Good and Service Tax Audit

One nation one Tax, Goods and Service Tax Act, 2017 has major contribution on Government Revenue. It is indirect tax collected by service provider or trader from end users and deposited in account of Government. It has also various issue on which litigation is been faced by tax payer.

Goods and Service Tax Act, 2017 has come into existence replacing or removing various national and state level tax with slogan of One Nation One Tax. It is still on implementation phase and day in day out enhancing itself. Meanwhile conducting assessment and issuing notice for various issue, which are been prudent tax litigation in terms of Indirect Tax Laws of Country. 

Tax audit refers to an examination or inspection of a taxpayer's financial records and accounts by a government tax authority to ensure that the taxpayer has correctly reported their income and deductions and paid the appropriate amount of tax. The tax audit is conducted to verify the accuracy of the tax returns filed by the taxpayer, identify errors, discrepancies, or underreporting of income, and determine if any penalties or fines need to be imposed. Tax audits can be conducted randomly or based on certain criteria such as the taxpayer's industry, the amount of deductions claimed, or any red flags on the tax return. The ultimate goal of a tax audit is to ensure compliance with tax laws and regulations and maintain the integrity of the tax system.

Applicability of Tax Audit 

Tax audit is applicable to certain categories of taxpayers as per the provisions of the Income Tax Act, 1961. The following categories of taxpayers are required to undergo a tax audit:

• Businesses: Any individual, HUF, partnership firm, LLP or company carrying on a business and having a total turnover or gross receipts exceeding Rs. 1 crore in a financial year.
• Professionals: Any individual, HUF, partnership firm, LLP or company engaged in a profession (legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorized representatives) and having gross receipts exceeding Rs. 50 lakhs in a financial year.
• Presumptive Taxation Scheme: Any individual, HUF or partnership firm opting for presumptive taxation under Section 44AD, Section 44ADA, or Section 44AE of the Income Tax Act and having income below the prescribed limit.
• Other cases: Any taxpayer who falls under any other category specified by the income tax department.

It is important to note that the turnover or gross receipts limit for tax audit may vary for certain states, and taxpayers must comply with the applicable provisions.

The objectives of a tax audit can be summarized as follows:

• Verification of compliance: One of the primary objectives of tax audit is to ensure compliance with tax laws and regulations. It verifies whether the taxpayer has accurately reported the income, expenses, and deductions in their tax return and has paid the appropriate amount of tax due.
• Detection of errors and discrepancies: Tax audit helps in detecting any errors, discrepancies, or inconsistencies in the financial records and accounts of the taxpayer. It ensures that the financial statements reflect the true and fair view of the taxpayer's financial position.
• Deterrent for tax evasion: Tax audit acts as a deterrent for taxpayers who are tempted to evade taxes. It sends a message that tax authorities are vigilant and serious about enforcing tax laws, and non-compliance can lead to penalties and legal consequences.
• Promotes transparency: Tax audit promotes transparency and accountability in financial reporting. It ensures that taxpayers maintain accurate and reliable financial records, which in turn helps investors, lenders, and other stakeholders in making informed decisions.
• Facilitates tax administration: Tax audit helps tax authorities in evaluating the effectiveness of their tax administration processes and identifying areas for improvement. It provides valuable feedback to tax authorities on the challenges faced by taxpayers and helps in streamlining the tax administration process.

Overall, the objective of a tax audit is to promote transparency, fairness, and compliance with the tax laws and regulations, and to ensure the smooth functioning of the tax system.

There are three types of tax audits that may be conducted under the provisions of the Income Tax Act, 1961. These are:

• Mandatory tax audit: As discussed earlier, certain categories of taxpayers, such as businesses, professionals, and taxpayers opting for presumptive taxation schemes, are mandatorily required to undergo a tax audit every year. The objective of this audit is to verify the accuracy of the financial statements, ensuring compliance with tax laws and regulations.
• Limited tax audit: Limited tax audit is conducted for a specific purpose, such as verifying the correctness of the books of accounts or examining a particular transaction or event. It may be conducted even if the taxpayer does not fall under the mandatory tax audit category.
• Special tax audit: Special tax audit is ordered by the Commissioner of Income Tax if there is a suspicion of tax evasion or when the tax authorities require a detailed examination of the taxpayer's financial statements. The objective of the special tax audit is to investigate the alleged irregularities or discrepancies in the taxpayer's financial records and identify tax evasion.

In all the above types of tax audits, the objective is to ensure compliance with tax laws and regulations, detect any errors or discrepancies in financial records, and ensure that the taxpayer has accurately reported their income and paid the appropriate amount of tax.

The following documents are necessary 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 
• 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 
• The amount received or paid to employees. 
• Particulars of Depreciation 
• Amount admissible under sections 32,33 and 35 on the ITA 1961
• Amount debited in Profit and Loss Account. 
• Amount of interest under Section 23 of MSME Act 2006
• Profit Chargeable to tax 
• Any payment made to persons u/s 40A 2 (b)
• Profit chargeable on tax 
• Deemed to be profit 
• Tax distributed on profit
• Tax summary
• Sum referred under section 43 B
• Details of Loan/amount deposited along with a certificate from Assessee declaring the same
• Sum referred u/s 43B
• Depreciation or loss brought forward.
• TDS
• Ratio of Turnover

Documents Required for Tax Audit

• Management Representation Letter
• Appointment Letter for Defining Scope 
• List of related parties and Transactions 
• Trail balance
• Notes on nature of business 
• Financial Statements duly signed by Owners 
• Statutory Compliances
• Liabilities including Contingent liability Estimation 
• Extraordinary items nature and Disclosure
• Depreciation Calculation Statement 
• Proof of revenue expenditure capitalised and assets purchased  
• Notes on accounts and Disclosure of accounting policies
• Bank balance confirmation 
• Bank balance Statements 
• Valuation of Inventories and for the total year quantitative inflow, outflow statement
• Major sundry debtors and creditor balance confirmation 
• Sample Purchase and sales bills
• Analytical Ratio analysis

The procedure for conducting a tax audit is as follows:

• Appointment of Tax Auditor: The taxpayer must appoint a chartered accountant as a tax auditor. The appointment must be made before the due date of filing the tax return.
• Preparation of Books of Accounts: The taxpayer must prepare the books of accounts and records for the financial year ending on 31st March. The books of accounts must be maintained as per the provisions of the Income Tax Act.
• Submission of Documents to the Tax Auditor: The taxpayer must provide all the necessary documents and records to the tax auditor. The tax auditor will verify the documents to ensure that they are accurate and complete.
• Conduct of Audit: The tax auditor will conduct the audit and examine the books of accounts and records. The audit will include the verification of the transactions, compliance with tax laws and regulations, and the correctness of the financial statements.
• Preparation of Tax Audit Report: After the completion of the audit, the tax auditor will prepare a tax audit report. The report will contain the observations and findings of the tax auditor.
• Filing of Tax Audit Report: The taxpayer must file the tax audit report along with the income tax return. The tax audit report must be filed on or before the due date of filing the income tax return.
• Follow-up Actions: The taxpayer must take the necessary follow-up actions based on the findings of the tax audit report. If there are any discrepancies or non-compliance with tax laws and regulations, the taxpayer must rectify them.

In summary, the procedure for conducting a tax audit involves the appointment of a tax auditor, preparation of books of accounts, submission of documents, conduct of audit, preparation of tax audit report, filing of tax audit report, and follow-up actions. The objective of the tax audit is to ensure compliance with tax laws and regulations and to detect any errors or discrepancies in the financial records of the taxpayer.

The penalty for non-filing or delay in filing a tax audit report is governed by Section 271B of the Income Tax Act, 1961. This section provides for a penalty if the taxpayer fails to get their accounts audited or fails to furnish a tax audit report on or before the due date of filing the income tax return.

The amount of penalty is equal to 0.5% of the total sales, turnover, or gross receipts of the business or profession, subject to a maximum penalty of Rs. 1,50,000. It is important to note that the penalty is levied in addition to any other tax liability that the taxpayer may have.

In case the taxpayer has reasonable cause for not getting their accounts audited or not furnishing the tax audit report, they can apply to the tax authority to waive off the penalty. However, the decision to waive off the penalty is at the discretion of the tax authority, and it is not guaranteed.

In summary, the penalty for non-filing or delay in filing a tax audit report is 0.5% of the total sales, turnover, or gross receipts of the business or profession, subject to a maximum of Rs. 1,50,000. The penalty can be waived off in case of reasonable cause, but it is not guaranteed.