Demystifying Reporting Challenges – Clause 44 of Tax Audit
September 01, 2022
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.
30C. (a) Whether the assessee has entered into an impermissible avoidance arrangement, as referred to in section 96, during the previous year? (Yes/No.)
(b) If yes, please specify:—
(i) Nature of impermissible avoidance arrangement:
(ii) Amount (in Rs.) of tax benefit in the previous year arising, in aggregate, to all the parties to the arrangement:
- Break-up of the total expenditure of entities registered or not registered under the GST:
| Sl No | The 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 the composition scheme | Relating to other registered entities | Total payment to registered entities | |||
| (1) | (2) | (3) | (4) | (5) | (6) | (7) |
Study of Clause 44 of Form 3CD
Clause 44 of Form 3CD requires reporting of the total amount of expenditure incurred during the previous year.
The heading of clause 44 requires reporting of the break-up of the total expenditure incurred. Hence, head-wise reporting of total expenditure is required to be reported in Form 3CD under this clause.
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 requires mention of the serial number, suggests that expenditures are required to be reported in a head-wise manner. Otherwise, if it is interpreted to be a consolidated figure, there is no requirement to mention the serial number in the table. The Form 3CD utility provides for adding rows more than one. However, the possibility of a contrary alternative view cannot be ruled out.
Furthermore, reporting under this clause is required for all the expenditure-revenue expenditure as well as capital expenditure.
This amount of expenditures is further required to be segregated into different components as specified in columns (3) to column (7) of the table of clause 44.
Columns (3) to (6) require to report how much of the total expenditure as reported in column (2) is attributed to GST-registered entities and column (7) requires to report how much of the total expenditure as reported in column (2) is attributed towards entities unregistered with GST.
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.
Column (4) 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 falling under the composition scheme of GST. In other words, this column requires to disclose expenditure incurred with GST composition dealers.
Column (5) 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 registered with GST. In other words, this column requires to disclose expenditure incurred with GST registered dealers.
Column (6) of the table under clause 44 of Form 3CD requires reporting 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 the disclosure of expenditures incurred by unregistered persons.
History of Clause 44 of Form 3CD abeyance
The said notification of 2018 came into force on 20th August 2018. Hence, any tax audit report which was required to be filed on or after 20.08.2018 requires reporting of total expenditure as per clause 44 of the Form 3CD.
The notification related to the amendment of Form 3CD incorporating Clause 44 thereto was issued on 20th July 2018 whereas, Clause 44 was made applicable one month thereafter from 20.08.2018.
The reporting requirement in clause 44 requires the compilation and arrangement of huge data. A sudden introduction of such a clause in the mid of the financial year having implication of voluminous data would cause immense hardships to tax auditors as well as the assessee, more particularly, when the accounting records were not kept in that manner.
Hence, representations were made before the Board to consider the genuine hardships of the taxpayers and to keep the operation of this clause in abeyance till the next financial year.
On 17th August 2018, CBDT issued an Order under section 119 of the Act vide Circular No. 06/2018 to keep the operation of Clause 44 in Form 3CD in abeyance till 31st March 2019.
During August 2018, the season for filing the tax audit reports with Form 3CD for the financial year 2017-18 (AY 2018-19) was going on. With this abeyance order, the applicability of clause 44 was deferred to FY 2018-19.
In May 2019, the CBDT again deferred the implementation of clause 44 of Form 3CD till March 31, 2020, to make these clauses applicable from April 1, 2020, vide CBDT Circular No. 09/2019 dated 14.05.2019.
Due to the COVID-19 pandemic and the country-wide lockdown imposed in March 2020, CBDT again extended the applicability date of Clause 44 of Form 3CD by an Order u/s 119 dated 24.04.2020 issued vide Circular No. 10/2020 dated 24.04.2020 till March 2021.
Again, CBDT vides an Order dated 25th March 2021 deferred and postponed the reporting requirement of Clause 44 related to GST in Form 3CD of Tax Audit Report from 31.03.2021 to 31st March 2022. This Order dated 25th March 2021 is issued vide Circular No. 05/2021 dated 25.03.2021.
Thereafter, no Order of the Board extending the applicability of Clause 44 of Form 3CD from 31.03.2022 was issued.
Clause 44 of Form 3CD: Applicability for AY 2022-23 (FY 2021-22)
The text of Circular No. 5/2021 dated 25.03.2021 defers the applicability of clause 44 in the following words-
“In view of the prevailing situation due to COVID-19 pandemic across the country, it has been decided by the Board that the reporting under clause 30C and Clause 44 of the Tax Audit Report shall be kept in abeyance till 31st March 2022.”
The above language of the Order creates confusion as to whether the applicability of Clause 44 of Form 3CD shall be in abeyance till all the tax audit reports are furnished till 31st March 2022 or the abeyance is applicable for the year ending on 31.03.2022 and consequently till FY 2021-22.
Presently, the tax audit report along with Form 3CD needs to be furnished for FY 2021-22 after 31.03.2022.
This gets clarified if we read the language of the Order of 2018 that was issued for the first time after the introduction of clause 44 in Form 3CD. In that Order, it was clearly written that “reporting under the proposed clause 30C and proposed clause 44 of the Tax Audit Report shall be kept in abeyance till 31st March 2019. Therefore, for Tax Audit Reports to be furnished on or after 20th August 2018 but before 1st April 2019, the tax auditors will not be required to furnish details called for under the said clause 30C and clause 44 of the Tax Audit Report.”
The abeyance on the applicability of clause 44 was given for furnishing of tax audit reports with Form 3CD up to 31st March 2019. TAR furnished on or after 1st April 2019 shall be required to be furnished with clause 44. It was a fact that up to 31.03.2019, TAR for FY 2017-18 could have been furnished. From 1.4.2019, tax audit reports for FY 2018-19 had to be furnished.
Though the requirement was also deferred and the same is continued till 31.03.2022. Hence, the abeyance of applicability of clause 44 was available till 31.03.2022 for all the tax audit reports required to be furnished till that date.
In the absence of any further abeyance order, tax auditors will be required to furnish details called for under clause 44 of Form 3CD of the Tax Audit Report if furnished on or after 01.04.2022.
As per rule, tax audit reports for the FY 2021-22 or AY 2022-23 needs to be furnished on or after 01.04.2022.
Based on the above discussion, it can be concluded that Clause 44 of Form 3CD required to be furnished with Tax audit Report for FY 2021-22 (or AY 2022-23) shall be applicable and accordingly the details of total expenditure for GST registered and GST unregistered persons as required in that clause shall be required to be furnished by the auditors for FY 2021-22 (AY 2022-23).
The deferment of Clause 44 up to 31.03.2022 gives an impression that same is applicable from the period commencing from 01.04.2022, The emphasis of the circular is on reporting requirements and not on any period of the previous year. Thus any report furnished after 31.03.2022 shall comply with the requirement of Clause 44. It means Clause 44 is applicable for the Assessment Year 2022-23 (or FY 2021-22).
Technically speaking, not only FY 2021-22, if any tax audit report with Form 3CD is furnished on or after 1st April 2022 even for any fiscal year prior to FY 2021-22 needs to have complied with the requirements of clause 44 of Form 3CD. Since, as stated above, from 1st April 2022, tax audit reports for FY 2021-22 will be filed, such reports must adhere to the requirements of clause 44 of Form 3CD.
The various issues that could emerge as a result of the new reporting requirements of Point No. 44 reporting could be as under:
- What is the meaning of “total” expense during the year? Whether capital expenditure would also be expenditure for the purpose or only items forming the part of Profit & Loss A/c would be there? Whether reimbursement of expenses to the buyer or by the supplier would form part of the total expenditure?
- Similarly, if the payment is done in one year and the bills are received in the next year, what would be the repercussion in clause No. 44?
- Whether the advance payment is done would be required to be reported if the bill is received in the next Financial Year?
- How do collect the information on expenses with regard to the GST dealers? If from Form 2A/ 2B/ 3B, then what if the assessee/vendor is not filing the returns?
- How to find composite dealers? A person may have issued the bills in the wrong mode.
- What if the GST number of the person issuing the bill is issued and the registration was canceled prior to its issuance?
- What if the credit note is issued as a post-balance sheet date?
- How to work out the figure for “Total Payments”? FIFO basis, opening balances to be considered – Who will be responsible for the creation of this record?
The purpose of a 3CD is to report that the income has been computed as per the provisions of law and to give disclosure of transactions directly impacting the assessable income. However, clause 44 is incorporated to ensure that the data can be used by the GST Department.
It is true that expenses cannot be disallowed on the basis of this reporting itself. The question remains as to why not continue with the GST audit for this reporting rather than cast an additional burden and responsibility on the Tax Auditor.
For more information- Contact us:-
Email id:- [email protected]
Contact no:- +91-8860190008
Contact us and win with our Financial Reporting and Assurance Services
