The Income-tax Act of 1961, specifically Section 44AB, provides a roadmap for tax audits in India. Central to this is the Form 3CD, and its Clause No. 44. This clause is a point of contention for many, as it demands a specific bifurcation of expenditure related to GST. Let’s delve deeper into the implications, challenges, and the possible suggestions surrounding this clause.
Detailed Analysis of Clause No. 44 in Form 3CD
1. The Mandate of Clause No. 44: Clause No. 44 of Form 3CD requires the Assessee to fill in data of the total amount of expenditure incurred during the year with a bifurcation primarily of expenditure relating to GST registered suppliers and Non-GST registered suppliers.
2. Obviously, and rightfully, the Tax Auditor would like to reconcile the data prepared by the Assessee with the Profit & Loss Account.
3. Accounting Challenges for Large Organizations: ERP or Enterprise Resource Planning software is a mainstay for large organizations. While it streamlines various processes, accounting often becomes a complex affair, especially when it’s done on a consumption basis of goods/services. This is better explained in the example below:
Example:
i. When material is received: Here, the inventory account is debited, but the corresponding creditor control account is credited.
Inventory A/c Dr XXX
To Sundry Creditor control A/c XXX
(Being material purchased on 22/2/2023)
ii. When Invoice is booked: The creditor’s control account is debited, with the supplier account credited.
Sundry Creditors Control A/c Dr XXX
To Supplier A XXX
(Being Invoice booked on 24/2/23)
iii. When the material is consumed for business: When consumed for business purposes, the stores and spares consumed account faces a debit, while the inventory account is credited.
Stores and Spares consumed A/c Dr XXX
To Inventory A/c XXX
(Being material issued from stores on 5/6/2023)
4. In the above example, the expenditure hits the Profit and Loss Account in FY 2023-24, but the material is purchased and paid for in FY 2022-23.
5. The challenge for the Assessee is gathering the data of such consumption-based expenses with regards to their supplier as this data is not readily available.
6. In the ERP system, the trail of the Supplier is available at the level of Invoice booking. The same trail is used to prepare ITC input credit details with regards to GST returns.
Issue:
1. The Overarching Issue: This scenario poses unnecessary hardship on the Assessee to prepare such working, and also for the Tax Auditor, as it is very difficult to audit data which does not have a proper trail.
Suggestion:
The GST Portal’s transparency is commendable. With substantial data already accessible, it’s high time that certain requirements under Clause No. 44 be reconsidered. For instance:
1. The requirement under clause No. 44 should be withdrawn. Instead, the Government can ask the Assessee to disclose only purchases made from unregistered dealers with the date of the invoice, invoice no., supplier name, supplier PAN (if any), amount, etc.
2. Rather, the Government should ask for such disclosure in the GSTR Form 3B itself.
3. It is not ethical to have stringent laws to control revenue loss only because a few assessees are offending the laws. This places an additional burden on organizations to spend money and time on such disclosures, especially those who are actually paying their taxes honestly.
Conclusion: Clause No. 44 of Form 3CD, though conceived with the best intentions, needs a relook, especially in an era where technology and transparency are reshaping tax compliance. The goal should be a more efficient, transparent, and user-friendly tax audit system, benefiting both businesses and the government.
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