Tax Audit (Section 63)

What Is a Tax Audit?

A tax audit is a mandatory examination of accounts required under section 63 of the Income-tax Act, 2025 (section 44AB of the Income-tax Act, 1961). It applies to businesses whose total sales, turnover, or gross receipts exceed INR 1 crore in a financial year, and to professionals whose gross receipts exceed INR 50 lakh. The audit must be conducted by a practicing Chartered Accountant (CA), who verifies the taxpayer's books of account, certifies the correctness of income computation, and reports findings in prescribed forms (Form 3CA or 3CB, accompanied by Form 3CD).

For foreign companies operating in India — whether through a wholly owned subsidiary, a branch office, or a permanent establishment — the tax audit is one of the most critical annual compliance obligations. Unlike a statutory audit under the Companies Act, 2013, which focuses on whether financial statements give a "true and fair view," the tax audit is specifically designed to verify compliance with Income-tax Act, 2025 provisions, identify disallowances, and ensure that the correct taxable income is reported to the Income Tax Department.

The tax audit report must be filed electronically on the Income Tax e-filing portal on or before September 30 of the assessment year (or October 31 for assessees subject to transfer pricing audit under Section 172 of the Income-tax Act, 2025 (section 92E of the Income-tax Act, 1961)). For tax years beginning on or after 1 April 2026 the consequence of non-compliance is a fee under section 428(c) of the Income-tax Act, 2025 (section 271B of the Income-tax Act, 1961) — INR 75,000, or INR 1,50,000 in the cases that provision specifies — not the 0.5%-of-turnover penalty that section 271B of the Income-tax Act, 1961 imposed for earlier years.

Legal Basis

• Section 63 of the Income-tax Act, 2025 — The core provision mandating audit of accounts for persons carrying on business or profession whose turnover or gross receipts exceed prescribed thresholds. Its predecessor, section 44AB of the Income-tax Act, 1961, was inserted by the Finance Act, 1984, effective from AY 1985-86, and continues to govern tax years beginning before 1 April 2026.
• Section 58 of the Income-tax Act, 2025 (sections 44AD and 44ADA of the Income-tax Act, 1961) — Presumptive taxation schemes for small businesses (turnover up to INR 2 crore/INR 3 crore with 95%+ digital) and professionals (receipts up to INR 50 lakh/INR 75 lakh with 95%+ digital). Opting out of presumptive taxation triggers mandatory tax audit if income exceeds the basic exemption limit.
• Section 428(c) of the Income-tax Act, 2025 (section 271B of the Income-tax Act, 1961) — Prescribes the consequence for failure to get accounts audited. It is a fee, not a penalty: INR 75,000, or INR 1,50,000 in the cases that provision specifies. Under section 271B of the Income-tax Act, 1961, which still governs tax years beginning before 1 April 2026, the amount was a penalty of 0.5% of total sales, turnover or gross receipts, capped at INR 1,50,000.
• Rule 6G of the Income Tax Rules, 1962 — Prescribes Forms 3CA, 3CB, 3CD, and 3CE for reporting tax audit findings.
• ICAI Guidance Note on Tax Audit (Revised 2025) — The Institute of Chartered Accountants of India's comprehensive guidance for auditors, including stricter reporting norms and GST reconciliation under Clause 44.

Who Needs a Tax Audit?

The applicability of tax audit under section 63 depends on the nature of activity, turnover level, and whether presumptive taxation schemes apply.

Turnover Thresholds

The INR 10 crore threshold for businesses applies only when at least 95% of all receipts and 95% of all payments during the previous year are made through banking channels or other prescribed electronic modes. Cash receipts and cash payments each must not exceed 5% of total receipts and total payments respectively. This digital threshold, introduced by the Finance Act, 2020, is particularly relevant for foreign companies whose India operations are largely cashless.

Entities Subject to Tax Audit

Tax audit applies to every "person" under the Income-tax Act, 2025 — individuals, HUFs, partnership firms, LLPs, companies (including foreign companies), and associations of persons. For foreign companies, the following India presence forms trigger tax audit if turnover thresholds are met:

• Indian subsidiary company — A private limited company incorporated in India is subject to both statutory audit under the Companies Act, 2013, and tax audit under section 63
• Branch office — A foreign company's branch office in India must file a separate income tax return and is subject to tax audit on its Indian turnover
• Permanent establishment (PE) — If a foreign company has a PE in India under the applicable DTAA, the profits attributable to the PE are taxable, and the PE's turnover determines tax audit applicability
• Project office — A project office executing contracts in India is treated similarly to a branch for tax audit purposes

Form 3CA vs Form 3CB: Which Form Applies?

The choice between Form 3CA and Form 3CB depends on whether the taxpayer is already required to get accounts audited under any other law.

For a foreign company's Indian subsidiary or branch, Form 3CA-3CD is almost always the correct combination, because the entity is already subject to statutory audit under the Companies Act. Form 3CB-3CD is used by proprietorships, unregistered partnership firms, and professionals who have no other audit mandate.

Form 3CD: The Statement of Particulars

Form 3CD is the substantive document — a detailed 44-clause statement that accompanies either Form 3CA or 3CB. Key clauses relevant to foreign-owned entities include:

• Clause 4: Whether the assessee is liable to pay indirect tax (GST); if yes, the registration number and reconciliation with GST returns
• Clause 15: Amounts not allowable under section 36 of the Income-tax Act, 2025 (section 40A(3) of the Income-tax Act, 1961) — cash payments exceeding INR 10,000
• Clause 22: Payments to Micro and Small Enterprises under MSMED Act — delayed payments exceeding 45 days are disallowed
• Clause 29: Amounts deemed as profits under provisions such as sections 48 and 49 of the Income-tax Act, 2025 (sections 33AB and 33ABA of the Income-tax Act, 1961)
• Clause 30: Details of transfer pricing adjustments and international transactions
• Clause 36A: Details of TDS/TCS compliance — amounts on which tax was deducted at source and deposited
• Clause 44: GST turnover reconciliation — comparison of turnover reported in the income tax return with GST returns (GSTR-9/9C)

Due Dates and Penalties

Filing Timeline

For FY 2025-26 (AY 2026-27), the tax audit report must be filed by September 30, 2026 for standard cases and October 31, 2026 for transfer pricing cases. The Chartered Accountant files the report electronically on the Income Tax e-filing portal, and the assessee must log in and approve the report before the ITR can be filed.

Consequence of Non-Compliance

Under section 428(c), failure to get accounts audited or furnish the tax audit report attracts a fee of:

• INR 75,000; or
• INR 1,50,000 in the cases that provision specifies

The shift from penalty to fee matters: a penalty required a show-cause notice and an adjudication process, with the assessee having a right to prove "reasonable cause" under section 470 of the Income-tax Act, 2025 (section 273B of the Income-tax Act, 1961), while a fee is mechanical and reduces litigation. For tax years beginning before 1 April 2026 the older measure still applies — a penalty under section 271B of the Income-tax Act, 1961 of 0.5% of total sales, turnover or gross receipts, capped at INR 1,50,000.

How Tax Audit Affects Foreign Companies in India

Foreign companies operating through any India presence face unique tax audit considerations:

Branch Offices and PEs

A foreign company's branch office in India is required to maintain separate books of account for its Indian operations under Section 44 of the Companies Act, 2013 (read with Section 381). If the branch's Indian turnover exceeds INR 1 crore (or INR 10 crore with 95%+ digital transactions), it must undergo a tax audit. The branch must also obtain a PAN and a TAN in India. Branch profits are taxed at 35% plus applicable surcharge and cess, making accurate income computation under the tax audit critical.

Indian Subsidiaries

A wholly owned subsidiary incorporated as a private limited company in India undergoes both statutory audit (Companies Act) and tax audit (Income Tax Act). The tax auditor under Section 63 can be a different CA from the statutory auditor. For companies taxed under the new regime at 22% (section 200 read with section 205(1) of the Income-tax Act, 2025; section 115BAA of the Income-tax Act, 1961) or 15% (section 201 (Table, Sl. No. 1) read with section 205(2) of the Income-tax Act, 2025; section 115BAB of the Income-tax Act, 1961), the tax audit ensures that conditions for the concessional rate — such as not claiming certain exemptions or deductions — are properly verified.

Transfer Pricing Overlap

Foreign-owned entities with international transactions exceeding INR 1 crore in aggregate value must also undergo a transfer pricing audit under Section 172 (reported in Form 48 (formerly Form 3CEB)). This extends the tax audit report due date to October 31 and the ITR due date to November 30. The tax auditor and the transfer pricing auditor are typically different professionals, but their reports must be consistent.

Tax Audit vs Statutory Audit

This distinction is critical because foreign investors often confuse the two:

A company that undergoes statutory audit does not automatically get a tax audit. These are separate engagements with separate reports, separate scope, and separate deadlines (though the dates often coincide). The statutory audit must be completed first, as the tax auditor in Form 3CA references the statutory audit report.

Common Mistakes

• Confusing statutory audit completion with tax audit compliance. Many foreign-owned companies assume that because their statutory auditor has signed off, the tax audit is done. These are separate engagements — completing the statutory audit does not satisfy Section 63. The tax audit report (Form 3CA/3CB + 3CD) must be separately filed on the Income Tax portal and approved by the assessee.
• Miscounting the 95% digital threshold for INR 10 crore relief. The condition requires that both receipts AND payments are 95%+ digital. Companies that receive all payments digitally but make some petty cash disbursements exceeding 5% of total payments lose the INR 10 crore threshold and revert to the INR 1 crore limit — a common trap for foreign companies unfamiliar with India's cash payment ecosystem.
• Missing the presumptive-taxation opt-out trap. If a business opted for presumptive taxation under section 58 and then opts out, it cannot re-enter the scheme for 5 years. During this lock-out period, tax audit is mandatory if total income exceeds the basic exemption limit — even if turnover is well below INR 1 crore. Foreign-owned entities with small India operations frequently stumble on this.
• Filing the wrong form — 3CB instead of 3CA. An Indian subsidiary company is required to be audited under the Companies Act, so Form 3CA applies. Filing Form 3CB (meant for entities with no other audit mandate) is technically incorrect and can trigger a defective return notice under section 263 of the Income-tax Act, 2025 (section 139(9) of the Income-tax Act, 1961).
• Ignoring MSME payment disallowances in Clause 22 of Form 3CD. Payments to Micro and Small Enterprise vendors that are delayed beyond 45 days are disallowed as a deduction under section 37 of the Income-tax Act, 2025 (section 43B(h) of the Income-tax Act, 1961). Foreign companies often do not track vendor MSME status, leading to unexpected disallowances flagged in the tax audit — and a higher tax liability.

Practical Example

Nordvik Technologies AS, a Norwegian software company, operates in India through two structures: (1) Nordvik India Pvt Ltd, a wholly owned subsidiary in Bangalore with annual revenue of INR 8.5 crore, and (2) a project office in Mumbai executing a 2-year systems integration contract worth INR 4.2 crore.

Nordvik India Pvt Ltd:

• Revenue: INR 8.5 crore. All client payments received via bank transfer (100% digital). However, the company makes INR 28 lakh in cash payments (petty cash, local vendor payments) out of total payments of INR 5.2 crore — cash payments = 5.4% of total payments, exceeding the 5% threshold
• Result: The INR 10 crore digital threshold does NOT apply because cash payments exceed 5%. The applicable threshold is INR 1 crore. Since revenue (INR 8.5 crore) exceeds INR 1 crore, tax audit under Section 63 is mandatory
• Form: Form 3CA-3CD (because the company is already audited under the Companies Act)
• The subsidiary also has international transactions with the Norwegian parent totaling INR 3.2 crore (management fees + software license). Transfer pricing audit under Section 172 is required. Due date for tax audit report: October 31. ITR due date: November 30

Mumbai Project Office:

• Contract receipts in FY 2025-26: INR 4.2 crore (all received via SWIFT/bank transfer)
• Total payments: INR 3.1 crore (all via bank transfer — 100% digital)
• Result: Both receipts and payments are 100% digital, so the INR 10 crore threshold applies. Since INR 4.2 crore is below INR 10 crore, tax audit is NOT required for the project office
• However: The project office still needs a statutory audit under the Companies Act. The statutory audit alone does not constitute a tax audit

If Nordvik India Pvt Ltd had reduced cash payments to below 5% (under INR 26 lakh), its revenue of INR 8.5 crore would have fallen below the INR 10 crore digital threshold, and tax audit would not have been required — saving approximately INR 1.5-3 lakh in audit fees and significant management time.

Key Takeaways

• Tax audit under Section 63 is mandatory for businesses with turnover exceeding INR 1 crore (INR 10 crore with 95%+ digital transactions) and professionals with gross receipts above INR 50 lakh (INR 75 lakh with 95%+ digital)
• It is distinct from statutory audit — both are required for companies, but they serve different purposes and require separate reports
• Foreign companies must file Form 3CA-3CD (not 3CB) since their Indian entities are already subject to statutory audit under the Companies Act
• The tax audit report due date is September 30, extended to October 31 for transfer pricing cases — and the ITR can only be filed after the audit report is approved
• Non-compliance attracts a fee under section 428(c) of INR 75,000, or INR 1,50,000 in the cases that provision specifies — a fee, not a penalty
• The 95% digital threshold for the higher INR 10 crore limit requires both receipts AND payments to be digital — failing either test reverts the threshold to INR 1 crore

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