What is a Tax Audit in India? Meaning, Applicability, Threshold, and Benefits
A tax audit is an in-depth review of the financial books of accounts of a taxpayer to ensure accuracy and compliance with the provisions of the Income Tax Act, 1961. The main goal of the audit is to verify whether the income declared and deductions claimed by the taxpayer are correct and supported by proper documentation. Tax audits are governed under Section 44AB of the Income Tax Act.
Objectives of a Tax Audit
- Accuracy Verification: Ensure that the books of accounts reflect a true and fair view of the financial situation.
- Compliance Check: Certify that the taxpayer has complied with income tax provisions such as depreciation, expenses, and deductions.
- Detection of Errors: Identify discrepancies or irregularities in income, expenditures, or tax calculations.
- Simplify Tax Assessments: Facilitate easier and faster assessment by the tax authorities by providing authenticated financial statements.
Who is Required to Undergo a Tax Audit?
A tax audit is mandatory in India for individuals and businesses whose turnover, sales, or gross receipts exceed a specified limit in a financial year. As per Section 44AB, the following persons must get their accounts audited by a Chartered Accountant:
- Business (Not opting for presumptive taxation): If total sales, turnover, or gross receipts exceed ₹1 crore during the financial year.
- Professionals: If gross receipts from the profession exceed ₹50 lakh in a financial year.
- Presumptive Taxation Scheme (Section 44AD/44ADA/44AE): If the taxpayer declares income lower than the prescribed limit and exceeds the basic exemption limit, a tax audit is mandatory.
Revised Threshold Limit (As per Finance Act, 2020)
With effect from Assessment Year 2020–21 (FY 2019–20), the threshold limit for businesses has been increased from ₹1 crore to ₹5 crore if:
- Cash Receipts do not exceed 5% of the total receipts, and
- Cash Payments do not exceed 5% of the total payments.
This move aims to encourage digital transactions and reduce the compliance burden for businesses primarily operating through banking channels.
Applicability Summary Table
| Category | Threshold | Conditions | Audit Requirement |
|---|---|---|---|
| Business | ₹1 crore | No condition | Mandatory |
| Business (Digital Transactions) | ₹5 crore | Cash transactions <= 5% | Mandatory |
| Profession | ₹50 lakh | Gross receipts | Mandatory |
| Presumptive Taxation (44AD/ADA) | Lower income than presumed & income exceeds exemption | Voluntary opt-out | Mandatory |
What Does a Tax Auditor Do?
A Chartered Accountant (CA) appointed as a tax auditor performs the following key tasks:
- Reviews the books of accounts, vouchers, and ledgers
- Verifies expenses, incomes, and claims
- Prepares and certifies Form 3CA/3CB and 3CD which include details about the taxpayer’s compliance
- Submits the audit report electronically on the Income Tax Portal
Forms Used in Tax Audit
- Form 3CA: Used when the taxpayer is already subject to statutory audit under another law (e.g., Companies Act).
- Form 3CB: Used when no statutory audit is required under any other law.
- Form 3CD: Statement of particulars containing details like turnover, deductions, TDS compliance, etc.
Due Date for Tax Audit
The tax audit report must be submitted by 30th September (or as updated by the CBDT from time to time) following the end of the financial year. For instance, the due date for FY 2023–24 is 30th September 2024.
Consequences of Not Complying with Tax Audit
- Penalty under Section 271B: If a taxpayer fails to get their accounts audited, they may face a penalty of 0.5% of turnover or up to ₹1,50,000—whichever is lower.
- Assessment Risks: Increased chances of scrutiny and disallowance of deductions/expenses.
Benefits of Tax Audit
- Assurance: Validates the accuracy of financial statements and helps avoid future disputes.
- Compliance: Ensures proper adherence to the Income Tax Act and other legal requirements.
- Prevention of Malpractices: Reduces the chances of fraud, tax evasion, and manipulation of accounts.
- Transparency: Enhances business credibility with banks, investors, and government authorities.
Conclusion
A tax audit is not just a compliance formality, but a powerful tool that improves the reliability and transparency of financial records. By ensuring accurate reporting and reducing the risk of penalties, it helps businesses stay on the right side of tax law. For a smooth and timely audit, always maintain well-organized records and consult a certified chartered accountant for professional assistance.
Need help with tax audit filing? Our experts can guide you through the entire process—ensuring compliance, avoiding penalties, and submitting all forms on time.