Written in : July 1999

Last week we saw some of the significant changes that have been incorporated in New Tax Audit Report issued by the Government.

A close, detailed analysis of the formats makes it clear the Department wants the Auditor to certify almost every single component of the tax return and accounts. Some of the following items were highlighted.

Look at the details that the Auditor is now asked to certify regarding this extremely pernicious disallowance. A detailed statement is now required of the amounts received from employees towards contribution to PF etc. and a statement of due dates payment and actual dates of payment. Notice how different this is from what was asked earlier which was brief.

To ask for such details is an interesting move by the Department as the taxpayers will find it difficult to escape easily.

The auditor is required to look very closely at the expenses debited to the Profit and Loss Account and offer detailed information in the tax audit report which would help the tax officer to make a good assessment.

He is required to specify and certify if any capital expenses are debited to the Profit and Loss Account.

He is also required to specify if any personal expenses are debited to the Profit & Loss Account.

The auditor is required to give details of expenses incurred at clubs with break-up for Entrance fees and Subscription; and of cost of club services and facilities. This will help the officer to allow expenses appropriately.

The auditor is required to specify separately if you have paid any penalty or fine.

The auditor is required to quantify amounts debited to the Profit and Loss Account which are not admissible and to identify and show them separately.

If you have made payments towards expenditure of amount in excess of Rs.20,000 other than by way of account payee cheques or demand drafts, 20% of such payments are to be disallowed in computing your income. The new tax audit report now requires the auditor to compute the disallowance and certify it.

If a firm has paid remuneration to partners (as most do) the auditor is now to verify the amounts paid, check that they are allowable and compute the amounts that ought to be disallowed and specify the amounts in the report. That is much more than what he did earlier.

Several statutory payments like sales tax, excise duty and several other payments like interests to banks etc are allowable only in the year of payment and not in the year they relate to. The auditor is now required to give details together with calculations of any such payments. The information asked for is quite detailed and exhaustive.

Another new requirement is for the auditor to offer details of modvat credits availed and its treatment in the books.

The auditor is now required to offer a detailed statement of brought forward losses, depreciation including computation of the amounts which are available for set off.

The form now requires the auditor to work out and certify section-wise details of various deductions that you are entitled to (and you might claim in your return). This is an extremely onerous task as the total number of deductions are huge and a lot of variables exists in deciding upon the admissibility of the deductions and their quantification.

The deductions that are required to be certified are all those which are covered by Chapter VIA – including those like tax holidays under sections 80IA, 80HH, 80HHA, 80HHC, 80HHD, 80HHE (the last three being export related) etc. Also covered are deductions like those under section 80L, 80U etc.

Just imagine – the government wants every claim by you to be certified by the auditor! What enormous responsibility is thrust on him!

The auditor is required to calculate and give four different accounting ratios from your accounts. These are Gross Profit to Turnover; Net Profit to Turnover; Stock-in-trade to Turnover; Material consumed To Finished Goods Produced.

Remember, what I have discussed in these two articles is only highlights of the tax audit report. The actual report is more detailed and exhaustive. You will see it when the auditor comes asking questions.

If you notice, the auditor is required to do virtually the entire job required to be done by the tax officer. Why? One reason is that the department is increasingly relying on the professional competence of the auditor. The other reason is that the department has started relying on voluntary compliance by the taxpayers and, expectedly, desires that the returns and accounts filed are more and more reliable. What better way to achieve this than ask the ever-reliable auditor to do it? What if this means multiplying the work of the auditor multi-fold? So be it.

There is no doubt that the entire audit exercise now required will increase the work of the auditor many times over. His responsibility will increase many times.

Perhaps it will also lead to greater transparency in book-keeping and returns filed by taxpayers.

A Dutchman was explaining the red, white and blue Netherlands flag to an American. 'Our flag is symbolic of our taxes. We get red when we talk about them, white when we get our tax bills, and blue after we pay them.' The American nodded. 'It is the same in the USA, only we see stars, as well!' he said.