By Timir Baran Chatterjee
Mentor : International Trade Committee, Bengal Chamber
Mentor and Managing Partner- TCN Global
The introduction of the new Direct Tax Code (DTC) presents a pivotal opportunity to redefine the landscape of tax auditing in India. With the evolving complexity of financial transactions and the increasing need for transparency and compliance, there is a growing discourse on the inclusion of Company Secretaries (CS) and Cost and Management Accountants (CMA) as eligible professionals to conduct tax audits. This note explores the hopes, justification and possibilities of such an inclusion, and the potential impact on the financial ecosystem in India.
Currently, the authority to conduct tax audits under Section 44AB of the Income Tax Act, 1961, is primarily vested in Chartered Accountants (CAs). However, with the proposed DTC aimed at simplifying and modernizing the tax regime, there is a strong case to expand the scope of professionals who can undertake tax audits. Both CS and CMA professionals possess the requisite expertise in financial reporting, corporate governance, and cost management, making them well-suited for this role.
CS professionals have a deep understanding of corporate laws, governance practices, and regulatory compliance. Their involvement in tax audits could enhance the quality of audits, particularly in areas involving corporate governance and regulatory adherence.
Inclusion of CS professionals could also lead to a more holistic audit process, integrating both financial and compliance perspectives, which is increasingly necessary in today’s complex business environment.
a. CMA professionals bring a unique perspective to tax audits with their expertise in cost management, pricing strategies, and financial analysis. Their inclusion could improve the accuracy of financial reporting and help identify cost inefficiencies that have tax implications.
b. As businesses strive for more precise financial management, CMAs could provide valuable insights during audits, ensuring that tax assessments reflect true economic realities.
The inclusion of CS and CMA professionals in tax audits under the new DTC could herald a new era of financial oversight in India. It would democratize the audit process, ensuring that a broader range of professionals contribute their expertise to maintaining the integrity of financial reporting.
a. Enhanced Compliance: The involvement of diverse professionals in tax audits could lead to better compliance, as different facets of financial operations are scrutinized through multiple lenses.
b. Professional Development: Allowing CS and CMA professionals to conduct tax audits would open new career avenues and professional growth opportunities, encouraging more students and professionals to pursue these qualifications.
c. Improved Governance: A broader range of professionals in the audit process could improve corporate governance standards, making Indian businesses more resilient and attractive to investors.
The existing Tax Audit Report, under Section 44AB of the Income Tax Act, 1961, covers various aspects of a business’s financial records, transactions, and compliance. While Chartered Accountants (CAs) are traditionally responsible for these audits, certain areas in the tax audit report are well-aligned with the expertise of Cost and Management Accountants (CMAs) and Company Secretaries (CS). Below are the areas from the tax audit report that these professionals are uniquely positioned to understand and contribute to.
Verification of closing stock, valuation methods (FIFO, LIFO, etc.), and consistency in applying inventory valuation methods.
CMAs are adept at cost determination and inventory valuation. Their specialized knowledge ensures accurate assessment of costs incurred in the production and the precise valuation of stock. They can identify discrepancies in material cost records, manufacturing overheads, and work-in-progress, which can affect tax liabilities.
Quantitative details of goods manufactured, traded, and their opening and closing stock.
CMAs excel in providing accurate quantitative analysis of goods and materials. They can evaluate the cost flow, wastage, and efficiency in production processes, ensuring accurate reporting in the tax audit.
Information related to the maintenance of cost records and compliance with cost accounting standards under the Companies Act.
As experts in cost accounting, CMAs are well-versed in the preparation and analysis of cost records, compliance with the Cost Audit Rules, and reconciliation of cost records with financial records. This area requires detailed knowledge of costing techniques and statutory cost reporting.
Reporting on payments like tax, duties, and other government levies that are allowed as deductions only when actually paid.
CMAs are skilled at assessing financial outflows linked to statutory payments such as taxes, duties, and employee contributions. They can provide insights into the impact of delayed or missed payments on a company’s financial health and tax liability.
The accounting policies adopted by the entity, including those relating to the treatment of capital and revenue expenditure.
CMAs have a solid grasp of cost apportionment between capital and revenue expenditures, depreciation methods, and other capital cost considerations that impact tax reporting.
Reporting compliance with TDS provisions, including details of deductions and their remittance to the government.
CS professionals are thoroughly knowledgeable about regulatory compliance, including TDS obligations under the Income Tax Act. They ensure the company is adhering to the required withholding tax regulations and can identify areas of non-compliance, which is critical for corporate governance.
Acceptance or repayment of loans and deposits beyond specified limits via permitted banking channels.
Company Secretaries are well-versed in statutory compliance related to loans and deposits, including regulatory restrictions under company law and provisions in the Income Tax Act. Their role in governance ensures adherence to these rules to avoid penalties for non-compliance.
Reporting on the applicability and computation of Minimum Alternate Tax (MAT) under Section 115JB or Alternate Minimum Tax (AMT) under Section 115JC.
As governance professionals, CSs have a keen understanding of MAT/AMT applicability for companies and Limited Liability Partnerships (LLPs). They ensure that the tax calculation under these provisions complies with company law and corporate governance norms.
Reporting on loans or advances to specified persons under Section 2(22)(e) of the Income Tax Act.
CS professionals are experts in corporate governance and related party transactions. They ensure that loans or advances to related parties comply with both the Income Tax Act and the Companies Act, reducing risks of misreporting or legal issues.
Reporting compliance with corporate governance norms and regulatory provisions, especially for listed companies.
Company Secretaries play a crucial role in ensuring corporate governance and adherence to legal norms under the Companies Act. Their expertise is vital in maintaining accurate records and verifying that the company’s governance structure complies with tax and legal obligations.
While Chartered Accountants have traditionally handled tax audits, the areas outlined above demonstrate how Cost and Management Accountants (CMAs) and Company Secretaries (CS) may also bring significant expertise to tax audits. CMAs excel in areas requiring cost analysis, inventory valuation, and financial management, while CS professionals add value through their deep understanding of compliance, governance, and legal reporting.
Incorporating CMAs and CS professionals into the tax audit framework under the new DTC could enhance the overall quality and comprehensiveness of tax audits, leading to better financial oversight and compliance in the Indian business ecosystem.