In the Indian financial and regulatory environment, audits play a vital role in ensuring transparency, compliance, and accountability. Two of the most commonly encountered audits in the business ecosystem are the Tax Audit and the Statutory Audit. While both serve distinct purposes and are governed by different laws, they are often misunderstood as interchangeable terms. This blog aims to clarify the difference between tax audit and statutory audit in India, their legal basis, applicability, scope, and significance.
What are Audits?
An audit is an independent examination of the financial information of an entity, whether profit-oriented or not, irrespective of its size or legal form. The purpose of an audit is to express an opinion on whether the financial statements show the true and fair view of the business affairs of the entity.
However, audits are not a one-size-fits-all process. In India, there are various types of audits mandated under different statutes, two of which are:
- Statutory Audit: Mandated under the Companies Act, 2013.
- Tax Audit: Mandated under the Income Tax Act, 1961.
What is a Statutory Audit?
A statutory audit is an audit mandated by law. It is carried out to examine whether a company’s financial statements comply with accounting standards and legal requirements. The main objective behind the statutory audit is to ensure that the financial statements are accurate and show the correct position of the company’s financial health.
- Section and Governing Law: Sections 139 to 148 of the Companies Act, 2013
- Governing Authority: Ministry of Corporate Affairs (MCA)
Applicability
- All companies- whether private or public, with certain exceptions- are required to undergo a statutory audit.
- It is mandatory irrespective of the turnover or profits of the company.
- The appointed auditor must be a Chartered Accountant (CA) or a CA firm registered with the Institute of Chartered Accountants of India (ICAI).
Objective
- To ensure the financial statements are free from material misstatement due to fraud or error.
- To ensure compliance with Schedule III of the Companies Act, 2013 and applicable Indian Accounting Standards (Ind AS).
Audit Report
- The auditor’s report is a formal written opinion provided by a Chartered Accountant (CA) or an audit firm after examining the financial statements of the company. It is submitted to the shareholders in the Annual General Meeting (AGM).
- It includes the auditor’s opinion:
- Disclaimer of opinion: The Auditor is unable to form an opinion due to a lack of sufficient information to form an opinion.
- Unqualified Report: The financial statements of the company are correct, accurate, complete, and in compliance with the accounting standards.
- Qualified Report: Minor discrepancies or issues identified during the audit.
- Adverse Report: The company’s financial statement contains substantial inaccuracies and is not reliable.
What is a Tax Audit?
A tax audit is an audit required under Section 44AB of the Income Tax Act, 1961. It aims to ensure that the taxpayer has maintained proper books of accounts and complied with the various provisions of the Income Tax Act, 1961.
- Governing law and applicable section: Section 44AB of the Income Tax Act, 1961
- Governing Authority: Income Tax Department (CBDT)
Applicability
As per Section 44AB, a tax audit is applicable to:
- Businesses: If the total turnover or gross receipts exceeds ₹1 crore in a financial year. However, if more than 5% of transactions are in cash, the limit is ₹1 crore; else it increases to ₹10 crore (as per the Finance Act, 2020).
- Professionals: If gross receipts exceed ₹50 lakhs in a financial year.
- Presumptive Taxation Scheme (PTS): If a person who has opted for PTS under sections 44AD, 44ADA, or 44AE of the Income Tax Act, 1961 declares income lower than the presumptive income and their income exceeds the basic exemption limit.
Objective
- To ensure proper maintenance of the books of accounts.
- To verify the correctness of income declared, deductions claimed, and compliance with tax provisions.
- To help the Income Tax Department assess the income accurately.
Audit Report
- The tax auditor must submit the report in:
- Form 3CA – For those already under statutory audit.
- Form 3CB – For those not subject to statutory audit.
- Form 3CD – A detailed audit report with 44 clauses on financial and tax compliance
- The deadline for submission is 30th September of the assessment year (subject to extension by CBDT).
Tax Audit Vs Statutory Audit
| Tax Audit | Statutory Audit | |
| Governing Law | Income Tax Act, 1961 | Companies Act, 2013 |
| Governing Authority | Income Tax Department (CBDT) | Ministry of Corporate Affairs (MCA) |
| Applicability | Based on the turnover/receipts of a business or profession | Mandatory for all companies irrespective of turnover |
| Threshold Limits | ₹1 crore/₹10 crore for business, ₹50 lakhs for profession | No minimum threshold |
| Audit Forms | Form 3CA/3CB and 3CD | Audit Report under Companies Act, 2013 as per ICAI format |
| Filing Deadline | 30th September (unless extended) | Before the Annual General Meeting (AGM) |
| Objective | Ensure correct income reporting and tax compliance | Ensure financial statements are accurate and fair |
| Report Submission | Electronically on the Income Tax Portal | With the Registrar of Companies (ROC) |
| Scope | Limited to tax compliance and related disclosures | Broader scope covering all financial operations |
| Audit Mandate | It may or may not be applicable every year | Mandatory every year for companies |
Who Can Conduct a Statutory and Tax Audit?
Both audits must be conducted by a Chartered Accountant who holds a valid Certificate of Practice (COP).
However, for statutory audits of companies:
- The Board of Directors must appoint the CA or an audit firm.
- Certain restrictions exist under Section 141 of the Companies Act, 2013, like limits on the number of audits, disqualifications, etc.
For tax audits:
- A taxpayer can directly appoint a CA.
- The same CA can do both audits if eligible and not disqualified.
Penalties for non-compliance
Tax Audit non-compliance
As per Section 271B of the Income Tax Act, 1961:
- Penalty of 0.5% of total sales/turnover or receipts, up to a maximum of ₹1,50,000.
Statutory Audit non-compliance
- The company and its officers may be penalised under Section 147 and Section 450 of the Companies Act, 2013.
- The auditor may face disciplinary action from ICAI if found guilty of professional misconduct.
Can Both Audits be Done Together?
Yes, in many cases, especially in private limited companies or closely held businesses, the same Chartered Accountant conducts both audits. This can help ensure consistency and reduce duplication of efforts. However, the audit procedures, documentation, and reporting format for each audit differ and must be complied with independently.
Importance of Both Audits in Business Compliance
While they differ in scope and objective, both audits are essential in maintaining financial discipline and regulatory compliance in India.
Benefits of a tax audit
- Reduces the chances of scrutiny from the Income Tax Department.
- Ensures accurate reporting and helps in avoiding penal consequences.
- Builds credibility with tax authorities.
Benefits of Statutory Audit
- Enhances investor and stakeholder confidence.
- Facilitates loan processing and regulatory approvals.
- Detects fraud, errors, and financial mismanagement.
Conclusion
Both the tax audit and statutory audit serve distinct but complementary roles in India’s financial ecosystem. While tax audit ensures compliance with income tax laws, statutory audit is mainly focused on showing a fair and transparent picture of a company’s financial affairs. Understanding the difference between the two is crucial for entrepreneurs, business managers, and financial professionals. It helps in maintaining robust internal controls, legal compliance, and fostering long-term financial integrity.
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