Every year, in the build-up to the Budget, news somehow gets around about some major change that would be announced by the Finance Minister. While most of these are only gossip, some of them do make it to the Budget speech albeit not in the manner suggested by the newsmongers.
This year, the grapevine is that Budget 2020 would remove the provisions regarding tax audit under Section 44AB of the Income Tax Act. Audit, at present, is mandatory if the turnover exceeds ₹2 crore for businessmen (₹1 crore for companies) and ₹50 lakh for professionals. However, persons having turnover lower than the above limit are also required to mandatorily get their books of accounts audited if the income offered for taxation is lower than the specified percentage (6 per cent, 8 per cent, 50 per cent) of its turnover.
Justification
The justifications given for removal of Section 44AB are that the required information can be furnished by the taxpayer himself in the ITR. There are enough penal consequences if the taxpayers do not comply with the provisions of the Income Tax Act or submit false or wrong information.
Taking the information from the auditor can be compensated by the same information from the taxpayer himself. Most of the columns in the audit reports are just compilation of the information which the taxpayer is required to furnish in the ITR, thereby making the tax audit an additional compliance burden on the taxpayer.
Also, the quality of audit reports have been falling and Section 271J was introduced to ensure that the audit report does not contain wrong information and errors. Audit provision under Section 44AB was introduced when the accounting system was manual and the third party audit was ensuring the authenticity of the books of accounts and records thereto. Now, the books mostly are computerised and the third party information is also available in digitalised format.
A defence of tax audit
While all the reasons given are factually correct, they still do not provide a cogent reason for removing the provisions regarding tax audit. Though the information required can be provided by the taxpayer himself, the tax auditor would make a difference regarding the quality of the information.
Had the Income Tax Act been a simple piece of legislation, it is possible that the taxpayer would provide the necessary information. But the IT Act is a complex piece of legislation that would require interpretational skills. Taxpayers may not have the resources, skill or time to comprehend these provisions and provide the necessary information.
In addition, the tax department has introduced Income Computation and Disclosure Standards (ICDS), which attempt a a fusion between accounting and tax standards. These Standards would need some knowledge of finance — an area where tax officers may need to be trained. The point regarding the quality of audits is well-taken but then there will always be black sheep in every fraternity and penal laws should be implemented rigorously to instil some fear into the minds of those who take a different path.
Whether the accounting records are manual or computerised, the laundry list of information needed for the tax audit is not going to change. Hence this argument will not hold. International tax is becoming complicated with each passing year, and this too is an area where the department would need the experience of tax professionals.
If at all the government does want to remove the provisions regarding tax audit, it should commence with an exhaustive exercise to simplify the Income Tax Act and Rules. Once this is done, it should gradually increase the threshold limit for tax audits. And, finally, it should ensure that tax audit provisions apply to the crème-de-la-crème of companies in India.
Accounting and tax professionals are worried that removing the provisions on tax audit would take away one of the means of their livelihood. They should remember that change is the only constant.
The writer is a chartered accountant