INCOME TAX AUDIT AN OVERVIEW

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. As per Auditing and Assurance standard: Basic Principles governing an Audit (AAS 1) published by the Institute of Chartered Accountants of India, Audit refers to the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such examination is conducted with a view to express an opinion thereon. 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.

There are three types of audits that can occur:

  1. Correspondence Audit:This is the most common type of audit and usually results from a mathematical error. Every tax return is run through a systematic computer tracking system. This system will detect math errors and will check to make sure your 1099 Statement of Income or T5 Statement of Investment Income forms match the ones the IRS or CRA received from your bank or broker. Typically, if your mathematical error is made by mistake and deemed to be non-negligent, no penalty will occur. You will have to pay the difference if the error has caused your tax rate to increase.

2.Field Audit:An IRS or CRA representative will contact you and arrange a time to come and verify your return. Typically, a field audit is done if you have too many write-offs to verify by mail. These audits are mostly targeted at small business owners, especially the ones who work out of their own homes. Since home deductions can be sizable, the IRS or CRA want to verify that you are indeed working out of your house and that your estimation is correct.This type of audit usually lasts two to four hours. The auditor will want to see all records of the expenses you claimed on your return. So make sure to gather all supporting documents and have them easily accessibly during your audit. If the auditor has found your deductions to be ineligible, you will have to pay the adjusted tax and will be liable to a penalty if the error was deemed to be negligent. If you are unfamiliar with some of the deductions claimed or tax in general, it might be wise to hire a tax expert or accountant to be present during your audit.

3.Random Audit: This is the least likely to occur, but it is also the one you’ll hope doesn’t happen to you. Every year, the CRA and IRS perform random audits for their own statistical purposes. If you are selected at random you will most certainly need a tax expert present. The auditor will meet with you in person and will perform an in-depth audit of your entire return. For every item, they will want justification or proof for why you did what you did. For example, if you claimed to be married on your return they will need to see a marriage certificate as proof. Be short and concise with your answers. The more you talk, the more potential questions the auditor may have for you.

The provisions for tax audits in India are covered under section 44AB of the Income Tax Act 1961. As per section this section, every person who falls under one of the categories listed below shall have their accounts audited by a practicing chartered accountant (CA), and have an audit report submitted by the due date for the filing of income return.

  • Any person carrying on a business whose total sales, turnover or gross receipts in the business exceeds Rs.1 crore; or
  • Any person carrying on a profession whose gross receipts exceeds Rs.25 lakh; or
  • Any person carrying on a business where the profits and gains from the business are determined on a presumptive basis under section 44AE, 44BB or 44BBB, and who has claimed their income to be lower than the profits or gains of his business; or

Any person carrying on a business whose income is determined on a presumptive basis under section 44AD and who has claimed such income to be lower than the profit of their business, yet exceeds the maximum amount which is not chargeable as income tax.

Who is covered by TAX AUDIT:-

Tax Audit is applicable to certain classes of individuals which are mentioned under Section 44AB of the IT Act.  Thus, as per the regulations of Section 44AB of the Income Tax Act, 1961, following is the list which outlines the classes of people who have to compulsorily follow the income tax audit procedures and get their accounts audited:

  • An individual who in engaged in business and the annual turnover of his/her business is Rs.1 crore and above.
  • An individual, who is a professional, i.e. engaged in any profession and his income receipts in a year aggregate Rs.50 lakhs and above.
  • An individual who qualifies for the presumptive taxation scheme under Section 44AD but later claims that the profits for said business is lower than the profits calculated in accordance with the presumptive taxation scheme. This is also applicable in case the income on record is more than the amount which is tax-free or not chargeable for taxation.
  • If the assesse who is qualified under the presumptive taxation scheme but opts out of it after a specified period, he would lose the ability to revert back to the presumptive taxation scheme for a continuous term of 5 assessment years after the decision to opt out is taken.
  • An individual who qualifies to choose the presumptive taxation scheme of selection under Section 44AE but then claims that the profits for such business are lower than the profits calculated in accordance with the presumptive taxation scheme of section 44AE.
  • An individual who qualifies to choose the presumptive taxation scheme of selection under Section 44BBB but then claims that the profits for such business are lower than the profits calculated in accordance with the presumptive taxation scheme of section 44BBB.

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, if a person who is required to comply with the section 44AB fails to get their accounts audited in any given year, the following penalties are imposed on that person:

  • 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 a very important requirement for individuals who are required to undergo such an audit. Failure to comply with the income tax rules would attract penalty and individuals wishing to avoid any penalty should ensure full compliance with all the rules of the income tax audit.

       Turnover Limit for Audit:[table id=41 /]

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:-[table id=42 /]

1.  Income Tax Rates – Individuals – Comparative table:-[table id=43 /]

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)[table id=44 /]

  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

[table id=45 /]

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[table id=46 /]

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[table id=47 /]

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:[table id=48 /]

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:-[table id=49 /]

10.Key Notes for Individual Tax Planning:-[table id=50 /]

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.

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