In India, there are several laws that govern businesses with regard to financial information and ensuring transparency and accountability.
Among these two audits the company mostly has to undergo, which are statutory audits and tax audits, though both involve examination of the financial books, the purposes that are covered under Indian law are disparate.
However, for many, the differences between statutory audits and tax audits can be confusing.
A statutory audit verifies the accuracy of financial statements in compliance with the Companies Act 2013, ensuring a true and fair view of the company’s financial health. On the other hand, a tax audit, governed by Section 44AB of the Income Tax Act, 1961, focuses on the accuracy of tax filings.
The article will outline some of the important differences that exist between the statutory and tax audits. It highlights the objectives, legal requisites, applicability and consequences of non-compliance.
Introduction
Audits play a very crucial role in holding the door of financial accountability open and strictly maintaining laws compliance within India’s dynamic ever-changing regulation landscape. A business goes through diverse audits while expanding, of which two are common: one the statutory audit and the other tax audit. Though appearing somewhat like each other, these are worlds apart with regard to their goals, legal basis, and aspects of financial checks.
Suppose your business was a well-oiled machine. A statutory audit ensures that every part of this machine- your financial statements- is working smoothly and in accordance with legal standards. A tax audit simply verifies if a specific component- your tax filings– is working as intended with no discrepancies.
First, let’s understand the two types of audits and what each serves in the light of Indian law.
It will help you to pass through compliance without unwanted penalties and problems that may arise with the law.
What is a Statutory Audit?
A statutory audit is mandatory under the Companies Act, 2013. It mandatorily arranges for an independent audit of a company’s accounts, to mean financial statements are accurately reflective of a company’s real and current financial position, devoid of material misstatements, as well as in compliance with appropriate accounting standards, such as Indian Accounting Standards (Ind AS) or Generally Accepted Accounting Principle (GAAP).
Key Features of Statutory Audit in India
- Mandated by Law– Statutory audits are compulsory for companies incorporated under the Companies Act, 2013. The objective is to provide a true and fair view of the company’s financial health.
- Annual Requirement– Every company, whether public or private, must undergo an annual statutory audit.
- Independent Review– The audit is conducted by an external auditor appointed by the company’s shareholders. The auditor must be independent and registered with the Institute of Chartered Accountants of India (ICAI).
The primary goal of a statutory audit is to safeguard the interests of shareholders, creditors, and regulatory authorities by providing a transparent financial overview of the company. In India, statutory audits are a cornerstone of corporate governance, as they help ensure the integrity of financial statements and compliance with applicable laws.
What is a Tax Audit?
A tax audit is mandated by Section 44AB of the Income Tax Act, 1961, and its primary focus is to verify the accuracy of income tax returns filed by businesses or individuals. It ensures that all declarations related to income, expenses, and tax liabilities are accurate and in line with Indian tax laws.
Key Features of Tax Audit in India
- Mandated for Specific Turnover– Under Section 44AB, a tax audit is required if a business’s gross turnover exceeds ₹1 crore (₹10 million) or if a professional’s gross receipts exceed ₹50 lakh (₹5 million) in a financial year. However, for businesses opting for the presumptive taxation scheme, the turnover threshold has been increased to ₹10 crore (subject to certain conditions).
- Verification of Tax Compliance– The auditor reviews the income tax returns to ensure compliance with the Income Tax Act. This includes verifying whether deductions, exemptions, and tax reliefs are claimed correctly.
- Audit Report Filing– After conducting the audit, the auditor prepares an audit report in Form 3CA/3CB and Form 3CD, which must be filed with the tax authorities by the stipulated deadline (usually September 30 of the assessment year).
A tax audit helps the Income Tax Department monitor compliance, minimize tax evasion, and ensure that businesses and professionals declare accurate income and pay the appropriate taxes.
Key Differences Between Statutory Audit and Tax Audit
While both audits involve reviewing financial records, their focus, legal backing, and scope are different under Indian law. The audit is associated with examining the company’s accounts to determine whether the company’s accounting records are correct, and its functions are legal.
People often get confused about the objectives of choosing tax audits and statutory audits. Let’s explore these differences in detail
1. Objective
- Statutory Audit– The objective is to ensure that the financial statement of a company really portrays an accurate and fair view of its financial position and as per Indian Accounting Standards and the Companies Act.
- Tax Audit- The goal is toto verify whether the income tax returns filed are properly done, with the correct amount of income reported and any deductions and exemptions accordingly in consonance with the provisions of Income Tax Act.
2. Legal Requirements
- Statutory Audit– Mandatory under the Companies Act, 2013 for all companies. The audit ensures compliance with various accounting and financial reporting standards (Ind AS or GAAP).
- Tax Audit– Required under Section 44AB of the Income Tax Act, 1961, for businesses and professionals whose gross receipts exceed specified thresholds. The focus is on verifying compliance with tax laws.
3. Applicability
- Statutory Audit– Applicable to all companies, including private limited, public limited, and one-person companies (OPC), registered under the Companies Act. It is also applicable to certain Limited Liability Partnerships (LLPs) based on their turnover or contribution thresholds.
- Tax Audit– Applicable to businesses with gross turnover exceeding ₹1 crore and professionals with gross receipts above ₹50 lakh. For businesses under presumptive taxation, the threshold increases to ₹10 crore if they meet certain cashless transaction criteria.
4. Scope and Focus
- Statutory Audit– Broad in scope, covering all financial statements, including balance sheets, profit and loss accounts, cash flow statements, and internal controls.
- Tax Audit– Narrower in focus, concentrating solely on tax-related aspects such as income declarations, deductions, and tax liability calculations.
5. Reporting Authority
- Statutory Audit– The audit report is submitted to the company’s shareholders and filed with the Registrar of Companies (RoC). It may also be submitted to other regulatory authorities like the Securities and Exchange Board of India (SEBI) for listed companies.
- Tax Audit– The tax audit report is submitted to the Income Tax Department, and the findings are included when filing the income tax return.
6. Penalties for Non-Compliance
- Statutory Audit– Failure to perform statutory audit can attract very severe penalties under Companies Act. In certain cases, fines against the company, disqualification of directors, and imprisonment for officers of that company are included.
- Tax Audit– Tax audit provisions failing to meet the compliance invite penalties under Section 271B of the Income Tax Act. The penalty is typically 0.5% of the turnover, up to a maximum of ₹1.5 lakh.
Who Needs a Statutory Audit in India?
In India, the Companies Act 2013 mandates that all companies, irrespective of size or turnover, must conduct a statutory audit. This includes-
- Public Limited Companies– Listed on the stock exchanges and required to submit statutory audit reports to the SEBI and other regulatory bodies.
- Private Limited Companies– Even small private companies must conduct statutory audits if they are registered under the Companies Act.
- One-Person Companies (OPC)– Despite their size, OPCs must comply with statutory audit requirements if they meet specific turnover criteria.
- Limited Liability Partnerships (LLPs)– LLPs with turnover exceeding ₹40 lakh or contribution exceeding ₹25 lakh are also required to undergo statutory audits.
Who Needs a Tax Audit in India?
Section 44AB of the Income Tax Act mandates that all individual as well as business entities maintaining their accounts above the specified income or turnover limit need to be subjected to a tax audit.
- Businesses– Taxes should be audited for entities with a turnover of more than ₹1 crore in a financial year. This threshold increases to ₹10 crore if the business opts for presumptive taxation and meets conditions related to cashless transactions.
- Professionals– Professionals such as doctors, lawyers, architects, and consultants must undergo a tax audit if their gross receipts exceed ₹50 lakh in a financial year.
- Presumptive Taxation– Businesses opting for presumptive taxation under Section 44AD must undergo a tax audit if their income exceeds the deemed income or if they claim that their income is lower than the presumptive income calculated under the scheme.
The Benefits of Statutory and Tax Audits in India
Benefits of Statutory Audits
- Transparency– Statutory audits enhance transparency by providing stakeholders with an accurate picture of a company’s financial health.
- Compliance with Regulations– Ensures that companies adhere to the Companies Act, 2013, and other applicable laws, avoiding penalties.
- Investor Confidence– Audited financial statements boost investor confidence and are essential for companies looking to raise funds.
Benefits of Tax Audits
- Accurate Tax Filings– Business tax audits enable the organizations to file accurate returns so that the proper income is declared along with appropriate taxes, thereby avoiding legal scrutiny from tax authorities.
- Prevention of Tax Evasion– By closely examining a company’s tax filings, tax audits help reduce the chances of intentional or unintentional underreporting of income, claiming wrong deductions, or evading taxes.
- Fewer Tax Disputes– When tax returns are audited and found compliant, businesses are less likely to face tax disputes, investigations, or legal issues with the tax department. This brings in with it peace of mind and makes the functioning easier.
- Avoidance of Penalties– A timely audit of tax and compliance with their tax laws saves a business from high penalties and fines that otherwise adversely affect financial health.
Conclusion
In India’s business setup, it is important for professionals to understand the key differences between statutory and tax audits. The statutory auditor under the Companies Act of 2013 is required to reasonably ensure that the company’s financial statements are not misleading, thereby instilling confidence in the shareholders, investors and stakeholders. Section 44AB of the Income Tax Act 1961 authorizes the tax audit to prevent tax fraud and ensure assessment.
In order to avoid sanctions and fines as well as win the confidence of the regulators, investors and the market, both the clutch works are important to sustaining good corporate governance and the long-term financial health of the business. In the business perspective and in accounting functions, monitoring these audits is important for all forms of compliance, mitigating risk and maximization of future value. Such follow-up audits can be termed preventive since they may smooth out potential problems before they progress to a level where they become more challenging and entail non-compliance with the law, health, and growth readiness.
Bibliography
The Companies Act, 2013 (Act No. 18 of 2013)
The Income-Tax Act, 1961 (Act No. 43 of 1961)
