Article on ‘Applicability Of Clause 44 Of Tax Audit’ by CA Preeti Kulkarni, Sr. Principal Advisor, Bizsolindia Services Pvt. Ltd.(September 2022)

In Tax Audit Report, Clause 44 of Form 3CD requires to report Break-up of Total Expenditure of entities registered or not registered under GST in the following format.

 

Sl. No

Total amount of Expenditure incurred during the year  

Expenditure in respect of entities registered under GST

Expenditure relating to entities not registered under GST
Relating to goods or services exempt from GST Relating to entities falling under composition scheme Relating to other registered entities Total payment to regis- tered entities
1 2 3 4 5 6 7

After the implementation in GST across India on 1.7.2017 and in view of reporting the Input credit details in Tax audit report, Clause 44 was introduced in vide CIRCULAR NO. 06/2018, dated 17.08.2018 so as to include the above information. However, the clause was kept in abeyance till 31st March 2019 and further till 31st March 2020 vide circular No Circular No. 09/2019, dated 14.05.2019.

On receipt several representation the board further extended applicability of clause 44 till 31st March 2021 vide Circular No. 10/2020, dated 24.04.2020.

On receipt several representation the board further extended applicability of clause 44 till 31st March 2022 vide Circular No.. 05/2021, Dated 25.03.2021

Hence any tax audit report furnished after 31st March, 22 shall include the details as mentioned in above table in the tax audit report.

The format as per clause 44 of form 3CD requires that the information is to be given as per the following details:

  1. Total amount of expenditure incurred during the year
  2. Expenditure in respect of entities registered under GST
  3. Expenditure related to entities not registered under GST

The reporting in respect of B above, i.e. the expenditure in respect of entities registered under GST is further sub-classified into four categories as follows:

  1. Expenditure relating to goods or services exempt from GST
  2. Expenditure relating to entities falling under composition scheme
  3. Expenditure relating to other registered entities
  4. Total payment to registered entities

Revised Guidance Note on Tax Audit under section 44 of the Income Tax of 1961, has been issued by Institute of Chartered Accountants of India (ICAI) on 14th Aug 2022 whereby following clarifications have been made :

Details of depreciation under section 32 and deduction for bad debts under section 36(1)

(vii) need not to be reported, since there is no supplier in this case.

 

  1. Remuneration to employees being neither a supply of goods and services as per Schedule III of CGST Act 2017 need not be reported in the above table.
  2. Details of Capital expenditure to be reported in the above prescribed format and it is suggested to separately report details of capital expenditure for ease in reconciliation.
  3. The Details mentioned in column 6 above is total Payment to registered entities, which should be harmoniously interpreted as expenditure as combined heading in column 3 4 and 5. Hence, the total expenditure in respect of registered entities i.e., sum total of values reported in columns (3), (4) and (5) should be reported in Column 6.
  4. In case of assessees having multiple GSTN, the above columns may have to be filled up consolidating the expenditure incurred under various GST registrations. Also, it is suggested that the tax auditor to obtain and verify details in following format and verify the underlying document on a test check basis and retain the same as part of his working papers.

 

Expenditure head Name of the entity to whom payment is made GSTIN of

the entity

Value debited to expenditure account Value for which input tax credit is taken Total amount paid to the vendor Reason for NIL GST General Remarks, if any
  1. It is a normal practice of the taxpayers not to mention the GSTIN of the suppliers in their accounting software where, ITC is ineligible under section 17(5) of CGST Act 2017 or Purchases from person under composition Scheme. In this case, Tax auditor may make a suitable remark / reference in this regard in his report.
  2. Tax Auditor shall make appropriate disclosure in Form 3CA/3CB, as the case may be for the view taken by the assessee in relation to the meaning of “Total Expenditure” and themethod of filling up the appropriate columns. If the assessee is not in a position to give the details as required in clause 44, an appropriate disclosure/disclaimer may be made by the auditor in Form 3CA/3CB. Where the assessee has provided reason for not being able to provide details, the same may be reported, if found appropriate.Following are our views for some of the expenditure for reporting in clause 44 :
    • Imported Goods, since the supplier is unregistered, it is suggested to report the same supplies from unregistered persons. Alternatively, suitable note can be provided that the imported goods are not reported in clause 44 maintaining proper reconciliation with the total
    • Expenditure in Foreign Currency where RCM is applicable – Since supplier is unregistered, the same shall be disclosed under Expenditure from unregistered persons. Alternatively, suitable note can be provided that the imported goods are not reported in clause 44 maintaining proper reconciliation with the total
    • However, though GST has been paid on Import of Goods and services, being reported under unregistered persons may attract scrutiny and suitable clarification to be issued in this
    • Expenditure in Foreign Currency where RCM is not applicable, since place of supply is outside India – Supplier is unregistered, the same shall be disclosed under Expenditure from unregistered
    • Interest Expenditure – To be disclosed as Relating to goods or services exempt from GST, being interest exempt under
    • Supplies under Reverse charge Mechanism where the supplier is registered – (e.g.: Director, Sponsorship) – These expenditure should be disclosed under Expenditure relating to registered persons
    • Supplies under Reverse charge Mechanism where the supplier is unregistered – This expenditure should be disclosed under Expenditure relating to unregistered persons

    In short, in Tax Audit Report for the FY 21-22, expenditure as per the accounts both revenue and Capital are to categorised whether sourced from GST registered (regular / composite / Exempt) and Unregistered Suppliers.

    While designing the above table in Sr No. 44 of Tax Audit Report, it is envisaged that total amount should match with financial statement i.e. reflected in P&L account. However, it will not match for the following reasons, and one will have to be ready with such reconciliation, since query may be raised by either GST Department or Income Tax Department after scrutiny of information available to them.

    • Procurement includes the goods or services received for capital / revenue expenditure.
    • Even though procurement is debited to purchase account, profit & loss account statement reflects only the consumption entries and therefore bifurcation r.t. procurement of goods & services to registered person or composition dealers or un-registered person should also be made for opening stock as well as closing stock / capital WIP. Otherwise,

    discrepancy will be noticed w.r.t. GST data.

    • Profit & Loss account reflects net expenditure whereas, procurement of goods and services thereof is appearing in the debit side and there may be credit entries which may be on account of credit notes (financial credit notes or credit notes with GST issued by suppliers) or outward supply, on which tax liability might have been discharged as
    • Provisions for various expenditures are made at the close of years and subsequently, reversed or credited based on the actual transactions and only net entry is appearing in the respective revenue
    • Net Expenditure is reflected in the employee cost in the grouping whereas there are lot of expenses, on which tax invoice might have been issued by supplier or taxpayer might have raised the tax invoice on employees by employer for services rendered and net expenditure is reflected as employee
    • Wherever ITC is not availed on the reasons, either full amount is capitalised or ineligible ITC in terms of Section 17(5)(h) of CGST Act 2017 or reversal of common inputs in terms of Rule 38, 42 & 43 of CGST Rules 2017, such expenditures are debited with full amount without considering GST separately in terms of Accounting Therefore, such bifurcation also will be required to be carried out for last year i.e. 2021-22 and also henceforth.
      • Now, 1st August 2022 onwards, even it has to be reported separately in GSTR-3B. New format is already functional on GST
    • Differences between financial accounts and bifurcation as referred in above table will have more reasons which needs to be

    Such reconciliation with GST records of input tax register / GSTR-2B will have to be made and kept ready, so as to provide information in above table accurately, which will help in any type of enquiry as may be conducted by either GST Department or Income Tax Department.

    As a matter of fact, income tax law doesn’t have the provision of disallowed expenditure w.r.t. procurement from unregistered person and therefore, the logic of amending tax audit report for seeking such details in the tax audit report is not understandable. Object of introduction of tax audit was to reduce the burden of income tax officer and harassment to the taxpayer during income tax assessment. However, by providing such detail working and finding out the reconciliation will be really tough challenge but will required to be done for replying the discrepancy pointed out by either GST officer or Income Tax Officer.

    Generally, any chartered accountant who certifies the tax audit report will obtain necessary certification from the company by way of management representation letter and the same figures will be reflected. However, board of directors and concern officials of the taxpayer will be held responsible for accuracy of such data.

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