provides the expert opinion about the quality of such statements & merely attests the truth of the statements. Audit implies to non-financial matters as well, like audit of operations, efficiency etc. In simple terms, Audit means critical and intelligent examination of facts – financial or otherwise, to give in the form of certificate or report an attestation, an expert opinion or advice. The main objective of the tax audit is to compute the taxable income according to the law and for maintaining transparency in the financial statements filed by the assessees with the Income-tax department.

Who is covered by TAX AUDIT:-

Tax Audit in case of Income Tax is applicable to specific persons and Section 44AD governs the same. Below is the list of people who compulsorily require tax audit:

  • An individual who is engaged in business and the annual turnover of his/her business is Rs.1 crore and above if he is filing under Section 44AB if filling under Section 44AD then turnover is Rs.2 crore.
  • Professionals income above Rs 50 Lakhs per annum
  • Any business having profit less than 8% of turnover and the give profit is above taxable limit.
  • Any person who has opted out of Section 44AD and has income more than taxable limit.

Forms of the Audit Report:-

The Audit report shall be submitted in the following forms:

  1. In the case of a person who carries on business or profession and who is required by or under any Law to get his accounts audited:

a) Audit Report in Form No.3CA

b) Statement in Form No.3CD

  1. In the case of a person who carries on business or profession but not required to get his accounts audited:

a) Audit Report in Form No.3CB

b) Statement in Form No.3CD

Penalty for not doing AUDIT:-

According to the section 271B :

  • 0.5% of the total sales in case of a business organisation or 0.5% of the total receipts in case of profession of the current financial year.
  • The business may be fined with an amount of Rs.1,50,000.

However, according to the section 273B, no penalty would be imposed on the person if valid reason for such failure is proved.
Thus tax audit is very important aspect and must be complied with timely , if not serious penalties can apply and will also affect the track record of the tax payer.

       Turnover Limit for Audit:

Category of TaxpayerFY 2016-17 Onwards
Business (Not opting Presumptive Income Scheme)1 crores
Professionals(Not opting Presumptive Income Scheme)50 Lakhs
Business opting Presumptive Income scheme u/s 44AD2 crores
Professionals opting Presumptive Income scheme u/s 44ADA50 lakhs

Pros and Cons of Auditing:-

Pros of Auditing:

  • Company Accounts– Auditing emphasizes the need of continual updation and maintenance of company accounts.
  • Financial State– A comprehensive auditing report presents true facts about the present financial state of the business in details.
  • Profit or Loss– It helps the business owner to arrive at precise profit or loss incurred by the business.
  • Company Assets – Audit firms in Singapore helps an owner in arriving at the market value of the company by assessing the value of its assets.
  • Tax– In countries such as Singapore, auditing report submission to regulating authorities is a must for companies. It helps them in dealing with tax issues.
  • Financial Decisions– Auditing helps investors, shareholders and business owner in making financial decisions.
  • Loan– Auditing brings a company’s strength as well as its shortcomings to the notice of financial institutions. Depending on that these institutions take proper decisions about the loan to the company.
  • Exchange of Views– A detailed report prepared by SBS Consultancy, an audit company in Singapore, brings strength, weakness, threats and opportunities of the business in the open. It opens up discussions and exchange of views about present and the future course of the company.
  • Financial Irregularities– Moreover, the process of auditing itself can help find and pinpoint financial irregularities in the conduct of the business.
  • Legal Document – An audited report is a legal document and can be presented to the court of law as evidence in support of company. This helps in settling claims against the company as well as partnership issues.

Cons of Auditing:

  • Accounting Principles– For various reasons, businesses use different accounting principles. It is auditor’s duty to know about them and proceed accordingly, to avoid misinterpretation of data. Auditing firms in Singapore are well versed with this issue. SBS Consultancy makes it an easy sailing for its clients.
  • Difference of Opinions– Auditors using same set of financial statements can arrive at different conclusions which may create complications.
  • Fraud/Error Detection– It may not be possible for the auditor to uncover smartly hidden financial irregularities from the financial statements presented.
  • Monetary Unit Principle– An audited report is based on the assumption that the currency is stable over the period under consideration. In practice it is not true and because of this, it may not reveal true financial state of the company.
  • Influence– Under the influence of management or for some other reason, auditor may come up with a biased audit. That is why associating with a reputed audit company in Singapore like SBS Consultancy is a must for an image conscious company.

Difference between Accounting and Auditing with the comparison chart:-

CriterionAccountingAuditing
DefinitionAccounting is keeping records of the financial transactions and preparing financial statementsAuditing is critical examination of the financial statements to give an opinion on their fairness
TimingContinuous with daily recording of financial transactionsPeriodic process and carried out after the preparation of final accounts
BeginningStarts where book-keeping endsStarts where accounting ends.
PeriodConcentrates on the current financial transactions and activitiesConcentrates on the past financial statements
CoverageAll transactions, records and statements having financial implicationsFinal financial statements and records.
Level of DetailVery detailed and captures all details related to financial transactions and recordsUses financial statements and records on sample basis.
Type of CheckingChecking details related with all financial recordsCarried out through test checking or sample checking.
FocusTo accurately record and present all financial transactions and statements.To verify the accuracy of the financial statements
ObjectiveTo determine the financial position, profitability and performance.To add credibility to the financial statements
Legal StatusGoverned by Accounting StandardsGoverned by Standards on Auditing
Performed byAccountantsAuditors.
StatusCarried out by an internal employeeCarried out by an external person or independent agency
AppointmentBy the managementBy the shareholders
QualificationSpecific qualification is not compulsorySome specific qualification is compulsory
Remuneration TypeSalaryAuditing fee
Remuneration FixationBy the managementBy the shareholders
Scope Determinationby the managementby the relevant laws
NecessityNecessary for all organizations in the day-to-day or routine operationsNot necessary in the day-to-day operations
DeliverablesFinancial statements e.g. Income Statement or P/L, Balance Sheet, Cash Flow Statement, etc.Audit Report
Report SubmissionTo the managementTo the shareholders
GuidanceAccountants may make suggestions for the improvement of accounting and related activitiesAuditor usually does not make suggestions
LiabilityGenerally ends with the preparation of the accountsLiability after preparation and submission of the audit report
Shareholders’ MeetingsAccountant does not attendAuditor may attend
ProfessionalAccountant is not usually prosecuted for professional misconductAuditor can be prosecuted for professional misconduct
Misconduct
RemovalBy the managementBy the shareholders

1.  Income Tax Rates – Individuals – Comparative table:-

Total IncomeExisting RatesProposed Rates (AY 18-19)
< 2.5 lakhsNilNil
2.5 lakhs to 5 lakhs0.10.05
% 5 lakhs to 10 lakhs0.20.2
Rs. 10 lakhs and above0.30.3

Surcharge on Total Income:-

From FY 2017-18 (AY 18-19), the surcharge for individuals is applicable as follows:

  • Total Income Upto Rs. 50 lacs – No surcharge
  • Total Income from Rs. 50 lacs to Rs.1 crore – 10% of tax payable
  • Total Income of Rs.1 crore and above – 15% of tax payable

Senior and Super Senior Citizens:-

Senior Citizens (60 years to 80 years) and Super Senior Citizens (80 years and above) have not received any additional benefits other than beneficial 5% slab rate reduction upto Rs.5 lacs.

1.  Income Tax Rates – Partnership firms For both AY 2017-18 and AY 2018-19:-

Regular Tax:

a)   Rate of tax @ 30% of Total Income

b)   Remuneration to partners maybe paid out of Total Income with maximum ceiling as follows, before calculating tax @ 30% in step (a)

On the first Rs. 3,00,000/- of the Book Profits or in case of LossRs. 1,50,000/- or @ 90 % of Book Profits, whichever is Higher
On the balance@60% of book profits

  1. Interest upto 12% on capital allowed

Surcharge as follows:

  1. Total Income up to Rs.1 crore – Nil
  2. Total income > Rs. 1 crore – 12%
  3. Income Tax Rates – Corporates/Companies:-

(I)INCOME TAX RATES

Domestic Companies

a) Regular rates

Total IncomeExisting Rates (AY 17-18)Proposed Rates (AY 18-19)
Turnover upto Rs. 50 crores (Turnover in FY 15-16)0.30.25
Turnover greater than Rs.50 crores0.30.3

b)Surcharge

  • Total income upto Rs. 1 crore – Nil
  • Total income from Rs. 1 crore to Rs.10 crores – 7%
  • Total income greater than Rs.10 crores – 12%

Foreign Companies

  1. Regular Rates

Tax at the rate of 40% of Total Income

– However, where Royalties of FTS received from services rendered to the Govt., that will be taxed @ 50%

b)Surcharge

  1. Total income upto Rs. 1 crore – Nil
  2. Total income from Rs. 1 crore to Rs.10 crores – 2%
  3. Total income greater than Rs.10 crores – 5%

(II)MAT u/s 115 JB

MAT rate is 18.5% of book profits of the company

Period of carry forward of MAT Credit was allowed for upto 10 years. This has now been increased to 15 years in Finance Act, 2017

4.Income from Salaries No significant changes other than the following important points:

a)House Rent Allowance:

If Rent paid > INR 1,00,000 per year (>INR 8333 per month) – Landlord Name and PAN is mandatory in submission to employer.

b)Interest paid on house property loan:

If interest paid on house property loan is to be claimed by an employee, he/she must submit Lender Name and PAN of Lender to the employer– includes Banks, NBFCs, Housing Finance Cos.

c)TDS on Rent Paid:

If Rent paid is greater than Rs.50,000/- per month – TDS to be deducted by tenant @ 5% and paid to the Government. TAN not required.

5.Income from House Property:-

a)Restriction on set-off of loss from House Property against other heads of income

CurrentlyExcess of loss from house property after adjusting interest paid against rental incomes is allowed to be set-off against any other head of income without limits. Any remaining house property loss, after setting off current year, maybe carried forward and set-off against only income from house property in the following years.
From 1 st April, 2018 i.e AY 2019-20The excess can still be set-off against other heads of income in that year, however, it is limited to a ceiling of Rs.2,00,000 only If there is still any loss from house property beyond Rs.2,00,000; it may be carried forward to the next year. However, it can only be set-off against income from house property in the subsequent years. It may be carried forward for 8 subsequent years before it lapses, if not set-off.

Carry forward and set-off provisions remain the same

b)Benefit for Real Estate Companies or House Developers:

No notional rent to be taxed on house property inventory which is less than 12 months old, from the end of the year in which the property is completed. Therefore, if property is completed on 1st July, 2017, then no notional rent is taxable for 12 months from end of FY in which property is completed. End of FY – 31st March, 2018. Therefore, 12 months from end of FY is 31st March, 2019.

6.Profit and gains from Business and Profession:-

a)Tax Audit Limits

Tax audit is applicable to the following classes of assessee’s if the turnover exceeds the limit as specified below

CategoryLimit of turnover/gross receipts
ProfessionalsExceeding Rs. 50 Lakhs during the year
Business AssessesExceeding Rs. 1 Crore during the year

If profits are lesser than the presumptive taxation prescribed rates, tax audit will be required.

b) Presumptive Taxation

i) Small tax payers/small businesses (Sec 44AD)

For businesses and non-professionals, the following rates are applicable

Turnover upto Rs. 200 Lakhs – Deemed Profit is as follows:

Tax as % of revenueWhen the rate is applicable
6% of gross receiptsReceived by cheque or electronic or banking channels or net banking
8% of gross profitOther than covered by above

ii) Small Professionals (44ADA)

Gross Receipt upto Rs. 50 Lakhs – Deemed Profit is 50% of Gross Receipts

7.Capital Gains:-

TAX ON CAPITAL GAIN FROM SALE OF EQUITIES

(i) Short Term Capital Gain on Sale of Equities & Equity Oriented Mutual Funds:

Tax @ 15 % on a Recognised Stock Exchange in India

(ii) Long Term Capital Gain on Sale of Equities & Equity Oriented Mutual Funds:

NIL (No tax) – If traded on a Recognised Stock Exchange in India

8.Income from Other Sources:-

Dividend income Taxation

Under the existing provisions of section 115BBDA, income by way of dividend in excess of Rs. 10lakh is chargeable to tax at the rate of 10% on gross basis in case of a resident individual, Hindu undivided family or firm.

9.Restriction on Cash Transactions:-

Nature of ExpenditureExisting LimitNew LimitIf Violated – implication
CAPITAL–Purchase of Fixed AssetsNo LimitRs.10,000/- per day per assetThe expenditure shall not be included in the cost of asset. No Depreciation benefit.
REVENUE – Expenditure on Specified BusinessNo LimitRs.10,000/- per day per assetNo deduction shall be allowed in respect of such expenditure
REVENUE – General ExpenditureRs.20,000/- per day to a personRs.10,000/- per day per assetNo deduction shall be allowed in respect of such expenditure.
Any Payment received:
(a) in aggregate from a person in a day;
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person
No LimitRs.2,00,000/- (Revised from Rs.300,000/- while finalising the Act)Penalty u/s 271DA equal to the amount of such payment received by a person

10.Key Notes for Individual Tax Planning:-

SectionNature of tax planningLimitNotes
24(b)Interest on Housing Loan (Self Occupied)Upto Rs. 2 lacsNo change
80CInvestments in Life Insurance Premium, PF, PPF,NSC, ULIP, housing loan repayment, Tax benefit mutual fundsRs.1.50 lacsNo change
80CCDInvestment in pension schemeUpto Rs.0.50 lacsFor individuals other than employee – limit of investment in NPS increased to 20% of GTI
80DMediclaim InsuranceVery Senior Citizen: Rs.30,000
Sr. Citizen : Rs. 30,000/-
Others : Rs. 25,000/-
New limit for Very senior citizen introduced. No other changes
80EEContinued Deduction from previous year – for Interest on Loan taken for Residential House PropertyRs.50,000/-Conditions:-
1. First time House Purchase
2. Home Loan sanctioned in 2016 2017
3. House Cost upto Rs. 50 Lakhs or Less
4. Loan Amount upto 35 Lakhs or Less
5. When the deduction is allowed for Interest under this section, deduction shall not be allowed in respect of such interest under any other provision of this act
80GGRent PaidLower of Following:
1. Rs. 60,000 p.a.
2. 25% of Total Income;
3. Rent Paid – 10% of Total Income
Lower Limit increased from Rs. 24,000/- p.a. to Rs. 60,000/-p.a.
80JJADeduction in respect of Employment of new employees30% of Additional Employee Cost(Conditions of Additional Employee Cost are separately discussed)Conditions:-
1. Section 44AB should be applicable;
2. Gross Total Income includes Profits & Gains of Business;
3. Accountant Report is submitted in Prescribed Format. No Deduction in Following cases:-
1. The business is formed by splitting up, or the reconstruction, of an existing business;
2. The business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganization

Summary of difference between Accounting and Auditing:-

Accounting and auditing both are important for an organization. Accounting and auditing are carried out separately by internal employees and independent third party respectively.

There are many differences between the two. Accounting is continuous; and focuses on accurately recording and preparing all financial transactions and statements. Auditing is independent; and focuses on critical evaluation of financial statements and providing an unbiased opinion on their accuracy.

However, they also complement each other in some respects. Accountants can learn from professional knowledge of an auditor; and implement the best practices in their accounting work. Auditor may get help from the accountants for a thorough knowledge of the accounting system of an organization and technical aspects of the business. If any fraud or error remains undetected; the auditor will be held responsible solely.

Having explained above, it is clear that audit is a experts work, though it can be done only by CA in India, still finding a suitable person who audits and assists in future planning is difficult.Also the selected person must have a ample experience and knowledge to identify the lacunas in accounting and guide you through the future planning and growth.
Hence at consultaxx, it is we take utmost care to choose the right person who audits the accounts of our clients,also client is given a options of various CAs who would audit the firm along with their experience and costs.
Feel free to have a free consultation about the audit process.

You can also read: Income tax refundIncome Tax in IndiaICAI Guidance Note on Income Tax


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