1. Clause 44 of the FORM 3CD (tax audit report) is mysterious. This is so because not only the reasons for seeking the given information are not apparent and at odds with the law but also because the manner of compiling the given information has many unanswered questions.
2. In the present article, we explore several aspects related to the topic. To begin with, the said clause 44 seeks information relating to the total value of the expenditure incurred in respect of the supplies received from GST registered entities as well as supplies received from the non-GST registered entities. It seeks further bifurcation of the value of the expenditure in respect of the supplies received from GST registered entities into that incurred in respect of exempt supplies, supplies on which composition tax has been paid and other taxable supplies. It also seeks the value of the payment made to the GST registered entities.
3. The said clause 44 was first introduced and made applicable in respect of the filings to be done for FY 2017-18 since the said FY was the first year of GST implementation. However, the implementation of the said clause was deferred and it is now made applicable. Hence the details in the said clause are required to be furnished and certified by the income-tax auditor for the filings to be done after 01.04.2022 (i.e. it shall apply from FY 2021-22).
4. Now let us examine some mysteries accompanying the said clause 44. We shall examine the mysteries from the following perspective:
- Justification of the said clause
- Issues while compiling the information for the said clause
5. We shall end the analysis with the approach that may be considered by the tax auditor while furnishing and certifying the details of the said clause.
Justification of the said clause
6. Sec. 44AA of the Income Tax (IT) Act, 1961 deals with the provisions related to the maintenance of accounts by persons carrying on profession or business. The said provisions provide that every person is required to keep and maintain such books of accounts and other documents that may enable the assessing officer to compute the total income in accordance with the provisions of the said Act. In respect of certain specified professions, the said provisions read with Rule 6F of the Income Tax Rules, 1962 require such person to maintain specified books of accounts and other documents. The perusal of the said provisions indicates that the taxpayer is required to maintain such records that are necessary to compute the total income.
7. Sec. 44AB of the IT Act, 1961 on the other hand provides that the specified persons shall be liable to furnish a further report by an accountant in the form prescribed (FORM 3CD). The said report is based on the facts maintained by the taxpayer and the opinion of the auditor on applying the law to the said facts in certain clauses.
8. Now the perusal of the aforesaid provisions dealing with the maintenance of the books of accounts and other records along with the requirement to furnish the report by the income tax auditor entails that the purpose of said provisions is to enable the assessing officer to compute the total income under the Act.
9. Now Clause 44 seeks details of the value of the expenditure bifurcated into the expenditure incurred in respect of the supplies received from the GST registered suppliers and the supplies received from the non-GST registered suppliers.
10. At this stage, we must therefore consider the justification of the said clause from the perspective of Sec. 44AA read with Sec. 44AB of the IT Act, 1961. As stated earlier the purpose of the said provisions is to cast a duty on the taxpayer to maintain all such books of accounts and records and to cast a duty on the income-tax auditor to furnish certain details that can enable the assessing officer to compute the total income. Therefore one must consider whether the bifurcation of the value of the expenditure between GST registered suppliers and non-GST registered supplies has any bearing on the admissibility or otherwise of the expenditure in question. We submit that there is no provision in the IT Act, 1961 that determines the admissibility of the expenditure merely based on the nature of the supplier in question (i.e. whether the supplier is GST registered or otherwise). Hence it appears that there is no justification for seeking the given information in the context of the purpose of computation of the total income.
11. One may wonder that the assessing officer may use the given information to seek further details as regards the expenditure incurred in respect of the non-GST registered suppliers to determine the genuineness. Now the said purpose may not still justify the requirement for the reason that genuineness or otherwise of a particular expenditure is not contingent on the status of the supplier. In fact, in cases involving fake invoicing, even the expenditure made from a GST-registered supplier will not be a factor to avoid adverse consequences.
12. Hence at this stage, it is suggested that the Government must relook at the purpose of clause 44 and redo the same in line with the said purpose rather than fishing for the data with the hope to connect the dots in the future.
Issues while compiling the information for the said clause
13. Clause 44 deals with the break-up of expenditure. Presently the following data is captured in GSTR-3B:
- Taxable value and tax payable on the inward supplies liable to reverse charge (Table 3.1(d)).
- Tax amount in case eligible as well as ineligible ITC (Table 4).
- Supplies received from a supplier under composition scheme, Exempt and Nil rated Supply as well as Non-GST supply, in aggregate, bifurcated into inter-state & intra-state supplies (Table 5).
14. On the other hand, Clause 44 requires data 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 registered entities | |||
| (1) | (2) | (3) | (4) | (5) | (6) | (7) |
15. From the above, it clearly appears that there is a disconnect between the two data sets. GSTR-3B is based on “inward supplies” whereas Clause 44 is based on “total expenditure”. Hence an assessee will have to prepare two sets of reconciliation statements. One under the GST Laws to reconcile the figures reported in audited accounts with the return (which will be “supply” driven reporting) and another under Income Tax Laws to reconcile the figures reported in the audited accounts with the figures which can be reported under clause 44 which is an “expenditure” driven reporting further bifurcated into “supply” driven reporting but different from the GST return since the said clause seeks break-up of expenditure into that from GST registered entities and otherwise.
16. However, if an assessee has filled all the relevant fields of GSTR-3B and hence has the working in support of the same, the task of reconciliation can get somewhat easier. As an example, if an assessee has filled up Table 5 in GSTR-3B, the working in respect of the same can facilitate further bifurcation as sought under Clause 44.
17. Following further points may be noted to fill up the information sought under Clause 44.
18. An assessee is first required to go head-wise for every expenditure to work out the break-up that can then be considered for furnishing the aggregate values in clause 44. Let us deal with major heads of expenditure now.
- Cost of Goods sold: This head will contain the purchases adjusted for the stock movements. Break-up of the purchase data needs to be obtained as required under Clause 44. One option can be to show only the break-up of all the purchases under Clause 44 and show stock adjustment in the reconciliation statement. Alternatively, based on the FIFO method, the break-up of the expenditure can be obtained by identifying the invoices pertaining to the goods in stock (i.e. opening as well as closing). Since there are no separate columns for reporting imports, the same may be shown as an expenditure from the unregistered entity.
- Salary & Wages: It may be noted that services provided by the employee to the employer in the course of employment are not regarded as a supply as per Entry No. 1 of Schedule III to the CGST Act. Hence such expenditure cannot be broken up into that from the registered entity and that from a non-registered entity. Said expenditure can be shown in the reconciliation statement.
- Depreciation: Since this is a non-cash expenditure, the same cannot be broken up into that from the registered entity and that from a non-registered entity. Said expenditure can be shown in the reconciliation statement. As far as capital procurements are concerned, since the same in the nature of “capital expenditure” which will form part of the “total expenditure”, the same needs to be reported under Clause 44.
- Interest: Supply of services by way of lending where the consideration is in the form of interest is treated as an exempt supply. Hence interest expenditure from a financial institution, which is registered, must be shown as an expenditure related to exempt services from the registered entity.
- Provisions: Various types of provisions are made in the accounts which are charged to appropriate heads of account. AS 29 defines `Provision’ as a liability which can be measured only by using a substantial degree of estimation. Provisions are also made under various accounting standards such as AS 7 – Construction Contracts, AS 22 – Accounting for Taxes on Income, AS 19 – Leases, AS 15 – Accounting for Retirement Benefits in the Financial Statements of Employers etc. Such provisions may not be, at the time of making the provision, a ‘supply’ under GST Hence the same may not be reported under clause 44.
- Reimbursements: An employee might have claimed reimbursements in respect of expenses incurred for business. Such expenses might have been incurred from registered entities or unregistered entities. However it can be said that such supplies are made by the vendors to the employees and not to the assessee, but the cost of which is borne by the assessee, being the economic beneficiary. Hence the details of such reimbursements may not be reported under Clause 44.
- Discounts: The assessee may have received credit notes for discounts for supplies that he would have received earlier. As a trade practice, such credit notes are received either with GST adjustment or without GST adjustment. In either case, the amounts of such credit notes will be adjusted to reduce the expenditure under the appropriate column under clause 44. Such deductions, therefore, need to be adjusted based on whether the same are from GST registered suppliers or otherwise and accordingly reported.
- Loss on sale of assets: Since the said expenditure does not involve any supply from the registered entity or otherwise, it shall form part of the reconciliation statement.
- Provision for taxation: Since the said expenditure does not involve any supply from the registered entity or otherwise, it shall form part of the reconciliation statement.
- Other Timing Differences: A transaction may be accounted for in the books of account at a point in time, but for the purposes of GST it may be recognized later. For example, goods may have been purchased but may remain in transit at the year-end. In such a case, while in the accounts the purchases may have been booked, for the purposes of GST the supply will be considered only on the receipt of the goods. Such cases of timing differences should be noted and should be included in the reconciliation statement.
19. It may also be noted that reporting of the value of the ‘exempt supplies’ from GST registered entities shall include supplies that are wholly exempt, nil rated and even non-taxable supplies (such as petrol).
20. From the above, it appears that the details sought under Clause 44 cannot be readily obtained. A reconciliation statement is a must. Whether one should attach such a statement along with the Tax Audit Report? Before answering the question, a tax auditor must obtain a certified reconciliation statement from the assessee which can act as a base for certifying the figures reported under Clause 44. As far as attaching the reconciliation statement with the tax audit report is concerned, legally one is not obliged to attach such a statement. One may however decide to attach the same to avoid any query on the preliminary scrutiny of the tax audit.
21. We may also address whether the values sought under Clause 44 are to be reported in aggregate or expenditure-wise. Readers would observe that there is no separate column under Clause 44 to report the nature of expenditure. Hence aggregate figures can be reported which are duly supported by a reconciliation statement.
22. It may also be noted that the said clause 44 seeks the value of the total payment made to the GST registered suppliers. However, the schema for the said FORM 3CD indicates that the said value is a summation of the expenditure incurred in respect of the GST-registered entities. Hence the said value shall be computed by the schema itself.
23. It can thus be seen that there can be several approaches to report the details in the said clause 44. In absence of any clear-cut guidelines, the reporting under the said clause may trigger needless scrutiny. Hence one has to have a duly management-certified reconciliation to support the given disclosure.
24. In absence of true and correct facts, one may consider putting a disclosure that the data required under the said clause 44 has not been maintained by the taxpayer and hence not furnished. One may also indicate the reason that the provisions of Sec. 44AA does not appear to mandate record keeping in such form. It must be remembered that addressing the mysteries with incorrect facts can turn out to be detrimental.
(Views are strictly personal)
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