Section 44AB of the Income tax Act, 1961, requires certain classes of taxpayers to get their accounts audited. It is mandatory for them to provide statement of particulars or specific information on various subjects as prescribed under Form 3CD. The audit aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfilment of other requirements of the Income tax Law.
Post implementation of Goods and Services Tax (GST) from 1st July 2017, the corresponding amendment in input tax credit reporting in tax audit report vide Form 3CD was also introduced in the form of clause 44. However, the introduction, extensions, and final implementation of clause 44 of Form 3CD are explained hereunder –
- Clause 44 was introduced vide notification dated 20th July 2018;
- As per circular no. 6/2018 dated 17th August 2018, clause 44 was kept in abeyance till 31st March 2019;
- Again, vide circular no. 9/2019 dated 14th May 2019, the abeyance period was extended till 31st March 2020;
- Further, vide circular no. 10/2020 dated 24th April 2020, the abeyance period was once again extended till 31st March 2021;
- Vide circular no. 05/2021 dated 25th March 2021, once again the abeyance period was extended till 31st March 2022.
- Accordingly, any tax audit report in Form 3CD furnished after 31st March 2022 will have to comply with the details in clause 44.
Meaning of Tax Audit Report
Every individual operating in business is required by the Income Tax Act, of 1961 to have his accounts audited if his total sales, turnover, or gross revenues in business exceed Rs. 1 crore in any preceding year. The Tax Audit turnover ceiling has been raised to Rs. 5 crores for businesses operating under Section 44AB and generating at least 95% of their revenue from digital transactions.
The turnover ceiling for mandatory tax audits has been enhanced to Rs. 10 crores under the Finance Act, 2021.
If a person carries on a profession, he is compelled to have his accounts audited if his gross receipts in the preceding year exceed Rs. 50 lakh.
The Finance Act, of 2020 changed the due date for filing tax audit reports to one month before the due date for producing the return of income under Section 139 (1).
Using certain “Audit Forms” that have been established by the income tax department, the individual performing the audit must record their findings in a report.
Forms 3CA and 3CB are mandated under Section 44AB. The auditor must also provide a form 3CD in addition to these two forms.
History of Form 3CD Clause 44
The aforementioned 2018 notice becomes effective on August 20, 2018. As a result, every tax audit report that must be filed on or after August 20, 2018, must include a total expenditure report in accordance with Section 44 of the Form 3CD.
On July 20, 2018, a notification for the modification of Form 3CD that included Clause 44 was released, and one month later, on August 20, 2018, Clause 44 became effective.
Huge amounts of data must be compiled and organized in order to comply with clause 44’s reporting obligation. In particular, where the accounting records were not kept in such a manner, a sudden introduction of such a clause in the middle of the financial year with implications for vast amounts of data would put tax auditors and the assessee through excruciating pain.
Therefore, requests were made to the Board to take into account the true problems of the taxpayers and to postpone the application of this clause until the following fiscal year.
In accordance with section 119 of the Act, the CBDT issued Circular No. 06/2018 on August 17, 2018, which suspended the application of Clause 44 in Form 3CD until the end of March 2019. The time period for submitting tax audit reports with Form 3CD for the fiscal year 2017–18 (AY 2018–19) was August 2018. The application of clause 44 was postponed until FY 2018–19 by this abeyance decision.
With CBDT Circular No. 09/2019 dated 14.05.2019, the CBDT again postponed the implementation of clause 44 of Form 3CD until March 31, 2020, making these clauses relevant from April 1, 2020.
By an Order u/s 119 dated 24.04.2020 issued vide Circular No. 10/2020 dated 24.04.2020, the CBDT once more extended the application date of Clause 44 of Form 3CD until March 2021 in response to the COVID-19 epidemic and the nationwide lockdown imposed in March 2020. Once more, the CBDT deferred and delayed the reporting obligation of Clause 44 pertaining to GST in Form 3CD of the Tax Audit Report from 31.03.2021 to 31.03.2022 by an Order dated 25.03.2021. This Order, dated March 25, 2021, is a result of Circular No. 05/2021, dated March 25, 2021.
After then, no Order of the Board is issued extending the validity of Clause 44 of Form 3CD beyond March 31, 2022.
Clause 44 format and basics
- Expenditure related to entities registered under GST; and
- Expenditure related to entities not registered under GST.
Before going into column-wise understanding, let us first refer to the format of clause 44 –
| Sr. No. | Total expenditure incurred during the year | Expenditure related to entities registered under GST | Expenditure related to entities not registered under GST | |||
| Relating to goods/ services exempt from GST | Relating to entities falling under the composition scheme | Relating to other registered entities | Total payment to registered entities | |||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| – | Column 6+ Column 7 | – | – | – | Column 3 + Column 4 + Column 5 | – |
Column-wise understanding of clause 44
Under column no. 2, the total expenditure incurred during the relevant Financial Year is to be mentioned. Notably, the said total expenditure here includes both expenditure in respect of entities registered under GST and also entities not registered under GST.
Now, expenditure in respect of entities registered under GST is sub-classified into three categories i.e. –
- Expenditure relating to goods/ services exempt from GST [column no. 3];
- Expenditure relating to entities falling under the composition scheme [column no. 4]; and
- Expenditure relating to other registered entities [column no. 5].
Let us understand the coverage of all the above sub-classified categories in the table below –
| Column no. of clause 44 | Particulars | Coverage |
| 3 | Expenditure relating to goods/ services exempt from GST | · Goods/ services attracting NIL rate of tax; · Goods/ services wholly exempt from tax; · Non-taxable supplies i.e., supply relating to alcoholic liquor for human consumption; petroleum crude, motor spirit, high speed diesel oil, natural gas and aviation turbine fuel. |
| 4 | Expenditure relating to entities falling under composition scheme | All the expenditure relating to goods/ services purchased from the person registered under composition scheme. |
| 5 | Expenditure relating to other registered entities | All the expenditure relating to entities registered under GST, other than – · Exempt supply (covered under column no. 3); and · Composition supply (covered under column no. 4). |
Column no. 6 (i.e. total payment to registered entities) is simply the total of column no. 3 + column no. 4 + column no. 5.
Value of all the inward supplies of goods/ services received from the person who is not registered under GST is to be mentioned in column no. 7.
Importantly, total of column no. 6 (i.e. expenditure relating to persons registered under GST) and column no. 7 (i.e. expenditure relating to persons not registered under GST) should be equal to column no. 2 (i.e. total expenditure incurred during the year).
Applicability of Clause 44 of the Tax Audit Report
Clause 44 of Form 3CD shall be inapplicable until all tax audit reports are submitted by March 31, 2022, or if the abatement is only applicable to the fiscal year that ends on that date, which corresponds to FY 2021–2022. Currently, after 31.03.2022, the tax audit report and Form 3CD must be provided for FY 2021–22.
Reading the contents of the Order of 2018, which was released for the first time with the addition of clause 44 in Form 3CD, clarifies this. “Reporting under the proposed clause 30C and proposed clause 44 of the Tax Audit Report must be maintained in abeyance until 31st March 2019,” it was expressly stated in that Order. Therefore, the tax auditors will not be required to provide the data requested under the aforementioned clauses 30C and 44 of the Tax Audit Report for reports that are provided on or after August 20, 2018, but before April 1, 2019.
Clause 44’s application was suspended for tax audit reports submitted with Form 3CD up until the end of March 2019. A TAR must include clause 44 if it is provided on or after April 1, 2019. It was true that TAR for FY 2017–18 may have been provided up to 31.03.2019. Tax audit reports for FY 2018–19 were to be provided as of 1.4.2019.
Although the requirement was also postponed, it is still in effect until 31.03.2022. In light of this, clause 44’s application was suspended until March 31, 2022, for any tax audit reports that were to be submitted by that time.
Punishment for Failing to File the Tax Audit Report
The taxpayer will be held responsible if he fails to have his books of accounts audited or fails to submit or file the audit report. A fine may be imposed under Section 271B of 1961 IT return filing Act by the Assessing Officer (AO). The lowest fine might be 0.5% of the entire sales, turnover, or gross earnings, while the maximum fine could be Rs. 150,000.
What is Clause 44 in the Tax Audit Report?
FAQs
Clause 44 in the Tax Audit Report pertains to the breakup of total expenditure into expenditures related to entities registered and not registered under the GST.
Why was Clause 44 introduced?
Clause 44 was introduced to provide detailed information on the compliance of taxpayers with GST provisions by tracking their expenditures and ensuring transparency.