The Growth of Audit Fees Trails Behind Corporate Expansion in India

Audit Fees

The Growth of Audit Fees Trails Behind Corporate Expansion in India

Audit fees see a modest 28% increase amidst heightened scrutiny on auditors, driven by rising talent and organizational expenses.

Audit Fees

Companies experienced a modest uptick as they fell short of matching their growth and operational performance. Market capitalization surged by 92.75%, net sales saw an 83.7% rise, and profit after tax (PAT) increased by 126.2%. According to data from Prime Database, audit fees for Nifty 500 companies climbed from ₹1,114 crore in FY18 to ₹1,430 crore in FY23, while for Nifty 50 companies, they rose from ₹404 crore to ₹466 crore.

Despite the marginal increase in audit fees, auditors are facing challenges due to the escalating complexity of business operations, heightened regulatory scrutiny on listed entities, evolving reporting requirements, and rising talent and organizational costs each year.

Audit fees for Nifty 500 increased from ₹1,114 crore in FY18 to ₹1,430 crore in FY23.

One significant factor hindering auditors from negotiating sufficient fees is the mandatory audit rotation mandated by company law every five years. Audit committees and CFOs exploit the competition among firms to limit fee increases. Concurrently, companies are imposing stricter deadlines on auditors to finalize reporting processes, adding to costs and work pressure.

Amidst the dual challenge for Indian businesses of navigating complex regulatory environments and coping with disruptions to achieve stakeholder objectives, trust becomes crucial. If trust forms the foundation of all organizational actions that drive significant outcomes, it should warrant a premium.

Auditors in India are receiving insufficient compensation compared to their counterparts in companies listed on both the NYSE and the Indian stock exchange, despite performing essentially the same tasks.

While expectations placed on auditors are increasing, this isn’t reflected in their audit fees. Delivering a high-quality audit demands several components, including skilled talent, advanced technology, and robust quality management processes. Sustained investment in all these areas is necessary, but the low fee levels pose a challenge. Nevertheless, some companies are defying this trend and are willing to pay a premium to auditors for timely and comprehensive reporting.

Despite the effort, complexity, and risks involved, India ranks among the lowest in terms of audit fees compared to other countries. However, some companies are willing to acknowledge the quality of talent, sector expertise, and technology-driven insights provided by audit firms.

Audit fees in India significantly lag behind those in the US and UK markets. For example, for all listed companies on the FTSE in the UK, the audit fee increased by 75% between 2018 and 2023, demonstrating a compound annual growth rate (CAGR) of 11.82%.

Read More: Late Filing Penalty under Section 234F of the Income Tax Act for FY 2023-23

Audit firms are facing growing pressure from clients to decrease billing hours by leveraging technology. However, this poses a dilemma as it requires investment in technology, including software licenses and data storage, which could be challenging given the current fee levels.

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Income Tax Department Extends Deadline for FY21 Businesses to Avail Reduced Tax Rate.

Indian businesses may choose to pay tax at a concessional rate of 22% plus any applicable surcharge or cess under the Income Tax Act, so long as they don’t take advantage of any of the designated deductions and incentives.

On Monday, the Income Tax department claimed the benefit of a lower corporation tax rate without providing incentives for FY21, but it also excused companies for their tardiness in filing a crucial form. In a social media post, the department stated that, under certain restrictions, businesses might now file form 10-IC by January 31, 2024, after receiving petitions for relief.

 

tax

 

As per the Income Tax Act, Indian corporations can choose to pay tax at a reduced rate of 22%, together with any relevant surcharge and cess, if they don’t utilize any certain deductions and incentives. If businesses file form 10-IC within the allotted time frame, they can choose to use this concessional rate starting in FY20. The income tax return for the relevant assessment year must have been filed on or before the due date, according to CBDT, in order for the delay to be excused.

 

Read More: Section 194R: TDS On Business Or Profession

 

According to experts, this ruling would help businesses that filed tax returns for the assessment year 2021–2022 and selected the 22% tax rate. These businesses were not eligible for the concessional rate since they neglected to include form 10-IC with their tax return.

Such companies now need to e-file form 10-IC for AY 2021-22 before 31 January 2024 in order to get the lower rate of tax of 22%.

Streamlining Small Business Taxation: An In-Depth Look at Section 44AD

A simplified method for calculating the income of specific qualified enterprises is provided by Section 44AD of the Income Tax Act of India. It is largely directed towards professionals, small businesses, and qualified taxpayers who have chosen to participate in the presumptive taxation program.

Section 44AD

Depending on the type of business, taxpayers and assesses under Section 44AD may determine their taxable income at a stipulated rate of either 6% or 8% of their total turnover or gross revenues. This implies that since their income is assumed to be at the predetermined percentage of their turnover, businesses are exempt from keeping regular books of accounts or going through a thorough audit process.

 

Section 44AD

 

Businesses with gross receipts or turnover of up to Rs. 3 crore, or INR 2 crore per financial year until the September 2021 knowledge cutoff date, are eligible under the scheme. Please be aware, though, that tax laws and limitations are subject to change, so it’s always a good idea to check the most recent versions of these documents or get expert guidance.

It is crucial to realize that companies who choose to use Section 44AD’s presumptive taxation scheme are assumed to have computed their income at the specified rate, regardless of the company’s actual profit or loss. Furthermore, this program is also open to those in the legal, medical, engineering, architectural, accounting, and technical consulting fields, among others.

The simplified provisions of Section 44AD can be utilized by eligible taxpayers to alleviate the cost of tax compliance. For precise and current information on Section 44AD, it is advised to speak with a licensed tax practitioner or check the most recent tax regulations.

Characteristics Section 44AD 

The Income Tax Act of India’s Section 44AD is advantageous for qualified enterprises due to a number of its aspects. The salient characteristics of Section 44AD are as follows:

Presumptive Taxation

A presumptive taxation plan is provided under Section 44AD, which enables qualified firms to determine their taxable income as 8% of their gross revenues or total turnover. This removes the requirement for keeping thorough books of accounts and doing a thorough audit.

Simplified Compliance

Businesses are exempt from having to keep regular books of accounts, which include records of their purchases, sales, and expenses, under Section 44AD. This lessens the burden of record-keeping and streamlines the compliance procedure.

Fixed Presumptive Income Rate

Depending on the type of business, the prescribed rate of income under Section 44AD is set at 8% of total turnover or gross receipts. This rate is considered the taxable income of the business, regardless of the actual amount of profit or loss realized.

Increased Eligibility Limit

Businesses having gross receipts or turnover up to INR 3 crores per fiscal year are eligible. From INR 2 crores in prior years, this cap has been raised. Keep in mind that the qualifying limit could vary, therefore it’s important to check the most recent regulations.

Who May Apply for Section 44AD Benefits?

Section 44AD of the Income Tax Act in India provides a simplified presumptive taxation scheme for certain eligible businesses. To be eligible for Section 44AD, a taxpayer must meet the following criteria:

 

Section 44AD

 

Nature of Business

Professionals and corporations are subject to Section 44AD. Small firms, such as partnerships, limited liability partnerships (LLPs), and sole proprietorships, are the target market for this scheme.

Turnover or Gross Receipts

The business’s overall revenue or turnover shouldn’t go over the designated limit. The threshold for qualifying is INR 3 crores per financial year as of August 2023. It is imperative, therefore, to consult the most recent provisions to see if there have been any changes made about this cap.

Digital Transactions (for reduced presumptive income rate)

Should the turnover or gross receipts be obtained via digital channels, including digital payment platforms or banking channels, the qualified taxpayer may benefit from a 6% presumptive income rate rather than an 8% one.

It is significant to remember that some occupations are expressly left out of Section 44AD’s purview. Legal, medical, engineering, architectural, accounting, technical consulting, interior design, and other vocations are among them. Under Section 44AD, professionals working in these sectors are not eligible for the presumptive taxation plan.

Section 44AD Applications

For qualified enterprises, Section 44AD of the Income Tax Act of India offers a number of uses and advantages. The following are some of the main ways that Section 44AD is used:

Simplified Taxation

For qualified firms, Section 44AD offers a streamlined way of determining taxable revenue. Rather than keeping consistent books of accounts and going through a thorough audit, companies can calculate their income at a set rate depending on their gross receipts or overall turnover.

Reduction in Compliance Burden

For small firms, the Section 44AD presumptive taxation method lessens the difficulty of compliance. They avoid the time, effort, and expense of compliance by not having to keep copious accounting records or go through a thorough audit.

Relief from Maintaining Books of Accounts

Companies that use Section 44AD are not required to keep conventional books of accounts, which include details of their purchases, sales, and expenses. This facilitates the accounting and record-keeping procedures, hence easing the compliance of qualified enterprises with tax laws.

Lower Audit Requirements

Businesses are exempt from tax audit requirements under Section 44AD unless their revenue surpasses the specified threshold. Increased to twice the presumptive income rate, or 12% or 16% of total turnover or gross receipts, is the threshold for tax audit applicability. For qualifying taxpayers, this lessens the audit burden even more.

 

Section 44AD

 

Encouragement of Digital Transactions

Businesses can benefit from a lower presumptive income rate of 6% rather than 8% if they obtain their turnover or gross revenues through digital methods, such as digital payment platforms or banking systems. This clause encourages companies to go cashless and provides incentives for the adoption of digital transactions.

 

Read More: 6 high-value cash transactions that can get you flagged by I-T dept

 

Tax Planning and Cash Flow Management

For qualified enterprises, Section 44AD provides a dependable way to figure out their taxable income. Because they know exactly how much tax they will owe based on turnover, businesses may better plan their taxes and manage their cash flow thanks to the set presumptive income rate.