Draft Form 26 Under Income-tax Rules 2026: Complete Analysis, 3CD Comparison, Audit Checklist & Impact on Businesses
Here’s a detailed analytical note on Draft Form No. 26 released as part of the Draft Income-tax Rules, 2026. This form is prescribed as the audit report and statement of particulars under section 63 of the Income-tax Act, 2025. It represents a major structural and reporting shift in tax audit documentation, both in scope and depth.
1. Purpose and Legislative Context
Draft Form 26 is intended to replace and modernize the existing tax audit reporting framework. It operationalizes section 63, which mandates audit reporting for certain categories of taxpayers engaged in business or profession. The form consolidates financial reporting, tax adjustments, compliance certifications, and disclosure requirements into one comprehensive reporting instrument.
Unlike earlier audit forms that largely focused on financial statement reconciliation and disallowance reporting, Draft Form 26 expands into:
- Digital accounting system disclosures
- International tax compliance
- Specified financial transactions
- Presumptive income cross-verification
- ICDS-based computation adjustments
- TDS/TCS compliance analytics
- GST linkage and indirect tax reconciliation
This signals a clear policy direction: tax audit is no longer only about book-to-tax reconciliation — it is a full-spectrum compliance validation tool.
2. Structure of the Form
The form is divided into four core parts and multiple detailed schedules, creating a layered reporting system:
| Part | Coverage |
| Part A | Basic assessee information |
| Part B | Statement of tax particulars (core reporting section) |
| Part C | Audit report (where accounts are audited under other law) |
| Part D | Audit report (where not audited under other law) |
This bifurcation ensures alignment with two types of assessees:
1. Those already subject to statutory audit under other laws (Companies Act, etc.)
2. Those subject only to tax audit
This reduces duplication while preserving audit accountability.
3. Part A – Foundational Tax Identity Reporting
Part A gathers structured identity data:
- Legal name
- Address with full geo breakdown
- PAN
- Status (individual, firm, company, trust, etc.)
- Residential status
- Contact information
- Tax year
While seemingly basic, this section standardizes classification data, likely enabling automated PAN-linked analytics and cross-form integration within the income-tax system.
4. Part B – The Core Compliance Engine
Part B is the most significant and transformative component. It captures over 50 clauses across thematic blocks:
4.1 General Information & Business Profile
Requires disclosure of:
- Relevant audit trigger clause
- Opting for special taxation regimes
- Partner/member changes
- Nature of business changes
- Cost audit linkages
- Comparative turnover ratios
This creates a risk profiling base, helping authorities track structural and financial shifts year-on-year.
4.2 Books of Account & Digital Infrastructure
One of the biggest modern inclusions:
- Books maintained (manual/digital)
- Accounting software used
- Cloud storage details including IP address and country
- Compliance with prescribed backup server rules
- Location of Indian data backup server
This reflects the government’s emphasis on data localization, digital audit trails, and forensic audit capability. Tax audit now validates IT governance, not just accounting.
4.3 Method of Accounting & ICDS Compliance
The auditor must report:
- Cash vs mercantile system
- Changes in accounting method
- Inventory valuation method
- Deviations from statutory valuation norms
- Adjustments required under Income Computation and Disclosure Standards (ICDS)
Detailed schedules capture ICDS I to X adjustments, converting tax audit into a structured ICDS impact statement. This ensures book profit ≠ taxable income reconciliation transparency.
4.4 Income Reporting Beyond P&L
The form mandates reporting of income taxable but not credited to P&L, such as:
- Deemed dividends
- Buyback income
- Subsidies
- Forfeited advances
- Business trust receipts
- Compensation interest
This prevents omission of non-operational taxable income.
4.5 Property & Capital Transactions
Auditor must verify:
- Conversion of capital asset into stock-in-trade
- Property transfers below stamp duty value
- Deemed income under negotiable instruments/hundi provisions
This expands tax audit into capital gains risk monitoring.
4.6 Expense Disallowance Matrix
This section is extensive and replaces scattered reporting with structured statutory tagging:
- Employer contributions
- Provisions
- Bonus/commission
- Bad debts
- Capital expenditure
- CSR expenses
- Prohibited expenses
- Penalties
- Related party payments
- MSME interest disallowance
- TDS-linked disallowances
The format ensures clause-wise statutory mapping, facilitating automated mismatch detection.
4.7 Losses, Depreciation & Deductions
Includes schedules for:
- Block-wise depreciation computation
- Additional depreciation tracking
- Capital gain adjustments within block
- Brought forward loss continuity
- Speculation loss tracking
- MAT/AMT credit utilization
The depreciation schedule mirrors return schedules, enabling direct system validation.
4.8 International Taxation
New-age global reporting:
- Transfer pricing primary adjustments
- Excess money repatriation
- Thin capitalization (interest limitation)
- Remittances under Form 145
Tax audit now integrates BEPS-aligned monitoring tools.
4.9 Financial Transaction Compliance
Covers:
- Loans/deposits beyond prescribed limits
- Cash receipt/payment violations
- Specified financial transaction (SFT) reporting
- Unquoted share transactions
- Deemed dividend loan reporting
This transforms tax audit into a financial integrity surveillance instrument.
4.10 TDS/TCS Reporting Analytics
The form requires granular data:
- Payments liable for TDS/TCS
- Short/non deduction
- Late deposit interest
- Disallowance u/s 35(b)
- Statement filing status
This enables end-to-end TDS compliance analytics within tax audit.
4.11 GST & Indirect Tax Linkage
Auditor must report:
- GST registration numbers
- Expenditure split between registered/unregistered entities
- Composition scheme suppliers
- Exempt supplies
This bridges direct tax audit with GST ecosystem, improving cross-tax data triangulation.
4.12 Quantitative Details
Trading and manufacturing units must disclose:
- Opening stock, purchases, sales, closing stock
- Raw material consumption
- Production yield %
- Shortage/excess
This revives stock audit discipline in tax audit, aiding profit suppression detection.
5. Parts C & D – Auditor’s Certification Framework
Two alternate reporting structures exist:
| Part | Applicable where |
| Part C | Assessee already subject to statutory audit |
| Part D | Assessee not subject to other statutory audit |
Both require:
- Confirmation of audit procedures
- Impact of qualifications on taxable income
- Clause-wise qualification tagging (1–53)
- Basis of audit evidence (test check / management representation / unable to verify)
This increases auditor accountability and traceability of audit limitations.
6. Key Policy Themes Emerging
1. Digitization of audit trail
2. Integration of direct and indirect tax data
3. ICDS enforcement
4. Financial transaction surveillance
5. Global tax risk monitoring
6. Structured auditor accountability
7. System-ready data architecture
The form is clearly designed for AI-driven scrutiny and automated risk flagging.
7. Impact on Stakeholders
For Assessees
- Greater documentation burden
- Need for stronger ERP and compliance systems
- Increased exposure to cross-verification
For Chartered Accountants
- Audit scope expands into IT systems and transaction analytics
- Higher liability due to clause-wise certification
- Need for ICDS expertise
For Tax Administration
- Structured data ingestion
- Better risk-based assessments
- Reduced reliance on manual scrutiny
8. Conclusion
Draft Form 26 marks a paradigm shift. It transforms tax audit from a financial statement review into a multi-dimensional compliance certification spanning accounting standards, digital infrastructure, transaction monitoring, international taxation, and cross-law integration.
It reflects the evolution of India’s tax system toward data-driven governance, where tax audit functions as a primary compliance intelligence document rather than a procedural formality.
Once finalized, this form will significantly raise the depth, accountability, and technological orientation of tax audits in India.
Great additions — these three angles make the analysis far more practical and implementation-oriented. Below is a continuation of the earlier note, now incorporating:
1. Clause-wise comparison with existing Form 3CD
2. Practical audit checklist for Chartered Accountants
3. Impact on MSMEs vs Large Corporates
All references remain based on the Draft Form No. 26 under Draft Income-tax Rules, 2025.
9. Clause-Wise Comparison: Draft Form 26 vs Existing Form 3CD
Draft Form 26 is not merely a renumbered version of Form 3CD — it is a structural redesign. The philosophy has shifted from “report exceptions” to “map the entire tax risk universe”.
9.1 Structural Difference
| Aspect | Form 3CD (Old) | Draft Form 26 (New) |
| Format style | Clause-based narrative | Data-structured schedules |
| Focus | Book-tax differences | Full compliance ecosystem |
| Digital system disclosure | Not required | Mandatory software & cloud details |
| ICDS reporting | Limited | Dedicated ICDS schedules |
| International taxation | Minimal | Integrated TP & BEPS-style reporting |
| TDS/TCS | Summary-based | Transaction analytics format |
| Indirect tax linkage | Not integrated | GST registration & expense mapping |
| Financial transaction reporting | Select clauses | Detailed loan, cash, SFT tracking |
| Auditor qualification tagging | General remarks | Clause-specific tagging (1–53) |
9.2 Key Area-wise Mapping
(A) Basic Particulars
| Form 3CD Clause | Draft Form 26 Reference | Change |
| Clause 1–8 (Name, address, PAN, etc.) | Part A | Similar but more structured, geo-coded address format |
(B) Nature of Business & Accounting
| Form 3CD | Draft Form 26 | What’s New |
| Clause 10 | Part B – General Information | Change in nature of business now schedule-based |
| Clause 11 | Clause 13–14 | Books of account now include software, cloud, IP location |
| Clause 13 | Clause 15–16 | Accounting method + inventory valuation compliance with statute |
| Clause 13(d) ICDS | Clause 17–18 + Schedule | ICDS now detailed line-item impact reporting |
(C) Income Not Credited to P&L
| Form 3CD Clause 16 | Clause 20–21 | Expanded list including buyback, subsidies, business trust income |
(D) Capital Transactions
| Form 3CD Clause | Draft Form 26 | Enhancement |
| Clause 17 | Clause 22–23 | Property undervaluation + capital asset to stock conversion structured |
(E) Disallowances & Expenses
This is where the largest expansion occurs.
| Form 3CD Clause | Draft Form 26 Clause | Change |
| 21(a) General disallowances | 27 series | Now broken into statute-wise tagging |
| 21(b)–(f) | 27(c) & 27(d) | CSR, penalties, illegal expenses mapped separately |
| 23 (MSME interest) | 33 | Same concept but integrated into larger expense schedule |
| 18, 19 (Depreciation) | Clause 36 + detailed schedules | Fully structured block-wise format aligned with ITR |
(F) Related Party Transactions
| Form 3CD Clause 23 | Clause 29 | Similar concept but includes more data fields |
(G) TDS/TCS
| Form 3CD Clause 34 | Clause 49–51 + Schedule TDS/TCS | Moves from summary to transaction-level compliance analytics |
(H) Cash / Loan Restrictions
| Form 3CD Clause | Draft Form 26 Clause | Expansion |
| 31, 31A, 31B | Clause 45 | Detailed tracking of mode, code, peak amount |
(I) International Tax
| Form 3CD | Draft Form 26 | Major Shift |
| Clause 30A, 30B | Clause 40–43 | Transfer pricing primary adjustments, thin capitalization, repatriation tracking |
Summary of Comparison
Draft Form 26 = Form 3CD + IT systems audit + global tax risk + transaction surveillance + GST linkage
It is effectively a compliance data statement, not just a tax audit annexure.
10. Practical Audit Checklist for Chartered Accountants
To adapt to Draft Form 26, CAs must upgrade their audit methodology. Below is a practical stage-wise checklist.
10.1 Pre-Audit Planning
√ Obtain ERP/Accounting software details
√ Identify cloud storage location and backup server compliance
√ Obtain partner/shareholder changes data
√ Review whether any special tax regime option exercised
√ Identify if ICDS adjustments are required
10.2 Books & Systems Verification
√ Verify list of books maintained (manual + digital)
√ Validate software audit trail functionality
√ Confirm server backup location in India
√ Cross-check inventory valuation method with statutory norms
10.3 Income Verification
√ Identify incomes taxable but not in P&L (subsidies, buyback, forfeitures)
√ Check property transactions vs stamp duty values
√ Verify conversion of capital asset into stock
10.4 Expense Scrutiny
√ Tag expenses under statutory disallowance heads
√ Check CSR expenditure classification
√ Verify MSME interest compliance
√ Scrutinize penalties and prohibited expenses
√ Review related party payments
10.5 Depreciation & Losses
√ Reconcile block-wise WDV with prior return
√ Verify additional depreciation eligibility
√ Track carry forward losses and continuity conditions
10.6 International Tax
√ Check TP primary adjustments
√ Review interest limitation computations
√ Verify foreign remittance reporting
10.7 TDS/TCS
√ Match expense ledger with TDS deducted
√ Verify short deduction / late deposit cases
√ Reconcile TDS returns vs books
10.8 GST & Indirect Tax
√ Obtain GST registration numbers
√ Map expense split: registered vs unregistered vendors
√ Identify composition scheme suppliers
10.9 Financial Transactions
√ Check loan/deposit acceptance modes
√ Identify cash receipts/payments beyond limits
√ Verify SFT reporting obligations
10.10 Reporting & Certification
√ Map audit qualifications clause-wise
√ Identify reliance on management representation
√ Document areas of inability to verify
This checklist effectively converts tax audit into a multi-disciplinary compliance audit.
11. Impact Analysis: MSMEs vs Large Corporates
Draft Form 26 does not affect all taxpayers equally.
11.1 Impact on MSMEs
Challenges:
Limited accounting system sophistication
Cloud/server reporting requirements difficult to comply
Inventory and quantitative reporting burdensome
TDS analytics and GST reconciliation require better records
Increased compliance cost and CA fees
Risk: Many MSMEs may struggle with documentation, increasing audit qualifications.
Likely Outcome:
Shift toward outsourced compliance systems and cloud ERPs
11.2 Impact on Large Corporates
Advantages:
√ Already use ERP systems
√ Have internal audit & compliance teams
√ Familiar with transfer pricing and global tax rules
New Pressure Areas:
Thin capitalization disclosures
Primary adjustment repatriation tracking
Detailed TDS/TCS analytics
Auditor qualification tagging increases exposure
Likely Outcome:
More integration between tax, finance, IT, and legal departments
11.3 Comparative Summary
| Factor | MSMEs | Large Corporates |
| Compliance burden | High | Moderate |
| System readiness | Low | High |
| Audit complexity | High relative to size | High but manageable |
| Cost impact | Significant | Absorbable |
| Risk of audit qualification | Higher | Lower |
12. Final Observations
Draft Form 26 signals a philosophical shift:
From: “Verify profit”
To: “Validate tax behavior, financial integrity, and system reliability”
It brings tax audit closer to:
- Forensic accounting
- Systems audit
- Regulatory compliance certification
For professionals, this means the future tax auditor must understand:
Accounting + Tax Law + IT Systems + Data Governance + International Tax
Draft Form 26 is therefore not just a new form — it is a new compliance era.
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