The biggest bounty, the one that made a marked difference to the fortunes of the practicing professionals, came exactly four decades back when tax audit was mandated under the Income-tax law. This not only created an instant opportunity, but also paved the way for myriad new audits in the years following, not only under the same law, but also under different state and central legislations such as sales tax, VAT, central excise and regulations like import/export etc.
The primary justification to inflict the added burden of a tax audit even on entities that were subject to the mandatory financial audit under other laws was that under the tax law numerous adjustments were required to be made to the reported results of an enterprise.
This was true in as much as the tax law in 1985 was a welter of artificial disallowances like gifts that exceeded Rs. 50 in value, hotel expenses per night more than Rs. 200 in cities and a lower amount in certain other places, cash payments exceeding a few pennies being disallowed, and a host of equally, and even more, irrational ones, that gave room for both conceptual and arithmetical disputes.
The ICAI could convincingly make out a case for its members to take the onus of fool-proofing the tax return such that the labor of checking and verifying it was saved at the level of the tax officer. Many of the irrational provisions in the law exited over the years as the pettiness in policy-making slowly gave way to pragmatism. The gap between the reported and the taxable income has narrowed significantly.
Need to revisit tax laws
Yet, the need to continue the tax audit has not been revisited in these forty years. Besides the changes in the law, the increased accounting disclosures, and practically the whole of the business transactions being scrutinized under the GST system are factors impossible to ignore.
The strengthening of the institutional framework post-1985 has helped improve the quality of corporate accounting and transparency, with limited scope for abusive practices. The cases of outright frauds are an exception and no system can deal with them.
Presently, companies are required to report the adjustments to the reported profits to arrive at the tax provision in a transparent fashion. This takes away any prospect of fiddling with the tax computation or slipping in some questionable exclusions while paying the tax. The notes to the accounts of the biggest companies listed on the bourses show that there is hardly any complexity in the process of working out the tax provisions.
There are other schedules that list out in great detail how the deferred tax asset and liability changes over time and insulates this exercise of any intended or unintended manipulation.
The line items in today’s corporate tax working is but a fraction of what a tax manager of 1985 dealt with! Yet, surprisingly, the industry associations like the CII that have clamored for the ease of doing business, have seldom argued for eliminating this excess in the compliance domain.
Call for adequate debate
Unlike in the U.K. where the Office of Budgetary Responsibility (OBR) periodically evaluates the cost-benefit of various compliance requirements, India has failed to accommodate an independent agency for such exercises. The entire policy-making has been kept within the close confines of the North Block. Even the latest Income tax Bill has been conceived and birthed by the midwives there and not exposed to the potential infections of a public review in its formation!
However, the need for the tax audit to survive post the historic simplification, chopping off many thousand words and eliminating irksome phrases like ‘notwithstanding’, needs adequate debate. In this milieu, the two Cinderella bodies that flank the more politically- connected ICAI have flung their hats in the ring to get a share of the tax audit pie! Between the two, ICMAI( née, ICWAI) may have a sound basis to be invited to the party.
Costing as a discipline failed to get its due place under the sun thanks to the dominance that ICAI gained over time and a less than flattering image of the ICWAI. Cost auditing was a pivot in the days when the price control regime was in full play in commodities like steel, cement, paper, sugar, medicines, textile, to name a few. With liberalization and the government stepping back from this ideology, the domain of cost accounting lost its footing. Its sheen faded being seen as a relic of the permit, licence, control era. With the result that many companies that flaunt great IT systems to run its business lack the basic data capture necessary to look at the product or activity level cost and profitability.
A cost audit when carried out by a competent professional carries a lot more insight for an audit committee to draw comfort as the accounting numbers link to the business activities, something not present in a financial audit!
The ICSI managed to catch the tail wind of the corporate governance tide and found its place in the sun with a compulsory reporting and audit that tabulates many facts which any company should be able to self-certify. The current secretarial audit content is unlikely to hold the attention of even a serious reader of an annual report.
The ICAI rushing to assert their primacy over certification and attestation is actually a good occasion to assess if it has delivered well in the core sphere of audits. The troubling data that stares one in the face is the write-offs that the banking sector has seen in the recent years.
The loans written off were not the ones given to agriculturists, artisans and poor vegetable vendors or the unorganized sectors of the economy. They represented some of the top corporations which were audited by leading CAs right through the year, reporting figures every quarter!
How often does a President of the ICAI talk about the failure of audits, both at the banks and of the borrowers, which has drained so much wealth that belonged to the common man into the hands of the ugly rich by diversion of funds and window dressed accounts?
A contradiction?
Equally, the ICAI has enough on its plate to focus on audit quality improvement given the rash of adverse NFRA findings in many audit file inspections. The continuance of the tax audit requirement in the new Bill shows that there has been lacking an effort to overhaul the tax law in a meaningful way beyond a few cosmetic changes to get some favorable press coverage. If it is true that the new law is simple, then having a tax audit is a contradiction!
As per the latest figures available for financial year 2022-23, out of a total number of 10,75,866 companies that filed the returns, just 5,498 companies, less than 0.6% of the total, contributed 73% of the taxes paid i.e.Rs. 5.2 tn out of Rs. 7.16tn of total corporate taxes collected for that year. This shows that the bulk of the taxes come from a small set of corporates that may be well equipped to present the details with no value added by an additional audit carried out.
In the process of enacting the new law, the Government can think of incentivizing disclosure of contentious claims by a taxpayer so that all the cards are upfront laid on the table and in the event of a disagreement the appeal route can resolve the question.
The main challenge before the direct tax system is the level of uncollected taxes which has more than tripled since 2013 and reached a staggering amount of Rs.28.59 tn as per the latest budget documents. If there is a role for the three institutes to play it is in helping the government to speed up the recovery of this humongous sum! Coupled with the above is the issue of black money and tax evasion which appears in no mood to abate. The data on income and wealth disparity in the country as captured in various studies clearly indicate a significant level of tax evasion as the present levels of collection do not correlate to the wealth and income data. There is no evidence of any of the measures like demonetization etc., having achieved a significant breakthrough in the matter.
The honchos of the three institutes can butt their heads on deliberating upon these bigger issues facing the system than vie for the tax audit which has lived out its time.