Lessons learnt from income tax and central excise audits

An unexpected notice on income tax and central excise audits

The partnership firm that I run with my husband has been scrutinized by the Income Tax and Central Excise departments in the last couple of years. Our firm provides consulting services in engineering and biotechnology to a plethora of clients – many of them international. Our deliverables fall under many different categories and customers as defined in the Income tax and central excise statutes. So our case seemed outwardly complicated.

 

Income tax audits
Income tax audits

 

We were quite nervous when we first received the scrutiny notices. But after successfully concluding the audits, and spending hours interacting with the officers, we have come out wiser and with new-found respect for our bureaucrats. With more and more professionals setting up their own shop, we thought sharing our lessons learnt would be helpful:

Lessons learnt

  1. They are not “out to get you”. It’s easy to picture nameless, faceless bureaucrats as being out on a vengeance to get you and your business. In fact, the officers we met were very professional and only trying to close the cases with the best possible information. Also there was no inkling of any corruption in any of these entities.
  2. You know your business best. The officers appreciated the fact that we knew more about engineering and biotech that they did. As such, it’s helpful to write up a small brief with a spreadsheet that covers broad heads (like “international income” and “domestic vendor expenses”). In our case, this spreadsheet set the tone for all future meetings and became the de-facto reference document which was frequently used to clarify questions. It is best if you prepare this document yourself instead of asking your CA to do it.
  3. Look at the big picture. We spent too much time looking up receipts for meals with clients, and traffic tolls prior to the meetings. In fact, the officers were more interested in the bigger picture and would only look at line items to spot check.
  4. It’s all about the income. The most crucial question in the officers’ minds was the source of our income. Have clear records for invoicing, client contracts, and (most important), incoming bank transactions.
  5. Do not be totally dependent on your CA. Have an idea about some basic tax and excise laws that cover your business. There isn’t anything that cannot be easily googled. Look up and read the sections of the income tax and excise laws that apply to your business – especially if you are claiming any exemptions. In our case, this exercise took about a couple of hours, but prepared us immensely for meetings with officers.
  6. This exercise is a “future business investment”. It’s easy to get frustrated at the lost time and productivity. However, the lessons learnt and rapport established with the various departments come in very handy as we continue our business. The anxiety of what will happen if we get scrutinized is much less and we have made our administration, compliance and accounting more efficient.

Our experience is most relevant for other service professionals like us and may not be helpful for businesses of different size and nature. Still, we hope this helps. Connections can PM me for any further non-sensitive information.

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