Books of Accounts in India: Compliance Requirements, Exemptions, and Key Regulations

What are the limits, exemptions & exceptions of maintaining Books of Accounts in India under Companies Act, 2013, IT Act, 1961 & CGST Act, 2017?

1.???? The Companies Act, 2013.

Section 128: Books of Accounts, etc. to be kept by Companies

Every company incorporated under the Companies Act, 2013 shall prepare and maintain books of accounts as per Schedule III of the Companies Act, 2013, giving a true and fair view of its business affairs. The books of accounts shall be kept at the registered office of the Company, unless:

-Board of Directors (“BoD”) agree to maintain books at any other place; AND

-The Registrar is informed of the same within Seven (7) days of such resolution via a notice.

Further, information relating to a Branch may be maintained at such branch provided periodical returns containing information are sent to the Head Office in prescribed form. The company must maintain boos of accounts in accordance with the aforesaid provisions for a period ‘not less than 8 financial years.’ The language used in the section implies that Central Government may by order prescribe a higher period preserving books of accounts.

Section 129: Preparation of Financial Statements.

Financial Statements, in the context of company law, include Balance Sheet, Statement of Profit or Loss, Statement of Changes in Equity, Cash Flow Statement, deeds, vouchers etc. However, Companies which fall under the purview of Section 2(85) of the Companies Act, 2013, are exempt from preparing a Cash Flow Statement.

Section 2(85) of the Companies Act, 2013 defines Small Companies. Small Companies are the companies having their Share Capital and Turnover below 4 crore and 40 crores respectively. Thus, the companies satisfying this criterion of 4 crores and 40 crores will be exempt from preparing a Cash Flow Statement.

2.???? The Income Tax Act, 1961

Unlike the Companies Act, 2013, all the taxpayers are not mandated to maintain books of accounts under the Income Tax Act, 1961. Only when the income of a person crosses a certain threshold limit, he will be required to maintain books of accounts.

Maintenance of ‘Specified Books of Accounts’ by ‘Specified Professionals’

Following Professionals are covered under this provision:

·???????? Legal (i.e. Lawyer, Judge, Arbitrator, Mediator etc.)

·???????? Medical

·???????? Engineering

·???????? Architectural

·???????? Accountancy

·???????? Technical consultancy

·???????? Interior decoration

·???????? Authorised Representative (one who charges fees for representing someone before the tribunal or any authority)

·???????? Film artist (producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designers.

·???????? Company Secretary (CS)

If the gross receipts of the aforesaid professionals exceed INR 150,000 in any of the 3 preceding years, or likely to exceed INR 150,000 in case of newly set up business or profession, then such professionals have to compulsorily maintain ‘specified books of accounts.’

Meaning of Specified Books of Accounts

As per Rule 6F, specified books of accounts include the following:

·???????? Cash Book

·???????? Journal

·???????? Ledger

·???????? Copies of bill of receipts or expenses

·???????? Daily case register with details of patients, services rendered, fees received, and date of receipt (persons carrying on medical profession)

·???????? Details of stock of drugs, medicines, and other consumables used (persons carrying on medical profession)

In case income of the assessee specified above does not exceed INR 150,000 and he does not fall within the exemption limit, then also he has to maintain such books of accounts from which the assessing officer can complete his inspection of books.????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Special Cases

A taxpayer who has paid tax under the following Sections is exempted from maintaining books of accounts and consequently also get exempted from audit:

Section 44AD

?Section 44AD is presumptive Taxation for small businesses. It can be used only by resident individuals, HUFs, Partnership firms (not LLP) engaged in any business. But this scheme cannot be used by such taxpayer who has made any claim towards deductions u/s. 10A/10AA/10B/10BA or 80HH to 80RRB in the Financial Year. It cannot be used by persons engaged in the following businesses:

·???????? Business of plying, hiring or leasing goods carriages referred to in Section 44AE.

·???????? Agency Business

·???????? Commission or Brokerage

·???????? Professions referred to in Section 44AA (“Specified Professions”).4

The threshold under this Section is 2 crores of turnover (or 3 crores in case cash receipt during the financial year does not exceed 5% of the total receipts).

Liability u/s 44AD = Cash Turnover 8% + Cheque, DD, Other Turnover 6%

One point to be noted in this regard is that the entities who have undergone international transactions or specified domestic transactions with their associated enterprises fall under the purview of transfer pricing provisions u/s 92A to 92E of the Income Tax Act, 1961, and therefore, cannot opt for Section 44AD.

Section 44AE

Section 44AE is presumptive taxation for those individuals, HUFs and Partnership firms (not LLPs) who are engaged in the business of plying, hiring and leasing vehicles and who do not own more than 10 vehicles at any times during the Previous year.

It can be summarized through the following flowchart:

Section 44B read with Section 172 of the Income Tax Act, 1961

Section 44B is a part of the presumptive taxation scheme under the Income Tax Act. It deals with the taxation of profits on shipping businesses carrying passengers or goods to or from an Indian port in relation to non-residents or foreign companies.

Any ship belonging to or chartered by a non-resident that carries passengers, livestock, mail or goods shipped at a port in India. Any amount received in relation to such carriage shall be treated as income from the shipping business. Such income also includes demurrage charges or handling charges in relation to such carriage.

Presumptive Taxable Income = Total Revenue * 7.5%

Section 172 of the Income tax Act gives the power to the assessing officer to collect taxes from the non-resident leaving India in the previous year itself, if he believes that such non-resident person will not come to India.

Section 44BB

This section is meant for profits and gains of the NRI engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. The profits and gains of the assessee who is NRI is calculated at the rate of 10 percent of the amount paid or payable in India or outside India for the mineral oils in India. The profits and gains of the NRI is calculated at the rate of ten percent of the amount received or deemed to be received in India for the mineral oils outside India. This section is not applied where the provisions of section 42, 44D, 44DA, 115A or section 293A apply. An assessee may claim lower profits, but he has maintain such books of accounts and get them audited by a CA and his case shall be decided u/s 143(3) of the Act.

Plant includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment Mineral oil includes petroleum and natural gas.

CGST Act, 2017

Every person registered under GST has to keep and maintain at his Principal Place of business the following records:

·???????? Production and Manufacture of goods and services.

·???????? Inward and outward supply of goods or services or both.

·???????? Stock of goods

·???????? Input Tax Credit availed

·???????? Output tax payable and paid.

·???????? Other such particulars as may be prescribed.

The principal place of business is the place mentioned in the GST Registration Certificate of such person. If the registered person has more than one place of business, then accounts relating to each place of business shall be kept at such place of business. If any records are found relating to the entity at any premises, they shall be deemed to be maintained by the entity, unless the contrary is proven. It must be noted that the CGST Act permits the maintenance of electronic records as the books of accounts.

The entries in the records so maintained by the entity must not be altered. In cases where the entries need alteration due to errors, the incorrect entries must be scored out under attestation and only then the new entries should be recorded. In cases where the records are maintained electronically, the entity has to maintain an edit log of the same.

The Commissioner of Indirect Tax may specify other records to a specific industry or all the Registered Persons. Thus, it is also important to check whether commissioner of a particular state has notified any other such books.

Production of Records on Demand: Any entity shall, on-demand, produce the records to a proper officer. The records, if maintained in electronic format, shall be produced either in electronic readable format (softcopy) or in hardcopy. The registered person shall also provide the details of username, password, and explanation for the use of such password.

Time Period: Time limit for maintenance of books under the CGST Act, 2017 is 72 months (or 3 years) from the due date of furnishing Annual return (GSTR 9B). Further, a person under appeal or revision of accounts must maintain them for longer period as prescribed by order.

Audit of books by a Chartered Accountant/Cost Accountant: If turnover of the entity exceeds 2 crore rupees, then it is required to get its books of accounts audited by a Chartered Accountant or a Cost Accountant. Such person has to furnish a copy of Annual Return (Form GSTR 9B) and a Reconciliation Statement (Form GSTR 9C).

Relaxation from Audit of Books of Accounts: It must be noted that the books of accounts of the company are not required to be audited in case the registered person is a Branch of Government whose books are subject to Audit by the Comptroller and Auditor General of India. However, this exemption does not apply to Government Companies, entities or Authorities, as they are NOT branches of government.

Penalty/Consequences of non-compliance: If a registered person under the Goods and Services Tax (GST) fails to account for goods or services in the prescribed manner, the tax authorities (referred to as the “proper officer”) have the authority to determine the amount of tax payable on those unaccounted goods or services. The process for determining this tax liability is similar to the procedures outlined in sections 73 or 74 of the CGST Act, 2017.

An entity may or may not be required to maintain certain books depending on its nature of business under the CGST Act, 2017. In some cases, an entity may be required to maintain even some additional records depending on its nature of business. The Statutory provisions with regard to the same is as follows:

In conclusion, books of accounts in India are governed by the Companies Act, 2013, the Income Tax Act, 1961, and the CGST Act, 2017. Each act provides particular requirements and exemptions based on company size, income threshold limits, and a particular kind of business. The result will be financial transparency and relief for the smaller ones. Commercial ventures need to be updated as to what one's obligations are, which will avoid possibilities of penalties.

For professional guidance, contact Water and Shark tax experts for further details!