What is the Difference Between Tax Audit and Statutory Audit?

Tax Audit under the Income Tax Act

The purpose of a tax audit is to conduct a thorough examination of the taxpayer's financial accounts. This audit is executed by a qualified Chartered Accountant. The relevant legislation governing this audit is Section 44AB of the Income Tax Act. Under this section, the auditor is required to provide their professional thoughts and opinions in the audit report. A tax audit is a mandatory requirement under the Income Tax Act of 1961.

However, there is a specific condition that triggers the requirement for a tax audit. This condition is defined under the Income Tax Act concerning the assessment of an assessee. The assessee typically engages in a business or profession with the objective of generating profit. Furthermore, they are required to maintain detailed accounting records of their business operations.

For income tax return purposes, the profit earned is considered taxable income. It is also possible that the business operations may result in a loss. Chapter V of the Income-tax Act provides comprehensive details regarding the tax audit process. The minimum turnover for a company to be subject to a tax audit is greater than ₹1 crore, and the gross receipts must not be less than ₹25 lakhs.

An Income Tax Assessee has the option to conduct an audit of their accounts if their turnover and gross receipts exceed the specified limits. A company can also choose to undergo a tax audit even if its income is below the standard taxable amount. The auditor, in their assessment, determines the taxable income by applying the relevant provisions of the Income Tax Act.

Statutory Audit under the Companies Act 2013

In India, the judiciary mandates a statutory audit for corporations. The primary purpose of this audit is to ensure the maintenance of accurate and legally compliant accounting records for the company. The Companies Act of 2013 defines rights, duties, remuneration, and how to appoint and remove an auditor from his duties.

The auditor executes the audit in accordance with the guidelines set forth by the law, and the audit's findings apply to the organization. Companies appoint their auditor and determine their remuneration with shareholder authorization at the annual general meeting.

Prior to the Companies Act of 2013, under the Companies Act of 1956, registered companies were permitted to engage a chartered accountant as an auditor. The company could appoint this individual after the finalization of its financial statements. Following the completion of the audit, the statutory auditor submits their report.

The auditor's report, including their professional opinion, must present a true and fair view of the company's financial accounts. These financial statements included in the audit must adhere to the provisions defined in the Companies Act.

An Overview of Differences Between the Tax Audit and the Statutory Audit

Tax audits and statutory audits differ in several aspects. Below is a comparison table providing a glimpse of how these two audits vary.

Tax Audit VS Statutory Audit:

Detailed Comparision Between the Tax Audit and the Statutory Audit

Key Difference Between Tax Audit and Statutory Audit:

• A statutory audit is a legally mandated audit conducted in compliance with specific statutes or laws. Similarly, a tax audit is also compulsory for companies that meet certain turnover and gross receipt thresholds.
• While a statutory audit can be performed by any external auditor, a tax audit must be conducted by a practicing Chartered Accountant hired by the company.
• The legal framework for statutory audits is provided by Section 143 of the Companies Act 2013. Tax audits, on the other hand, are governed by Section 44AB of the Income Tax Act of 1961. It's also beneficial to be familiar with other relevant sections, such as Section 80P of the Income Tax Act.
• Every company registered under the Companies Act of 2013 is required to undergo a statutory audit, regardless of their financial performance. In contrast, a tax audit is applicable to companies, Limited Liability Partnerships (LLPs), partnership firms, individuals, and professionals whose turnover or gross receipts surpass the prescribed threshold.
• There is no turnover or gross receipt threshold for a statutory audit; it is mandatory for all registered companies, even those with no turnover. However, a tax audit is mandatory for any organization whose annual turnover exceeds ₹1 crore and whose gross receipts are more than ₹25 lakhs.
• A company must complete its statutory audit within six months of the end of the financial year. Prior to the commencement of the audit, a general meeting with company officials and shareholders must be held. A tax audit, on the other hand, must be performed and the Tax Audit Report filed with the Income Tax Department by the 30th of September of the relevant financial year.
• Non-compliance with statutory audit requirements can result in penalties for the company ranging from ₹25,000 to ₹5,00,000. Officers found to be non-compliant may face penalties from ₹10,000 to ₹1,00,000. For non-compliance with tax audit requirements, the penalty can be 0.5% of total sales, gross receipts, or turnover. If paid monetarily, the minimum penalty is ₹1,50,000.

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