A tax audit is essential to ensure businesses and individuals comply with income tax regulations, avoiding penalties by providing accurate financial information. Here’s everything you need to know about tax audits in India, their objectives, who they apply to, and the types of audits conducted.
A tax audit involves the detailed examination of financial records to confirm they align with income tax laws. The purpose is to simplify income computation for tax returns, fostering transparency and accountability in financial practices.
The primary goals of a tax audit include:
A tax audit becomes mandatory if certain thresholds are crossed:
Note: Amendments under the Finance Act of 2021 increased the turnover threshold to Rs. 10 crore if cash transactions are less than 5% of total transactions, offering relief to certain businesses.
A tax audit ensures that businesses comply with the Income Tax Act of India. It helps detect any discrepancies early by reviewing financial records. A completed audit also makes the tax filing process smoother and more efficient for tax authorities to review.
Only Chartered Accountants or CA firms can conduct tax audits. However, each CA is limited to a maximum of 60 tax audits. In a CA firm, this limit applies to each partner individually.
Tax audits fall into three main categories:
A business must undergo a tax audit if its income exceeds Rs. 1 crore (for businesses) or Rs. 50 lakh (for professionals). However, the income from each activity (business vs. profession) is calculated separately.
Here are some tips to reduce your tax liability:
Failing to conduct a tax audit can lead to a penalty of the lesser of 0.5% of total sales/turnover or Rs. 1.5 lakh. However, exemptions apply in cases like natural disasters, auditor resignation, or loss of records due to unforeseen circumstances.
How can we help? *
