Do you file your taxes in India? Do you prepare your tax returns, or do you have someone else do it for you? If you make any errors while filing your taxes, then you could receive a letter from the government. They may ask you to show the details of your taxes and other financial information. What happens in these audits varies, depending on where and how much money is involved. Let us attempt to know what is involved in the process of tax audit in India so that you don’t end up owing more than expected.
What is a Tax Audit?
A tax audit is a process conducted by the authorities to determine whether you’re correctly reporting your income and paying the requisite taxes. The provisions of Section 44AB deal with the class of taxpayers whose accounts need to be audited by a chartered accountant (CA). The audit under Section 44AB is designed to ensure compliance with various income tax slabs and other requirements.
The Objective of a Tax Audit in India
A tax audit is an examination of your books, papers, and related records by a government auditor. A tax audit is carried out to accomplish the following objectives:
- Ensure that taxes are paid on all taxable income as per the income tax slab.
- To determine whether a taxpayer is complying with tax laws.
- To verify the accuracy of financial reporting by taxpayers.
Types of Tax Audits in India
As per the Indian government, there are three types of tax audits. We will discuss all of them below.
A field audit is when a tax auditor comes to your house or office and takes a look at your reports or financials. It can happen at any time. But it’s not common for them to come unannounced.
An office audit is when a tax auditor comes to your place of business. They take a look at your business’ financials or reports.
A correspondence audit is when you receive a letter from the Indian Revenue Service (IRS), asking for certain documentation.
Who Conducts Tax Audits?
The Indian Income Tax Department conducts tax audits. This department collects income tax and keeps track of taxpayers’ records. While you may only be familiar with paying taxes, a tax auditor, or CA, is responsible for ensuring that you are filing your taxes correctly. They also make sure that your company has filed its taxes correctly as per the income tax slab.
At times, there may be some discrepancy between what you report on your personal tax return and what was reported by your employer. A CA investigates these issues and determines whether any action needs to be taken.
Who Needs a Tax Audit in India?
The Income Tax Department has set rules for who is supposed to have a tax audit. Certain taxpayers have to file their tax audit report every year, according to the Income Tax Act of 1961. These include professionals like doctors, lawyers, accountants, and business owners whose annual income exceeds Rs. 50 lakh. Additionally, if a taxpayer’s assets are worth more than Rs. 10 crore or their annual turnover is greater than Rs. 2 crore, they will be subject to a tax audit as well.
Calculate Taxable Income for the Taxpayer
One of the easiest ways you can mishandle your tax filing is by incorrectly calculating your taxable income. It’s one of those things that sounds really easy. But it has a lot of moving parts. What is the best way to do it? Hire an accountant. If you don’t want or can’t afford one, here are some tips for how to calculate taxable income on your own while keeping in mind the income tax slab:
First, you need to know what business expenses are deductible. That means knowing what expenses are considered ordinary and necessary for your industry. As far as business expenses go, there are two kinds: direct costs and indirect costs. Direct costs are pretty self-explanatory. They’re just your actual expenditures on things like supplies or payroll. Indirect costs are a little trickier.
How to Perform Tax Audits in India
The entire purpose of conducting tax audits is to determine whether taxpayers have reported their income accurately and whether they’ve paid the requisite amount of tax. In other words, if your taxes are lower than what you’re supposed to pay according to what you report, you’ll be served underpayment penalties.
There are the most common tax audits required in India:
- Form 3CA: Professionals and businesses that require an annual audit need to fill this form out.
- Form 3CB: For companies that are not required to be audited.
- Form 3CD: This form includes all transactions and important details about a company.
- Form 3CE: This form is for foreign companies or NRIs that receive royalties from Indian companies.
Penalties For Not Getting Accounts Audited
If individuals fail to obtain an audit of their accounts or do not obtain a certificate as required under Section 44AB, they shall be punished with a fine that may extend up to Rs. 1.5 lakh or 0.5% of total sales.
There is no doubt that a tax audit is a major stressor. The anxiety of thinking you owe money or might be at risk of getting audited can make you feel pretty down and out. Before you let your imagination take center stage, consider these points: Most people get audited because they forgot or missed one line on their income tax return. In all likelihood, there’s nothing to worry about if you have your documentation ready. Piramal Finance offers you accurate information on such concerns and other banking and financial services. Make sure your financial knowledge is up to date on essential services and products, such as audits, personal loans, and financial calculators, by reading the informative blogs on their website.