Income Tax Audit Process & E-filing: Insights from Tax Urban

UNDERSTANDING THE INCOME TAX AUDIT PROCESS IN INDIA: A COMPLETE GUIDE

By Taxurban Admin on 05 Sep 2024

Tax audits can sound intimidating, but they’re a standard procedure to ensure that businesses and individuals comply with the income tax laws of India. Whether you’re a small business owner, a professional, or part of a larger enterprise, it’s crucial to understand how the income tax audit process works and why it’s important.

In this blog, we’ll break down the tax audit process, explain who needs to get audited, and offer a clear, easy-to-understand guide to help you navigate the procedure.

1. What Is a Tax Audit?

A tax audit, as per Section 44AB of the Income Tax Act, 1961, is an examination of an individual's or entity’s financial records to verify that the income tax filings are accurate. The purpose of the audit is to ensure that the income reported, the deductions claimed, and the taxes paid are all in line with the legal requirements.

A tax audit is generally conducted by a chartered accountant (CA), who will review your accounts and submit an audit report to the tax authorities.

2. Who Is Required to Get a Tax Audit in India?

Not everyone is required to undergo a tax audit. However, certain categories of taxpayers are mandated to do so if they meet specific criteria. Here’s a breakdown:

For Businesses:

If your total turnover or gross receipts in a business exceed ₹1 crore in a financial year, you need to get a tax audit.
If your business turnover is between ₹1 crore and ₹10 crore and you’ve opted for the presumptive taxation scheme, a tax audit is not required. However, if your profits are lower than the prescribed limit (8% of turnover for cash transactions or 6% for digital transactions), a tax audit is mandatory.

For Professionals:

If your gross receipts in a profession exceed ₹50 lakh in a financial year, you must undergo a tax audit.

For Taxpayers Opting for Presumptive Taxation (Under Section 44AD and 44ADA):

For individuals opting for the presumptive taxation scheme, if the declared income is less than the prescribed percentage of turnover (8% or 6%) and your total income exceeds the basic exemption limit, you are required to undergo a tax audit.

For Other Circumstances:

If the taxpayer's income or losses are being carried forward or adjusted in a future year, or they have claimed certain deductions under tax law, they may need to undergo a tax audit.

3. What Happens During a Tax Audit?

During a tax audit, a chartered accountant (CA) reviews your financial records, including income, expenses, assets, and liabilities, to verify the accuracy of your tax return. The audit aims to check for errors, discrepancies, or non-compliance with tax laws.

Here’s a step-by-step breakdown of how the process works:

Step 1: Appointment of a Chartered Accountant (CA)

If your business or profession meets the audit threshold, the first step is to appoint a qualified CA. The CA will audit your books of accounts and financial records.

Step 2: Preparation of Financial Records

The taxpayer (you or your business) must prepare and present all financial records for the audit, including:

Books of accounts (e.g., ledgers, balance sheets, and profit & loss statements)
Income and expense records
Bank statements
Invoices and receipts for business transactions
Tax deducted at source (TDS) certificates
GST returns (if applicable)

Step 3: Verification of Financial Information

The CA will then examine these financial records in detail, verifying:

The accuracy of income reported
The correctness of expenses claimed as deductions
Compliance with tax laws
Whether the taxpayer is adhering to accounting standards

Step 4: Identification of Errors or Omissions

If there are discrepancies—such as underreporting of income, overstating deductions, or non-compliance with regulations—the auditor will note them in the audit report. The taxpayer may be asked to clarify or rectify these issues.

Step 5: Filing of Tax Audit Report (Form 3CA, 3CB, and 3CD)

Once the audit is complete, the CA will submit an audit report. This report is generally filed online via the Income Tax e-filing portal and includes:

Form 3CA or 3CB: General audit report forms, based on whether the taxpayer is required by other laws to maintain audited accounts.
Form 3CD: A detailed statement of particulars covering all income, expenses, deductions, and other relevant financial information.

The tax audit report must be filed before the due date of filing the income tax return, which is typically September 30th for individuals and businesses who are subject to tax audits.

4. Benefits of a Tax Audit

While tax audits may seem burdensome, they offer several benefits to both taxpayers and the government:

Ensures Compliance: A tax audit helps ensure that taxpayers comply with tax laws and regulations, reducing the risk of non-compliance or fraud.
Accurate Reporting: The audit process ensures that income and deductions are accurately reported, minimizing errors in tax filings.
Reduced Penalties: By conducting regular audits, businesses can avoid future disputes with tax authorities, reducing the risk of heavy penalties for underreporting income or incorrect deductions.
Transparency: For businesses, undergoing a tax audit creates transparency in their financial dealings, helping them maintain clean records for potential investors or partners.

5. Consequences of Failing to Conduct a Tax Audit

Failing to comply with tax audit requirements can lead to significant penalties. If a taxpayer is required to undergo a tax audit but fails to do so, the penalty under Section 271B of the Income Tax Act can be:

0.5% of turnover or gross receipts, or
A maximum penalty of ₹1.5 lakh, whichever is lower.

Additionally, if a tax audit is not conducted, it may raise red flags with the tax authorities, leading to increased scrutiny, notices, and potentially more detailed investigations into your tax filings.

6. Key Deadlines for Tax Audits

It’s crucial to be aware of the key deadlines for tax audits in India:

The due date for submitting the tax audit report is typically September 30th of the assessment year.
If you miss this deadline, you may face penalties unless you have a reasonable cause for the delay.

Conclusion: Stay Prepared for a Tax Audit

Understanding the income tax audit process in India is essential for any business owner, professional, or individual taxpayer whose income crosses the prescribed thresholds. Not only does a tax audit ensure compliance with the law, but it also helps improve the accuracy of your financial records, ultimately benefiting your business.

If you’re unsure whether you need a tax audit or how to get started, consulting a qualified chartered accountant is always the best course of action. At Taxurban, we offer expert guidance on income tax audits, helping you remain compliant, avoid penalties, and maintain your financial health.

Need help with your tax audit? Reach out to our experts at Taxurban for professional assistance today!