The Goods and Services Tax (GST) regime is one of the most important features in India that has modified the country’s indirect tax regime. Every registered person, according to the CGST Act, 2017, needs to preserve their financial statements and necessary documents up to date, fully and subject to the provisions set out by the legislation.
Moreover, the government commands the Tax Audit Report (TAR) for companies with an annual turnover of above INR 1 crore. Clause 44 of the TAR authorises an exhaustive breakup of costs with and without GST. This article elucidates Clause 44 of the Tax Audit Report.
Brief Glimpse
Clause 44 of the Tax Audit Report is a key clause that concerns the breakup of costs with and without Goods and Services Tax (GST). It seeks all taxpayers to prepare a list of their expenditures, itemized according to their GST applicability, along with supporting invoices. This part of the legislation seeks to ensure that people comply with the GST law and do not attempt to get a tax deduction where they should not. It concerns the highlights of a taxpayer’s financial behaviour, by way of tax modifications during a financial year.
Consequently, one should understand the most important details of Clause 44 in order to evade any tax penalties or complications.
Overview of Clause 44 of Tax Audit Report
Clause 44 of the Tax Audit Report is associated with the ‘Quantitative Details’ of the taxpayer’s financial dealings. It needs the taxpayer to present an exhaustive statement of the specified:
- Cost of Goods Sold and Expenses
- Debtors and Creditors
- Turnover and Gross Receipts
- Purchases and Sales
- Opening Stock and Closing Stock
The details above are compulsory for companies that exceed a fixed turnover threshold limit. The clause pertains to every taxpayer, and covers business concerns and individuals, together with firms.
What’s in Clause 44 of the Tax Audit Report?
Clause 44 of the TAR requires businesses to categorize their overall costs. The clause asks companies to classify their costs into these groups:
- Direct Expenses
- Indirect Expenses
- To find out how much tax a business owes, it’s crucial to break down costs with and without GST.
- The categorization aids in identifying the Input Tax Credit (ITC) qualifications for multiple spending.
Clause 44 of Tax Audit Report Form 3CD
Clause 44 of the Tax Audit Report Form 3CD is the latest tax information requirement that was introduced in the Finance Act, 2021. It enjoins all assesses who qualify for such tax review outlined in Section 44AB of the Income Tax Act, 1961, to list the break-up of their total expenditure incurred during the earlier year.
This clause needs to be well-documented by those who have to pay taxes, regardless of their subscription under GST or not. It requires the listing of the net amount of expenditure incurred during the last year, along with revenue and capital expenditure. Nonetheless, specified expenses, like depreciation under Section 32 and subtraction for bad debts under Section 36(1)(vii), which do not feature under spending, can be excluded from this clause from the respective columns 3 to 7.
Schedule III of the Central Goods and Services Tax Act, 2017, illustrates tasks or transactions that are neither a provision of goods nor a provision of services. Expenditure incurred in respect of such tasks need not be listed under this clause in any of the columns from 3 to 7. For example, Para (1) of the Schedule III encompasses “Services by an employee to the employer during the course of or associated with his employment”. Therefore, payment to employees does not need to be listed.
The amount of expenditure needs to be classified into multiple sections listed under columns (3) to (7) of the table of Clause 44. Columns (3) to (6) need a listing of how much of the net expenditure is worded in column (2) and is ascribed to GST-subscribed entities (i.e., procurement from registered vendors under GST, more specifically, can be drawn from GSTR-2A/2B). Column (7) needs a listing of how much of the net expenditure projected under column (2) is ascribed towards entities not registered with GST (i.e., procurements from unregistered dealers under GST).
This report may be readied for an entity overall or for a branch thereof, as may be audited. The details in these columns may have to be completed by consolidating the expenditure incurred under different GST registrations.
The details to be listed under this clause comprise the following:
- The net amount of expenditure incurred.
- The amount of expenditure incurred by entities registered with GST.
- The amount of expenditure incurred by entities coming under the GST composition scheme.
- The amount of expenditure incurred by unregistered entities.
Clause 44 format and fundamentals thereof –
Clause 44 needs a break-up of total expenditure into the defined 2 classifications –
- Expenditure linked to entities registered under GST, and
- Expenditure linked to entities not subscribed under GST
Column-wise break-up of clause 44
Under column no. 2, the ‘total expenditure incurred during the appropriate Financial Year is to be stated. Notably, the stated total expenditure here covers both expenditures related to entities registered under GST and those not registered under GST. Now, spending in respect of entities registered under GST is sub-grouped into three categories, i.e. –
- Expenditure linked to goods/services exempt from GST [column no. 3];
- Expenditure relating to entities coming under the composition scheme [column no. 4]; and
- Expenditure in respect of other registered entities [column no. 5].
Let us explain the coverage of the entire sub-classified categories in the table specified –
| Column no. of clause 44 | Particulars | Coverage |
| 3 | Expenditure pertaining to goods/services exempt from GST | Goods/ services drawing ZERO tax slab, Goods/services wholly exempt from tax. Non-taxable supplies, i.e., supplies linked to beverages carrying alcohol for human consumption; petrol or gasoline, crude oil, natural gas, high-speed diesel oil and aviation turbine fuel. |
| 4 | Expenditure associated with entities falling under the composition scheme | The entire expenditure is linked to goods/ services bought from the person registered under the composition scheme. |
| 5 | Expenditure pertaining to registered entities | The whole expenditure linked to entities registered under GST, except for – Exclude provisions (determined by column no. 3), and Composition provisions (determined by column no. 4) |
Column no. 6 (i.e. total payment to subscribed entities) is just the total of column no. 3 + column no. 4 + column no. 5. Value of all the incoming supplies of goods/ services acquired from the person who is not registered under GST is to be stated in column no. 7. Crucially, the total of column no. 6 (i.e. expenditure related to persons not registered under GST) should match column no. 2 (i.e. total expenditure incurred during the year).
In a Nutshell
Understanding Clause 44 of the Tax Audit Report plays a crucial role in accurate tax compliance. This clause presents an explanation of how to categorise total spending in conjunction with the documents related to GST reporting. Auditors and companies need to make sure that the information they provide matches the set columns and follows GST rules. Correct documentation and reconciliation are critical to meeting the requirements of this clause for a streamlined tax review.
At Kanakkupillai, we assist our customers by focusing on high-quality tax verification that fosters financial accountability and compliance with regulations. Our domain experience facilitates navigating complicated tax landscapes and optimising tax planning for sound decision-making.
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