Clause 44 of Tax Audit Report Form 3CD

Column (1) of the table in Clause 44 of Tax Audit Report Form 3CD mentions the serial number, which suggests that expenditures are required to be reported in a head-wise manner. However, the guidance note of the Institute of Chartered Accountants of India (ICAI) states that the heading of the table, which starts with the words "Breakup of total expenditure", indicates that the total expenditure, including purchases, should be given in the above format. This suggests that head-wise or nature-wise expenditure details are not envisaged in this clause.

In practice, most assessees report their expenditure in a head-wise manner, even though it is not mandatory. This is because it is easier to understand and analyze the data in this format. However, it is important to note that the assessee is free to report the expenditure in any manner they choose, as long as the information is accurate and complete.

The term "total expenditure" in Clause 44 of Tax Audit Report Form 3CD includes all types of expenditure incurred by the assessee, whether it is revenue expenditure or capital expenditure. Revenue expenditure is expenditure that is incurred to generate revenue, such as the cost of goods sold, salaries, and rent. Capital expenditure is expenditure that is incurred to acquire or improve assets, such as the purchase of machinery and equipment.

The guidance note of the Institute of Chartered Accountants of India (ICAI) states that "separate reporting of capital expenditure will help in easy reconciliation". This is because capital expenditure is usually amortized over a period of time, while revenue expenditure is incurred in the current year. By separately reporting capital expenditure, the tax auditor can easily determine the amount of expenditure that has been amortized in the current year.

In practice, most assessees report their expenditure in a head-wise manner, even though it is not mandatory. This is because it is easier to understand and analyze the data in this format. However, it is important to note that the assessee is free to report the expenditure in any manner they choose, as long as the information is accurate and complete.

Column (3) of the table in Clause 44 of Tax Audit Report Form 3CD requires to report how much of the total expenditure as reported in Column (2) is related to goods or services exempt from GST. In other words, this column requires to disclose expenditure exempt under GST.

For example, the following expenditures are exempt from GST: * Alcoholic liquor * Petroleum crude * High speed diesel oil * Motor spirit * Natural gas * Aviation turbine fuel

The assessee is required to determine the amount of expenditure that is exempt from GST by referring to the GST law and the relevant notifications issued by the government. The assessee is also required to keep documentary evidence to support the amount of expenditure that is claimed to be exempt from GST.

The information in Column (3) can be taken from the GST returns of the entities, the accounting records of the assessee, or Schedule III to the Central Goods and Services Tax Act, 2017.

Column (4) of the table in Clause 44 of Tax Audit Report Form 3CD requires to report how much of the total expenditure as reported in Column (2) is related to entities falling under the composition scheme of GST. In other words, this column requires to disclose expenditure incurred with GST composition dealers.

Major taxpayers do not have this information readily available with them. However, they can use the autopopulated GSTR-9 for considering the amount of purchases from composition dealers. The GSTR-9 is a monthly return that is filed by all registered taxpayers under GST. It contains information about the taxpayer's supplies, purchases, and input tax credit.

The GSTIN of the supplier can also be verified on the GST portal to know the status of the supplier (composition dealer or casual taxable person, etc.). However, there is no bulk verification facility available either on the GST portal or on the Income Tax Portal for this.

The assessee can also obtain the information from the supplier's invoice. The invoice should contain the GSTIN of the supplier and the statement "Composition Dealer" if the supplier is a composition dealer.

The assessee is required to keep documentary evidence to support the amount of expenditure that is claimed to be incurred with GST composition dealers.

Column (5) of the table in Clause 44 of Tax Audit Report Form 3CD requires to report how much of the total expenditure as reported in Column (2) is related to entities registered with GST. In other words, this column requires to disclose expenditure incurred with GST registered dealers other than composition dealers.

The information in this column can be compiled from the purchase register or the GSTR 3B ITC register. The purchase register is a record of all purchases made by the assessee, and the GSTR 3B ITC register is a record of the input tax credit claimed by the assessee.

The GSTR-2A/2B report is a monthly summary of the supplies made and received by the assessee. It can be used to verify the information in the purchase register and the GSTR 3B ITC register.

The assessee is required to keep documentary evidence to support the amount of expenditure that is claimed to be incurred with GST registered dealers other than composition dealers.

Here are some of the documents that can be used as evidence:

• Purchase invoices
• GST returns of suppliers
• GSTR-2A/2B report
• Reconciliation statement between the purchase register and the GSTR 3B ITC register

Column (6) of the table in Clause 44 of Tax Audit Report Form 3CD requires reporting how much payment was made to GST-registered entities in the previous year. This column is non-editable in the tax audit report, and it is the total of amounts specified in columns (3), (4), and (5).

The amount specified in this column should not be interpreted as the amount actually paid by the assessee. The amount payable is also included in this column. For example, if the assessee has made a purchase from a GST-registered entity but has not yet paid the full amount, the amount payable will be included in this column.

The assessee is required to keep documentary evidence to support the amount of payment that is claimed to have been made to GST-registered entities. This evidence can include purchase invoices, GST returns of suppliers, and bank statements.

Column (7) of the table in Clause 44 of Tax Audit Report Form 3CD requires reporting how much of total expenditure as reported in Column (2) is related to entities not registered with GST. In other words, this column requires to the disclosure of expenditures incurred by unregistered persons.

The auditor may obtain/retain the reconciliation prepared by the assessee for verification. The reconciliation should show the following:

• The total amount of expenditure incurred by the assessee.
• The amount of expenditure incurred with GST-registered entities.
• The amount of expenditure incurred with unregistered entities.

The auditor may also ask the assessee to provide other documents to support the information reported in Column (7), such as:

• Purchase invoices from unregistered persons
• Bank statements showing payments made to unregistered persons
• Evidence of the registration status of the suppliers

Additional analysis for certain transactions

Stock transfers, cross charge, or credit distributed through ISD:

Stock transfers, cross charge, or credit distributed through ISD are not considered as expenditure incurred under Clause 44 of Tax Audit Report Form 3CD. This is because tax audit is carried out based on PAN and not GSTIN wise.

Stock transfers are transfers of goods from one location to another within the same legal entity. Cross charge is a method of charging one branch of a company for the services provided by another branch. Credit distributed through ISD is the distribution of input tax credit by an Input Service Distributor (ISD) to its registered clients.

These transactions do not involve any payment to a third party, and therefore, they are not considered as expenditure incurred.

The assessee should exclude these transactions from the purchase register and the GSTR 3B ITC register. They should also be excluded from the amount reported in Column (5) of the table in Clause 44.

Cost of material consumed mentioned in financials

Many taxpayers mention cost of material consumed instead of showing purchases in the financials. This is because the cost of material consumed is the amount of materials that have been used up in the production process, while purchases is the amount of materials that have been bought by the company.

However, for the purpose of Clause 44 of Tax Audit Report Form 3CD, the assessee is required to report the actual amount of purchases made, not the cost of material consumed. This is because the amount of purchases is the amount that has been actually incurred by the company, while the cost of material consumed is an estimate.

To calculate the actual amount of purchases, the assessee needs to consider the opening stock and closing stock of materials. The opening stock is the amount of materials that were in the warehouse at the beginning of the year, and the closing stock is the amount of materials that were in the warehouse at the end of the year.

The formula for calculating the actual amount of purchases is as follows:

Actual purchases = Opening stock + Purchases - Closing stock

Details of Expenditure relating to goods/services falling under composition scheme

if the assessee has not claimed input tax credit (ITC) on the expenditure, it is still required to be reported under Clause 44. This is because the clause requires reporting of all expenditure incurred, regardless of whether ITC has been claimed or not.

The assessee can mention a suitable observation in the tax audit report stating that "Since no ITC has been claimed by the assessee, no reporting has been made under this clause."

However, it is important to note that the assessee should still keep records of the expenditure, even if ITC has not been claimed. This is because the records may be required by the tax authorities for audit or investigation purposes.

Import of Goods on which IGST is paid

Import of goods on which IGST is paid is considered as expenditure incurred by an unregistered person. Therefore, it should be reported in Column (7) of the table in Clause 44.

The assessee should also make a suitable observation in the tax audit report stating that the amount reported in Column (7) includes import of goods on which IGST is paid. This will help to clarify the nature of the expenditure and avoid any confusion.

Here are some of the documents that can be used to support the amount reported in Column (7):

• Import invoices
• Bill of lading
• Bank statements showing payments made to the importer
• IGST payment challan

Import of Services on which recipient is required to pay GST under RCM

Import of services on which the recipient is required to pay GST under the reverse charge mechanism (RCM) is considered as expenditure incurred by an unregistered person. Therefore, it should be reported in Column (7) of the table in Clause 44.

The assessee should also make a suitable observation in the tax audit report stating that the amount reported in Column (7) includes import of services on which GST is paid under RCM. This will help to clarify the nature of the expenditure and avoid any confusion.

Here are some of the documents that can be used to support the amount reported in Column (7):

• Import invoices
• Bank statements showing payments made to the importer
• GST payment challan