Clause 44 of FORM 3CD of Tax Audit Report which deals with reporting requirements connected to GST expenditure, is a significant source of concern for both the tax auditors and the assessee. The application of clause 44 of Form 3CD for the assessment is creating confusion currently.
Form 3CD Form 3CD of Tax Audit Report (TAR) was amended in July 2018 by Notification No. 33/2018 dated 20.07.2018 inter alia to incorporate the following two clauses – Clause 30C on reporting of GAAR transactions and Clause 44 on reporting of GST transactions.
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Applicability of Tax Audit Report
According to the Income Tax Act of 1961, any individual conducting business must have his accounts audited if his total sales, turnover, or gross earnings in business in any prior year exceeded Rs 1 crore. The threshold for tax audit turnover has been raised to 5 crores and than to 10 crore for business under section 44AB where at least 95 per cent turnover is made on digital transactions.
In the case of a person carrying on the profession, he is required to get his accounts audited, if his gross receipt in profession exceeds 50 lakh in the previous year.
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Triggering Clause of Tax Audit under section 44AB are as follows:
| Clause 44AB(a) | In case of Business, Total sales/Turnover/Gross receipts, exceeds Rs.10 Crores |
| Clause 44AB(a) – Proviso where aggregate cash receipts & cash payments exceeds 5% | In case of Business, Total sales/Turnover/Gross receipts, exceeds Rs.1 Crores but less than Rs.10 Crores |
| Clause 44AB(b) | In case of Profession, Gross receipts exceeds Rs.50 lacs |
| Clause 44AB(c)-i | Audit is conducted by virtue of provisions of section 44AE (Business of plying, hiring, or leasing goods carriages) |
| Clause 44AB(c)-ii | Audit is conducted by virtue of provisions of section 44BB (Business of exploration, etc., of mineral oils) |
| Clause 44AB(c)-iii | Audit is conducted by virtue of provisions of section 44BBB (Foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects) |
| Clause 44AB(d) | In case of Profession, Gross receipts less than Rs.50 lacs and Net Profit is less than 50% of gross receipt and total income exceeds basic exemption limit |
| Clause 44AB(e) | In case of Business, Total sales/Turnover/Gross receipts less than Rs.1 Crores and Net Profit is less than 6/8% of Turnover and total income exceeds the basic exemption limit |
| 3rd proviso to section 44AB – Audited under any other law | Where any person is required by or under any other law to get accounts audited (For Eg. Company, LLP, society, etc.) |
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Analysis of Clause 44 of Tax Audit Form 3CD
The total amount of expenditures made during the preceding year must be reported in accordance with Clause 44 of Form 3CD. According to clause 44’s header, a breakdown of all incurred expenses must be reported. Therefore, under this paragraph, Form 3CD requires head-wise reporting of total spending.
Further, this clause is required to be reported by all the reporting assessees whether the assessee is registered under GST or not. Thus, even if a person is not registered under GST, a break-up of total expenditure in the prescribed table is required to be furnished.
Analysis of column (1) of the table, which is required for the statement of the serial number, indicates that expenses must be reported head-wise. Otherwise, it is not necessary to include the serial number in the table if it is assumed that the figure is a consolidated one. The Form 3CD utility provides for adding rows more than one. However, the possibility of a contrary alternative view cannot be ruled out amount of expenditures is further required to be segregated into different components as specified in column (3) to column (7) of the table of clause 44.
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Column (2) of the table under clause 44 of Form 3CD requires to report total expenditure including purchases, imports to be given. Capital expenditure should also be reported, separate reporting of capital expenditure will help in easy reconciliation.
Column (3) of the table under clause 44 of Form 3CD requires to report how much of total expenditure as reported in column (2) is related to goods or services exempt from GST. In other words, this column requires to disclose expenditure exempt under GST.
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Column (4) of the table under clause 44 of Form 3CD requires to indicate the percentage of total spending that is related to entities covered by the GST composition scheme, as shown in column (2). In other words, you must disclose any expenses you had with GST composition dealers in this column.
Column (5) of the table under clause 44 of Form 3CD requires to indicate the percentage of total spending that can be related to GST-registered entities, as shown in column (2). In other words, the disclosure of any costs associated with GST-registered dealers is required for this column.
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Column (6) of the table under clause 44 of Form 3CD requires to report how much payment was made to GST registered entities in the previous year.
Column (7) of the table under clause 44 of Form 3CD requires to report how much of total expenditure as reported in column (2) is related to entities not registered with GST. In other words, this column requires to disclose expenditures incurred with unregistered persons.
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Some important points to note on Clause 44 of Tax Audit Report 3CD
1. Any amount that is not in the nature of an cash expenses must not be mentioned. For instance, depreciation, provision for bad debts, and so on.
2. Schedule III of the CGST Act, 2017 describes activities or transactions that are neither a supply of goods nor a supply of services, and thus expenditure incurred in connection with such activities is excluded from reporting under this clause. As an example, consider salary expenses.
3. Ensure that the total of columns 6 and 7 equals the amount specified in column (2).
4. There is no clarity on reporting GST-paid transactions under the Reverse Charge Mechanism (RCM).
5. If the taxpayer cannot furnish the details as required in clause 44, the auditor should consider making an appropriate disclosure or disclaimer in Form 3CA/3CB. If the taxpayer provides reasons for their inability to provide details, these reasons may be reported if relevant.
6. If the entity has multiple GST registrations, combine expenses from different registrations for financial reporting. Keep records of these transactions and fill in the columns with the total expenses incurred across all registrations.
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