ICAI releases updated guidance note on Tax audit under section 44AB along with clause 44 of Form 3CD

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ICAI has released Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 AY 2022-23 (Effective for the AY 2022-23 and subject to amendments made by law, judiciary or administration, for the subsequent assessment years).

The earlier Guidance note which was popularly available for helping the professional in Tax audit is Guidance note on Tax audit, 2014 edition.

Now, on 14.08.2022 ICAI has released an updated version of guidance note on Tax audit which has 448 pages.

In this guidance note ICAI has talked about various definitions, provisions of Income tax act and has also discussed the entire Tax audit report in Form 3CD, clause by clause along with various issues being faced by auditors and views of ICAI in relation to such issues.

ICAI has also talked about Clause 44 of Form 3CD in its guidance note on Tax audit – 2022 edition, which has been a part of discussion for a very long time. We have even posted an article way back stating as to why such clause 44 will be applicable for AY 2022-23, when people were confused as to whether this clause will be applicable for AY 2022-23 or not. To read the post CLICK ME.

Clause 44 for those who don’t know talks about break-up of total expenditure into expenditure in respect of GST registered entities and non-GST registered entities. The table as required in clause 44 is as under:

Now let’s discuss some important points from the Guidance Note, 2022 edition by ICAI on clause 44 of Form 3CD which is as under:

1. Total Expenditure

The details in the above table need not be given expenditure wise and detail needs to be provided for total expenditure as the table talks about total expenditure.

2. Depreciation, bad debts and things which are not expenditure

Depreciation and bad debts need not be covered in above table as same are not expenditure.

3. Schedule III items of CGST Act:

Things covered under Schedule III of CGST Act, need not be a part of above table, for eg: Salary by employer to employee.

4. Supplies not leviable under GST and exempt supplies:

Supplies such as (i) supply of alcoholic liquor for human consumption (ii) supply of petroleum crude, high speed diesel oil, motor spirit, natural gas and aviation turbine fuel are not leviable under GST and as per the definition would be covered under exempt supply under GST and thus needs to be reported in above table.

There are various other exempt supplies which could be covered under above exempt supply as per various notifications issued by GST department.

5. Composite supply

In case of ineligible input tax credits which are blocked under section 17(5) of the CGST Act, 2017 or in case of purchases from persons registered under composition levy, it is a normal practice of the small and medium taxpayers not to mention the GSTIN of the said suppliers in their accounting software. Hence, a suitable remark / reference in this regard by the tax auditor may be included in the report.

6. Column 6 is total ‘payment’ to registered entities:

The word ‘payment’ should harmoniously be interpreted as ‘expenditure’ as the combined heading of columns (3), (4), (5) i ‘Expenditure in respect of entities registered under GST’. Hence, the total expenditure in respect of registered entities i.e., sum total of values reported in columns (3), (4) and (5) should be reported in Column 6.

7. Expenditure relating to entities not registered under GST (Column 7):

The value of inward supply of goods and/or services received from unregistered persons should be reported here. It should be ensured that the total of columns 6 and 7, tallies with the amount mentioned in column (2).

8. Capital expenditure:

In the table under clause 44, the language used is “expenditure in respect of”. Since, the word used is ‘expenditure’, it is necessary that the capital expenditure should also be reported in the format prescribed. Separate reporting of capital expenditure will provide ease in reconciliation.

Guidance by ICAI to auditors:

In order to verify the details filled in, the tax auditor needs to obtain from the assessee the required details in the tabular format given in guidance note (an illustrative format which may be modified by the Tax auditor according to the facts and circumstances). The Tax auditor should verify the details furnished with the underlying document on a test check basis and retain the same as part of his working papers.

An appropriate disclosure should be made by the Tax auditor in Form 3CA/3CB, as the case may be, for the view taken by the assessee in relation to the meaning of “Total expenditure” and the method of filling up the appropriate columns. If the assessee is not in a position to give the details as required in clause 44, an appropriate disclosure/disclaimer may be made by the auditor in Form 3CA/3CB. Where the assessee has provided reason for not being able to provide details, the same may be reported, if found appropriate.

In order to read full Guidance note on Tax Audit, 2022 edition issued by ICAI CLICK ME.

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