ICAI plans guidelines to plug loopholes in audit

First, the Institute will issue a specific guidance note on tax audits of charitable institutions later this month or early next month, followed by another guidance note on tax audits in general, including changes to reporting obligations and formats Will be may come in the Union Budget, said a person familiar with the development.

The guidance note on charitable institutions assumes significance as the Income Tax Department is tightening reporting obligations for these institutions seeking tax exemption.

The government does not want these structures to be used to misuse tax exemptions given to genuine charitable organizations.

The income of the trust from property held for charitable or religious purposes and voluntary contributions received for these purposes are tax-free under the Income Tax Act subject to riders.

As part of their tax returns, charitable institutions are required to file their audited accounts.

If the trust’s total income exceeds the basic exemption limit, it requires a tax audit.

The guidance note will include do’s and don’ts for auditors.

“The guidance note will include suggestions from the regulators and is not just for chartered accountants. The Income Tax department also relies on it,” said the person cited above.

The second guidance note on tax audit is likely to come generally after the Union Budget for FY24 to keep auditors updated about the expectations of parliamentarians.

The tax department has, over the years, tightened regulatory oversight of trusts claiming tax exemptions.

In addition to the tax audit report, these entities will have to make detailed disclosures about their religious or charitable purpose, whether there has been any change, the source of income and their use and whether conditions for tax relief have been complied with.

Trusts also have to provide details about their beneficial owners.

Detailed reporting will help the tax authorities ensure that only those entities that meet the conditions and use the funds for their specified purpose get tax exemption.

The focus of the auditor along with the tax authority will be on the goals of the institution, the source of its funds and their use.

The tax department has, over the past few years, carried out searches in several states, including Maharashtra, Karnataka, Tamil Nadu and West Bengal, to probe cases of alleged diversion of funds from educational institutions run by trusts that enjoy tax exemptions.

Tax audit helps the assessing officers to satisfy themselves about the genuineness of the claim of exemption and to ensure that the conditions are fulfilled.