For a taxpayer, the period between June to September is a particularly stressful period since all the financial data for the last financial year needs to be accumulated together and the final tax liability would be determined on the basis of the same.
The ‘Tax Audit’ limit under Section 44AB is Rs 5 crore (the threshold limit is Rs 10 crore where minimum 95% of business transactions are done in digital mode). If the taxpayer is subject to audit, then this process is even more elaborate as one not only has to submit a return but also a tax audit report to the Income Tax authorities. In this context, we whould have heard or come across the ‘Form 3CD’. We will cover the following aspects with regard to Form 3CD.
The History of the Tax Audit Report
An audit is a process of examining and confirming accounts, transactions, or records. A tax audit is conducted to determine if a certain taxpayer is following all of the rules of the nation’s income tax legislation. The audits of the taxpayers specified under Section 44AB of the Income Tax Act, 1961 are covered by that section. The taxpayers specified under Section 44AB may be professionals or businesspeople. They must have a CA audit their books of accounts (chartered accountant). The CA examines, confirms, and draughts the audit report on the accounts. The tax audit report includes information on the audit’s conclusions and observations. The goal of the report is to make sure that the taxpayer is abiding by the law and that the books of accounts are correct.
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).
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.
CBDT Notification on Clause 44 of Form 3CD
Notification No. 33/2018 dated 20.07.2018 changed Form 3CD of Tax Audit Report (TAR) in July 2018 to include, among other things, Clause 30C on reporting GAAR transactions and Clause 44 on reporting GST transactions.
30C:-
- whether the assessee engaged in an unlawful avoidance arrangement, as defined in section 96, during the preceding year. (Yes/No.)
- If yes, please explain:
- Characteristics of an improper avoidance arrangement:
- Amount (in Rs.) of tax advantage accruing to all parties to the agreement in the preceding year:
44:-
Total spending breakdown by registered and unregistered entities:
| Sl No | The total amount of Expenditure incurred during the year | Expenditure in respect of entities registered under GST | Expenditure relating to entities not registered under GST | |||
| Relating to goods or 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) |
Clause 44 format and basics thereof –
Clause 44 requires break-up of total expenditure into the following two broad categories –
- 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).
FAQs
What is Clause 44 of the Tax Audit Report?
Clause 44 requires the auditor to provide a detailed breakup of the total expenditure of the entity, distinguishing between entities registered and not registered under GST, as well as the expenditure on exempt and non-exempt goods or services.
When was Clause 44 introduced?
Clause 44 was introduced as part of the amendments to the Form 3CD by the CBDT via notification No. 33/2018 dated 20th July 2018. However, its implementation has been deferred several times and has become applicable from the financial year 2021-22 onwards.
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