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%.

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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Initiatives in GST for Small and Medium Enterprises

Small and Medium Enterprises

Initiatives in GST for Small and Medium Enterprises

Small and Medium Enterprises

Through a number of Act provisions, small taxpayers are generally given preferential treatment under the GST Law.

(a) For intrastate and interstate service provision up to R 20 Lakh (R 10 Lakh for the states of Manipur, Mizoram, Nagaland, and Tripura), there is no registration need.

(a) Effective April 1, 2019, there is no need for registration for intra-state supply of commodities up to ₹ 40 Lakh (₹ 20 Lakh in the states of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura, and Uttarakhand).

(c) There is no tax on payments made in advance for the supply of goods.

Small and Medium Enterprises

(d) A composition plan has been developed for small business owners who supply both restaurant services and commodities. According to the plan, an individual whose turnover does not exceed ₹ 1.5 Cr (₹ 75 Lakh in the states of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand) must file an annual return and make quarterly payments.

(e) A composition strategy for service providers has been developed. A person having a turnover up to ₹ 50 lakh is required by the plan to file annual returns and make quarterly payments starting in FY 2019–20, and to pay tax equal to 6% of that turnover.

(f) Composition taxpayers are required to make quarterly tax payments. These taxpayers are exempt from the need to keep comprehensive accounts and records, and they are required to file quarterly challans and a single annual return in lieu of monthly statements and a return.

(g) Small taxpayers shall receive free accounting and billing software from GSTN.

(h) At the zonal and state levels, Grievance Redressal Committees (GRCs) have been established with CGST and SGST authorities, as well as trade and industry representatives and other GST stakeholders (such as GST practitioners and GSTN, among others). At the state and zonal levels, these committees handle complaints from taxpayers that are either specific or generic in character.

New GST and Policy Measures Aimed at the MSME Industry

(a) The Small Taxpayer QRMP Program: Beginning on January 1, 2021, small taxpayers with aggregate annual turnover up to ₹ 5 Cr will have the option to file quarterly reports rather than monthly filings under the quarterly filing and monthly payment (QRMP) system. For such taxpayers, the number of returns in a year has decreased from 24 previously to 8. Approximately 89% of taxpayers who have registered for GST are eligible for this service.

(b) The upper maximum on late fees has been adjusted to correspond with taxpayer turnover and tax liability in order to lessen the burden of late fees on smaller taxpayers.

The following late fee is capped per return for failure to furnish FORM GSTR-3B and FORM GSTR-1:

(i) The maximum late fee for taxpayers with no tax due on Form GSTR-3B or no outward supplies on Form GSTR-1 is ₹ 500 (₹ 250 CGST + ₹ 250 SGST).

(ii) For additional taxpayers:

◊ The maximum late fee for taxpayers with Aggregate Annual Turnover (AATO) of ₹ 1.5 Cr in the previous year was ₹ 2,000 (₹ 1,000 CGST + ₹ 1,000 SGST);

◊ The maximum late fee for taxpayers with Aggregate Annual Turnover (AATO) in the previous year ranging from ₹ 1.5 Cr to ₹ 5 Cr was capped at ₹ 5,000/- (₹ 2,500/- CGST + ₹ 2,500/- SGST);

◊ The maximum late fee for taxpayers with an aggregate annual turnover (AATO) of more than ₹ 5 Cr in the previous year was ₹ 10,000/- (₹ 5,000/- CGST + ₹ 5,000/- SGST).

•If there is no tax liability on the return, the late charge for composition taxpayers is limited to ₹ 500/-(₹ 250/-CGST + ₹ 250/-SGST) per return; if not, it is ₹2,000/-(₹ 1,000/-CGST + ₹ 1,000/-SGST) per return.

• The late charge for submitting Form GSTR-7 after the deadline has been lowered to ₹ 50/-per day (₹ 25/-CGST + ₹ 25/-SGST), with a maximum of ₹ 2,000/-(₹ 1,000/-CGST + ₹ 1,000/-SGST) per return.

(c) For the months of March, April, and May of 2021, the following COVID-related relaxations have been made available to smaller taxpayers with AATOs up to ₹ 5 Cr:

New GST and Policy Measures Aimed at the MSME Industry

• Interest Decrease:

 

9% interest for the following 45 days, 30 days, and 15 days for the months of March 2021, April 2021, and May 2021, after the first 15 days after the tax payment deadline.

• No late fee is charged:

 

For tax periods ending in March 2021, there will be no late fee for 60 days for returns in FORM GSTR-3B that are submitted after the deadline. The same was excluded for 45 days in April 2021 and 30 days in May 2021, respectively.

(d) Making the Annual Return Simpler:

• By virtue of Notification No. 32/2023-Central Tax dated July 31, 2023, taxpayers with Aggregate Annual Turnover up to ₹. 2 Cr are exempt from making an annual return in FORM GSTR-9 for FY 2022–2023.

• As per Notification No. 14/2022-Central Tax dated 05.07.2022, taxpayers with Aggregate Annual Turnover up to ₹ 2 Cr are exempt from filing annual returns in FORM GSTR-9 for FY 2021–2022.

• Notification has been given of changes made to sections 35 and 44 of the CGST Act by the Finance Act of 2021. Due to the fact that taxpayers can now self-certify the reconciliation statement rather to having it approved by a chartered accountant, the compliance requirement for providing reconciliation statements in FORM GSTR-9C has been loosened. From FY 2020–21 onward, the Annual Return is subject to this modification.

• For taxpayers with aggregate annual turnover up to ₹ 2 Cr, making an annual return in Form GSTR-9 for FY 2020–21 is now optional.

• Taxpayers with an aggregate annual turnover exceeding ₹ 5 Cr are required to file the reconciliation statement in FORM GSTR-9C for the fiscal year 2020–21.

(e) Starting on July 1, 2017, interest will be charged on net cash liability. The 45th meeting of the Council decided to apply the same ruling to ineligible ITC that was obtained and used.

(f) The following changes have been made to the CGST Rules’ Rule 45(3) regarding the requirement to file FORM GST ITC-04:

• Once every six months, taxpayers whose aggregate annual revenue in the previous fiscal year exceeded ₹5 Cr are required to provide FORM ITC-04;x

• Taxpayers who had an aggregate annual revenue of up to ₹ 5 Cr in the previous fiscal year are required to submit FORM ITC-04 on a yearly basis.

(e) Clarifications pertaining to exports have been released in Circulars Nos. 159 and 161, both dated September 20, 2021. This has eliminated doubt over the meaning of intermediary services’ scope and the export of services as a whole.

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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%.