Ensuring GST Compliance through Income Tax Law: Know about Clause 44 in Tax Audit Report


Ensuring GST Compliance through Income Tax Law: Know about Clause 44 in Tax Audit Report


Under Section 44AB of the Income-tax Act, Assessee has to get his books of accounts audited if the turnover exceeds a certain threshold limit or if the profit offered for taxation is lower than the prescribed percentage.

The Income Tax Act, 1961 authorizes the Chartered Accountant conducting the tax audit to give his reports & observation in the form of a tax audit report at the e-filing portal of Income-tax in Form No. 3CA/3CB and 3CD.

The new mechanism by the Government to control the GST compliance is by using the provision of the income tax Act. Now, clause 44 of the tax audit report in Form No. 3CD requires the auditor to give the Break-up of the total expenditure of entities registered or not registered under the GST needs to be disclosed.  Year after year, the reporting requirements are increasing and there are numerous new reporting clauses which have been incorporated in the last few years.

With effect from 01.04.2022, the tax auditor would be required to give the break-up of total expenditure of entities registered or not registered under the GST. Earlier, it was made applicable from 2020.  Further, during covid, its implementation was again deferred till 01.04.2022. It was kept in abeyance till 31st March 2022 vide CBDT Circular No. 5/2021 dated 25.03.2021. Now, it has been effective and the tax auditor would be required to ensure the reporting in clause 44 of Tax Audit Report in Form No. 3CD. Let us know about clause 44 which is reproduced hereunder:

Total Amount of expenditure incurred

during the year

Expenditure in respect of entities registered under the GST Expenditure relating to entities not registered under GST


Relating to the Goods or Services exempt from GST Relating to the entities falling under the composition scheme Relating to the other registered entities Total Payment to Registered entities

The clause is requiring the reporting of the total expenditure of assessee whether registered or not registered under the GST. Further, whether the amount is exempt or taxable is required to be examined. Further, the amount paid to the person opting the composition scheme would be required to be aggregated. Total payment to registered entities vis a vis non registered entities would be required in the reporting clause. The reporting will be a terrible exercise and would involve heavy time and energy in reporting of this. Rather, every item of the Profit & Loss account would be required to be reported in clause No. 44.

Being statutory requirements on each and every expense, the tax auditor cannot adopt the “Test check” basis for its reporting. It means that bigger is the volume of the assessee transactions, higher is the responsibility of compilation and reporting. The reporting requirements may result in higher cost to the taxpayer if the auditor decides so.

The various issues that could emerge as a result of new reporting requirements of Point No. 44 reporting could be as under:

  1. What is the meaning of “total” expense during the year? Whether capital expenditure would also be expenditure for the purpose or only items forming the part of P & L A/c would be there? Whether reimbursement of expenses to the buyer or by the supplier would form the part of the total expenditure?
  2. Similarly, if the payment is done in one year and the bills are received in next year, what would be the repercussion in clause No. 44?
  3. Whether advance payment done would be required to be reported if the bill is received in the next FY?
  4. How to collect the information of expenses with regard to the GST dealers? If from Form 2A/ 2B/ 3B, then what if the assessee/vendor is not filing the returns?
  5. How to find composite dealers?Person may have issued the bills in the wrong mode?

What if the GST number of the person issuing bill is issued and the registration was cancelled prior to its issuance?

  1. What if the credit note is issued as a post balance sheet date?
  2. How to work out the figure for “Total Payments”? FIFO basis, op. balances to be considered?
    – Who will be responsible for the creation of this record?

The purpose of a 3CD is to report that the income has been computed as per the provisions of law and to give disclosure of transactions directly impacting the assessable income. However, clause 44 is incorporated to ensure that the data can be used by the GST Department.

It is true that expenses cannot be disallowed on the basis of this reporting itself. The question remains as to why not continue with the GST audit for this reporting rather than cast an additional burden and responsibility on the Tax Auditor.