The Mighty #TaxAudit

The Income Tax Audit for the FY 2020-21 is in the news again. The date is extended one more time and there is a sigh of relief everywhere. Here is a take on what makes the tax audit a lengthy process.


Data collaboration

The first and foremost problem that comes to tackle the tax audit is the collaboration of data that is scattered all across the ERP / finance accounting data. Even when the statutory audit is complete, the data that is required to fulfil the tax audit statement of form 3CD is still out across the ledgers, supporting documents, challans, vouchers and confirmations from various stakeholders.


Reconciliation

The tax audit comprises of the data being reported as per the financial statements and their reconciliation to the various deductions and exemptions of the income computation under income tax rules. The segregation of the data into buckets and then reconciling them back to the statements becomes the lengthy and tiresome process.
The auditors deal with, staff welfares and contribution reconciliations, bank statements reconciliations to different heads of income, identification of the disallowed expenses, cash ledger reconciliation, income and expense reconciliation to the cash flows, TDS and TCS payment reconciliations (34A), Related parties transactions reconciliations, deductee wise payments segregation, nature wise expenditure mapping, contracts being checked for the borrowed money, recons of the money repaid from whom the business borrowed the money along with day-wise and payee wise limits of transactions being allowed, the method of payment check, quantitative details of trading and manufacturing activity reconciliations, the stock transactions reconciliations and Specified financial transactions reconciliations.


The experienced auditors are able to do the entire above in the matters of weeks for a decent size business, however for a corporate size business, the tax audit becomes a lengthy and very tiresome exercises expanding over multiple man-months.


As if the above-mentioned requirements were not enough, the Government already added a new clause 44 in the form 3CD which has been kept in abeyance till 31st March 2022. This clause requires reconciliations of the entire expenditure into the categories that combines the GST audit and tax audit under one table.

The clause 44 will require categorization of the expenditures into GST exempt, GST under composition scheme, with GST registered entities, expenditure to non-gst registered entities and importantly, it will require the payment and expenditure reconciliations with the GST registered entities.
FORM 3CD FOR FY 2020-21

In short, the tax audit is a process of data collection from all the different aspects of the business, processing of the same through the exhaustive manner of the form 3CD and then the auditor’s certification on the data filled in the form after due verification and reconciliations by the audit team.

The lengthy looking process has ample opportunities for the technology to utilize. With the increasing number of reconciliations in the business environment of this decade and further, the need for the smart solutions will attract innovations in this tax technology space. The finance teams require more and more tech tools for the tackle of the tax audit to reduce the time-cycle so that the audits are completed well in time.