Tax Audit Applicability - A Guide

Tax audit refers to the examination and verification of a taxpayer's financial records, transactions, and other relevant information to ensure that they have accurately reported their income and complied with the tax laws of their country. Tax audits are typically conducted by tax authorities for enforcing tax regulations.

Objectives 

The main objectives of a tax audit are:

• Ensuring Compliance: The tax authorities aim to verify whether the taxpayer has fulfilled their tax obligations correctly and honestly, as per the applicable tax laws.
• Detecting Errors and Discrepancies: The tax audit helps identify any errors, omissions, or discrepancies in the taxpayer's financial statements, income declarations, deductions, exemptions, and other tax-related information.
• Preventing Tax Evasion: Tax audits are instrumental in preventing tax evasion, which is the intentional act of not reporting or underreporting income or inflating deductions to reduce tax liability.
• Enhancing Tax Revenue Collection: By conducting audits, tax authorities can recover any unpaid taxes, penalties, and interest owed by non-compliant taxpayers, thereby increasing overall tax revenue.

Who is subject to Tax Audit?

The following persons are compulsorily required to get their accounts audited:

Section 44AB

• Business: If the total sales, turnover, or gross receipts in business exceed Rs. 1 crore, except for those opting for the presumptive taxation scheme under section 44AD, where the total sales or turnover doesn't exceed Rs. 2 crores.
• Profession: If the gross receipts in a profession exceed Rs. 50 lakhs.

Note: The threshold limit for business increases to Rs. 10 crores if cash receipts and payments during the year do not exceed 5% of the total receipt or payment, as applicable.

Click here to know more about Section 44AB: Applicability of Tax Audit & Penalty

Section 44ADA

Under Section 44ADA of the Income-tax Act, tax audit is applicable to professionals who opt for the presumptive scheme but declare profit below 50% of their total turnover/gross receipts, and their total income exceeds the income not chargeable to tax. The scheme allows specified professionals to pay tax on presumed profits at 50% of gross receipts, reducing compliance burden and simplifying taxation for small professionals.

Note: In the Budget 2023, the presumptive taxation limits were revised for FY 2023-24:

• Sec 44AD: For small businesses, the previous limits of Rs. 2 crore were increased to Rs. 3 crore*.
• Sec 44ADA: For professionals like doctors, lawyers, engineers, etc., the previous limits of Rs. 50 lakh were increased to Rs. 75 lakh*.

These revisions aim to extend the benefits of simplified taxation to a larger group of small businesses and professionals, reducing their compliance burden and promoting ease of doing business.

Section 44AE

Section 44AE of the Income Tax Act applies to individuals or entities engaged in the business of plying, hiring, or leasing goods carriages. To be eligible for presumptive taxation, they must own not more than 10 goods carriage vehicles during a financial year. 

Under Section 44AE, those opting for the presumptive taxation scheme can estimate their income at Rs. 7,500 per month per vehicle owned, regardless of whether it's a light goods vehicle or a heavy goods vehicle. Taxes are paid based on this estimation.

However, if a person engaged in the business of plying, hiring, or leasing goods carriage chooses not to opt for the presumptive scheme and declares an income lower than Rs. 7,500 per month per vehicle, they must maintain account books and get them audited as per Sections 44AA and 44AB. This audit ensures compliance with the Income Tax Act and validates the accuracy of financial records.

Section 44BB

As per the provisions of the income tax act, a tax audit is applicable to Non-resident or foreign companies in the following scenarios:

Non-resident opting for presumptive scheme u/s 44BB: If a non-resident individual or entity opts for the presumptive taxation scheme under section 44BB, and declares income at a rate lower than the rate prescribed by the law (i.e., less than 10% of the amount paid or payable to the taxpayer or any person on his behalf) on the amount received or deemed to be received in India or on behalf of the taxpayer, a tax audit becomes mandatory.

Foreign company opting for presumptive scheme u/s 44BBB: Similarly, if a foreign company chooses to avail the presumptive taxation scheme under section 44BBB, and declares income below the prescribed rate (i.e., less than 10% of the amount paid or payable to the taxpayer or any person on his behalf), a tax audit will be required.

Section 44AD

Tax audit is applicable u/s 44AD in the following cases:

• Taxpayer opted out from presumptive taxation u/s 44AD and his income exceeds the maximum amount not chargeable to tax in the subsequent 5 years.
• Total cash receipts are less than 5% of total turnover, and the taxpayer's declared income is less than 6% or 8% of total turnover.