5 Major Reasons that may invite an Income Tax Notice

Here are 5 Major Reasons that may invite an Income Tax Notice: Mismatch in Income Reporting Mismatch in income reporting, where ITR data does not match with Form 26AS/AIS or Form 16, can invite an ITR Notice at the time of processing of the ITR itself. Some examples: Mismatch in Salary income reported in ITR, Form 26AS/AIS or Form 16 Mismatch in Deductions/Exemptions reported in ITR, Form 26AS/AIS or Form 16 Income Transactions coming in Form 26AS, but not shown in ITR and TDS Credit claimed. High Value Transactions High-value transactions, especially where your expenditure does not match with your ITR, can invite a Tax Notice. Some examples: High Value of cash Deposit/Withdrawal in your Bank Account A banking company or cooperative bank on which the banking regulation is enforced must report Cash deposits amounting to Rs. 10 lakh or above in more than one account (excluding the current account and time deposit) in a financial year. A banking company or cooperative bank to which the banking regulation is applicable must report Cash deposits or cash withdrawals (including through bearer’s cheque) totalling Rs. 50 lakh or more in a financial year, from one or more current accounts of a person. Large Credit Card spent: Payments above Rs. 1 lakh in cash or above Rs. 10 lakh in any other mode made to pay the credit card bill is reported by the banking company, cooperative bank or other financial institution in SFT with your PAN. High Cash Payments/ Receipts 1. Any person who is liable for audit u/s 44AB of the Act is required to report Receipt of cash payment of more than Rs. 2 lakh for the sale of goods or services of any kind. 2. Non Filing of ITR Non-filing of ITR can invite an income tax notice if it is found that your Income was more than the Slab limit. 3. Large transactions, like the purchase of House property and non-filing of ITR, generally invite Income Tax Notice u/s 147. It is usually advised, if you have purchased House Property or are planning to purchase one, please file your ITR, even if your income is below the slab limit. Claiming Fake Exemption/ Deductions to increase Income Tax Refund Generally, it is a very common practice among salaried taxpayers to claim fake exemptions/Deductions to increase the Income Tax Refund or reduce Tax Liability. With complete matching with Form 16 and automated scrutiny, this can land you in trouble and invite a tax notice. Random ITR Scrutiny u/s 143(2) Random ITR scrutiny u/s 143(2) on the basis of past data, flagged PAN or high value transactions as per the algorithm of the Income Tax Department can also take place. Received Income Tax Notice! What can happen? Summon u/s 133(6) for claiming exemptions or deductions in your ITR: Give a proper reply and submit all the relevant proof on time. File ITR-U and correct the excess exemptions or deductions claimed in your ITR. Scrutiny Notice u/s 143(2) or Income Escaping Notice u/s 147 You cannot file ITR-U now. You need to proceed legally by submitting the reply. Income Tax Officer can levy a Penalty of up to 200%. Filing ITR for 2024-25 Be very careful in ITR filing for the current year. Best to avoid any kind of fake claim or exemption Disclaimer: Views expressed above are the author’s own and do not reflect the publication’s views.

Income Tax Changes- Union Budget 2025

The Union Budget 2025 has introduced revised income tax slabs aimed at providing relief to taxpayers through lower rates and a simplified structure. However, the removal of deductions and exemptions raises concerns about its impact on the middle class’s investment habits and long-term financial goals. Reduced Incentives for Savings Under the old tax regime, deductions under Sections 80C, 80D, and 24(b) encouraged disciplined investments in instruments like PPF, EPF, life insurance, and home loans. The new tax regime eliminates these benefits, potentially reducing motivation for structured savings. Without these incentives, taxpayers may allocate more funds toward discretionary spending rather than securing their financial future. Impact on Future Financial Goals With the absence of tax-saving benefits, middle-class households may struggle to build sufficient retirement savings or plan effectively for major expenses like education and homeownership. The shift away from tax-linked investments could lead to lower financial security in the long run. Changing Investment Patterns While traditional tax-saving investments may decline, individuals might turn to alternative investment options like mutual funds, stocks, and real estate. However, without the push of tax benefits, the habit of systematic long-term investing may weaken. Conclusion The new tax regime simplifies taxation but shifts the responsibility of financial planning entirely onto individuals. Without structured incentives for investment, the middle class may face challenges in achieving long-term financial stability. To counteract this, policymakers may need to introduce alternative measures to encourage disciplined savings and secure future financial goals. Disclaimer: Views expressed above are the author’s own and do not reflect the publication’s views.

Public Provident Fund (PPF) Rules Effective October 2024

*Major Overhaul: Public Provident Fund (PPF) Rules Effective October 2024* The Indian government has introduced significant changes to the Public Provident Fund (PPF) rules, effective from October 2024. These changes aim to streamline the scheme, enhance flexibility, and align it with contemporary financial needs. *Key Changes:* *Increased Investment Limit*: The annual investment limit in PPF has been raised from ₹1.5 lakhs to ₹2.5 lakhs. *Flexible Withdrawal Options*: Partial withdrawals allowed from the 3rd year onwards, instead of the 7th year. *Loan Facility*: Loan facility available from the 3rd year to the 5th year, with reduced interest rates. *Nomination Rules*: Nomination mandatory for accounts opened after October 2024. *Account Closure*: Premature closure allowed after 5 years, subject to conditions. *Interest Calculation*: Interest calculated on the lowest balance between the 5th and the last day of the month. *Premature Withdrawal*: Premature withdrawal allowed for specific purposes (e.g., education, medical emergencies). *Online Services*: Online facility for opening, investing, and withdrawing from PPF accounts. *Other Important Aspects:* - *Tax Benefits*: PPF continues to offer tax benefits under Section 80C. - *Maturity Period*: The maturity period remains 15 years. - *Extension Options*: Account extension options remain unchanged. *Implications and Benefits:* - Increased investment limit attracts more investors. - Flexible withdrawal options enhance liquidity. - Reduced interest rates on loans make borrowing more attractive. - Mandatory nomination ensures smoother succession. *Effective Date:* These changes come into effect from October 1, 2024. *Action Items:* - Review existing PPF accounts and adjust investments accordingly. - Consider taking advantage of increased investment limits. - Familiarize yourself with new withdrawal and loan facilities.

नकद लेनदेन की सीमा – आयकर अधिनियम के तहत नकद भुगतान प्रतिबंध और दंड

वित्त अधिनियम 2017 ने काले धन पर लगाम लगाने के लिए कई उपाय किए और इन उपायों के परिणामस्वरूप, आयकर अधिनियम में एक नई धारा 269ST डाली गई। चूंकि धारा 269ST ने लेन-देन पर प्रतिबंध लगाए हैं, इसलिए प्रति दिन नकद लेन-देन की सीमा 2 लाख रुपये प्रति दिन तक सीमित है। धारा 269ST में कहा गया है कि कोई भी व्यक्ति 2 लाख रुपये या उससे अधिक की राशि (नकद प्राप्ति सीमा) प्राप्त नहीं करेगा:एक दिन में किसी व्यक्ति से कुल मिलाकर; या एकल लेन-देन के संबंध में; या किसी व्यक्ति से एक घटना या अवसर से संबंधित लेन-देन के संबंध में। हालांकि, केंद्रीय प्रत्यक्ष कर बोर्ड (CBDT) ने स्पष्ट किया है कि यह नकद निकासी सीमा बैंकों और डाकघरों से निकासी के लिए लागू नहीं होती है। इस प्रकार धारा 269ST के प्रावधान निम्नलिखित पर लागू नहीं होंगे: खाता भुगतानकर्ता चेक या खाता भुगतानकर्ता बैंक ड्राफ्ट या बैंक खाते के माध्यम से इलेक्ट्रॉनिक समाशोधन प्रणाली (ECS) के उपयोग के माध्यम से प्राप्त नकदी। सरकार, किसी बैंकिंग कंपनी, डाकघर बचत बैंक या सहकारी बैंक द्वारा प्राप्त कोई रसीद। धारा 269एसएस में निर्दिष्ट प्रकृति के लेन-देन। ऐसे अन्य व्यक्ति या व्यक्तियों का वर्ग या रसीदें, जिन्हें केंद्रीय सरकार आधिकारिक राजपत्र में अधिसूचना द्वारा निर्दिष्ट कर सकती है। डाकघर से निकासी भारतीय डाक विभाग के अंतर्गत डाकघर डाकघर बचत खाते से निकासी के साथ-साथ एटीएम सुविधा की सुविधा भी देते हैं। एक दिन में डाकघर या एटीएम से निकाली जा सकने वाली नकदी की सीमा 25,000 रुपये है और प्रति लेनदेन 10,000 रुपये तक सीमित है। डाकघर वित्तीय और गैर-वित्तीय लेनदेन (शेष पूछताछ, स्टेटमेंट अनुरोध) सहित प्रति माह पाँच निःशुल्क लेनदेन की अनुमति देता है। निःशुल्क लेनदेन से परे, जीएसटी के साथ 20 रुपये का शुल्क लिया जाता है। अन्य बैंक एटीएम से निकासी स्वीकार्य है, जिसमें मेट्रो शहरों में 3 निःशुल्क लेनदेन तक और गैर-मेट्रो शहरों में पाँच निःशुल्क लेनदेन हैं। निःशुल्क लेनदेन से ऊपर के लेनदेन के लिए जीएसटी के साथ 20 रुपये का शुल्क लिया जाता है। बैंकों से निकासी. एक दिन में किसी व्यक्ति से कुल मिलाकर; एकल लेनदेन के संबंध में; या किसी व्यक्ति से एक घटना या अवसर से संबंधित लेनदेन के संबंध में। धारा 269ST के प्रावधान तब लागू नहीं होते जब निम्नलिखित व्यक्तियों से 2 लाख रुपये से अधिक की नकदी प्राप्त की जाती है: सरकार; कोई बैंकिंग कंपनी, डाकघर बचत बैंक या सहकारी बैंक; केंद्र सरकार द्वारा अपने आधिकारिक राजपत्र में अधिसूचित कोई संस्था, संघ या निकाय या संस्थाओं, संघों या निकायों का वर्ग। धारा 269ST के तहत जुर्माना धारा 271DA के अनुसार, धारा 269ST के प्रावधानों का पालन करने में विफलता के मामले में, रसीद की राशि के बराबर जुर्माना राशि देय होगी। आयकर अधिनियम की धारा 269T धारा 269T में प्रावधान है कि बैंकिंग कंपनी या सहकारी समिति, फर्म या किसी अन्य व्यक्ति की कोई शाखा किसी ऋण या जमा राशि का भुगतान उस व्यक्ति के नाम से तैयार किए गए अकाउंट पेयी चेक या अकाउंट पेयी बैंक ड्राफ्ट के अलावा किसी अन्य तरीके से नहीं कर सकती, जिसने ऋण या जमा किया है, यदि: ऋण या जमा की राशि ब्याज सहित 20,000 रुपये या उससे अधिक है; या ऐसे व्यक्ति द्वारा अपने नाम पर या किसी अन्य व्यक्ति के साथ संयुक्त रूप से ऐसे पुनर्भुगतान की तिथि पर रखे गए ऋण या जमा की कुल राशि ब्याज सहित 20,000 रुपये या उससे अधिक है। धारा 269T के प्रावधान तब लागू नहीं होते जब ऋण का पुनर्भुगतान किया जाता है या नीचे उल्लिखित व्यक्ति से जमा लिया जाता है या स्वीकार किया जाता है: सरकार; कोई बैंकिंग कंपनी, डाकघर बचत बैंक या सहकारी बैंक; केंद्र, राज्य या प्रांतीय अधिनियम द्वारा स्थापित कोई निगम कंपनी अधिनियम, 2013 की धारा 2 के खंड (45) में परिभाषित कोई सरकारी कंपनी केंद्र सरकार द्वारा आधिकारिक राजपत्र में अधिसूचित कोई संस्था, संघ या निकाय या संस्थाओं, संघों या निकायों का वर्ग। धारा 269T के तहत जुर्माना धारा 271E के अनुसार, धारा 269T के प्रावधानों का पालन करने में विफलता के मामले में, चुकाए गए ऋण या जमा राशि के बराबर जुर्माना राशि देय होगी। DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

Benefits of ITR Filing

Benefits Of Filing ITR- वित्त वर्ष 2023-24 और असेसमेंट ईयर 2024-25 के लिए इनकम टैक्स रिटर्न (ITR) दाखिल करने का टाइम आ गया है. भारत में बहुत कम लोग ही आयकर के दायरे में आते हैं. इसलिए यहां आईटीआर रिटर्न दाखिल करने वालों की सख्‍या कम ही है. जिन लोगों की सालाना इनकम टैक्‍स दायरे में नहीं आती, वो भी आईटीआर दाखिल कर सकते हैं. रिटर्न भरने में कोई नुकसान नहीं है, बल्कि फायदा ही फायदा है. 1.आईटीआर भरने (ITR Filing) के फायदों को देखते हुए ही वित्‍तीय सलाहकार उन व्‍यक्तियों को भी इनकम टैक्‍स रिटर्न भरने की सलाह देते हैं, जिनकी आय इनकम टैक्‍स के दायरे में नहीं आती. इससे भविष्य में आपको कई तरह के लाभ मिल सकते हैं. लोन लेने, बिजनेस शुरू करने, किसी देश का वीजा लेने या बच्‍चों को विदेश में पढ़ाई के लिए भेजते समय आईटीआर बहुत काम आती है. 2.इनकम टैक्‍स रिटर्न (ITR) किसी भी व्‍यक्ति की आय का पुख्‍ता प्रमाण होता है. इसे सभी सरकारी और प्राइवेट संस्‍थान इनकम प्रूफ के तौर पर स्‍वीकार करते हैं. आईटीआर भरने वाले को कार, लोन या होम लोन सहित किसी भी तरह का ऋण जल्‍दी मिल जाता है. 3.आईटीआर की रसीदें आपकी आय का पुख्‍ता प्रमाण होती हैं. अगर आप किसी दूसरे देश में जा रहे हैं तो वीजा के लिए जब आप आवेदन करते हैं तो आपसे आपकी आय का सबूत मांगा जा सकता है. आईटीआर क्‍योंकि आय का पुख्‍ता प्रमाण है, तो आप इसे पेश कर आसानी से वीजा ले सकते हैं. आईटीआर दूसरे देश के अधिकारियों को यह विश्‍वास दिलाती है कि आप अपनी यात्रा पर होने वाले खर्च को वहन करने में सक्षम हैं. 4.अब तो बीमा कंपनियां भी बड़े टर्म प्‍लान लेने वालों से उनकी आईटीआर रिसिप्‍ट मांगने लगी हैं. वास्तव में वे बीमा कराने वाले की आय का स्रोत जानने और उसकी नियमितता परखने के लिए ITR पर ही भरोसा करती हैं. 5.शेयर या म्यूचुअल फंड में निवेश करने वालों के लिए भी ITR बहुत मददगार है. इनमें घाटा होने की स्थिति में घाटे को अगले साल कैरी फारवर्ड कर इनकम टैक्स रिटर्न भरना जरूरी है. अगले साल कैपिटल गेन होने पर घाटे को फायदे से एडजस्ट कर दिया जाएगा और इससे आपको टैक्स छूट का फायदा मिलेगा. 6.यदि आपकी आय इनकम टैक्स के दायरे में नहीं आती, तो भी किसी वजह से TDS कट जाता है. ऐसे में आपको रिफंड तभी मिलेगा, जब आप आरटीआर दाखिल करेंगे. ITR दाखिल होने के बाद ही आयकर विभाग उसका आकलन करता है कि आप पर कर देयता बनती है या नहीं. DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

Legal Entity Identifier (“LEI”) for Cross-Border Transactions

Legal Entity Identifier (“LEI”) is a concept that has been implemented at the global level. The concept of the Global Legal Entity Identifier System (“GLEIS”) has been set up by Global regulatory authorities to address the global financial crises. The LEI is designed so that parties to a Financial transaction can be easily identified and counterparty risk can be minimized. Under LEI, a global reference data system is created that uniquely identifies every legal entity that is a party to a financial transaction in any jurisdiction. 1. What is a Legal Entity Identifier The Legal Entity Identifier (LEI) is a 20-digit global reference number that uniquely identifies every legal entity or structure that is a party to a financial transaction, in any jurisdiction. LEI is assigned to any legal entities including all intermediary institutions, banks, mutual funds, partnership companies, trusts, holdings, special purpose vehicles, asset management companies and all other institutions being parties to financial transactions. LEI will serve as a proof of identity for a financial entity and facilitates reporting of transactions to Trade repositories. LEI is a 20 Digit number wherein: First 4 digit represents the Local Operating Unit (“LOU”) Identification number. Such as 3358 is LOU for Legal Entity Identifier India Limited, i.e., the company authorized for issuing globally compatible LEIs. Next 2 Digits are reserved digits set as Zero. Next 12 Digits are random Alphanumeric identification numbers generated and assigned to an entity by the LOU according to transparent and sound allocation policies Last 2 are calculated check digits under ISO 17442. 2. Implementation of LEI in India The concept of LEI has been introduced by RBI in India in a phased manner. Initially, LEI was introduced for all the participants in the Over-the-Counter (“OTC”) market for Rupee Interest Rate derivatives, foreign currency derivatives etc. Entities without LEI were not permitted to participate in OTC Derivative market. Gradually, LEI was mandated for the following entities: RBI mandated LEI for all borrowers of banks in India. Entities without an LEI code are not to be granted renewal/enhancement of credit facilities; RBI mandated LEI for the non-derivative market including government security markets, money market and non-derivative forex market; SEBI mandated LEI for Eligible FOreign entities in Commodity derivative market; IRDAI mandated LEI for all insurers and their corporate borrowers RBI mandated the LEI for all payment transactions of INR 50 crore and above undertaken by entities (non-individuals) for Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT). Now, RBI has extended LEI to for cross-border transactions such as capital or current account transactions of ₹50 crore and above. The timeline to obtain LEI Number is October 1, 2022. In this article, a detailed discussion has been carried out on the applicability of LEI on Cross Border transactions. 3. What are Cross-Border Transactions Cross-border payments are transactions where the payee and the transaction recipient are based in separate countries. The transactions can be between individuals, companies or banking institutions who are looking to transfer funds across territories. 4. Introduction of Legal Entity Identifier for Cross-Border Transactions Legal Entity Identifier has been implemented by RBi on Cross Border Transactions vide Notification No. RBI/2021-22/137 A.P. (DIR Series) Circular No. 20 dated 10th December 2021. As per instructions of RBI, AD Category, I banks shall obtain the LEI number from resident entities (non-individuals) undertaking capital or current account transactions of ₹50 crore and above (per transaction) under FEMA, 1999 with effect from October 1, 2022. In case of non-availability of LEI Information, Considering non-resident counterparts/ overseas entities, AD Category I banks may process the transactions to avoid disruptions. AD Category I banks may also encourage concerned entities to voluntarily furnish LEI while undertaking transactions even before October 1, 2022. Once an entity has obtained an LEI number, it must report such LEI number in all transactions of that entity, irrespective of transaction size. AD Category-I banks shall make sure that LEI information is captured for all the applicable transactions correctly and ensure that any LEI captured is validated against the global LEI database available on the website of the Global Legal Entity Identifier Foundation (GLEIF). AD banks may inform their constituents concerned about applicability of this circular and may advise entities, which undertake large value transactions (₹50 crores and above) under FEMA, to obtain LEI in time, if they do not already have one issued. 5. How to obtain LEI Legal Entity Identifiers are issued by Local Operating units accredited by Global Legal Entity Identifier Foundation (GLEIF). GLEIF is a body tasked to support the implementation and use of LEI. In India, Legal Entity Identifier India Limited (“LEIL”) acts as a Local Operating unit authorized for issuing LEI. Any entity liable to obtain LEI may obtain the same by visiting https://www.ccilindia-lei.co.in/. “Rules, FAQs & Docs” on the website provides the User Manual and FAQs for applying for an LEI. 6. What to do after obtaining a Legal Entity Identifier number As soon as an entity has obtained an LEI number, it has to be reported in all transactions of that entity, irrespective of the transaction size. Concerned AD Category I banks shall capture the LEI information correctly and shall ascertain that it’s validated against the global LEI database available on the website of the Global Legal Entity Identifier Foundation (“GLEIF”). All single payment transactions of INR 50 crore and above undertaken by entities (non-individuals) should include remitter and beneficiary LEI information. LEI reporting is applicable to transactions undertaken through the NEFT and RTGS payment systems. LEI is not required for customer transactions where both the remitter and beneficiary are individuals. For transactions, where either or both parties are non-individual/s, LEI will be required. 7. What changes will Legal Entity Identifiers for Cross-Border Transactions bring Since LEI uniquely identifies legal entities at the global level, it can act as an important tool for reducing financial contagion and promoting financial stability by helping in evaluating systemic risks and adopting remedial measures. Each LEI contains information about an entity’s ownership structure and thus answers the questions of ‘who is who’ and ‘who owns whom’, therefore the publicly available LEI data pool can be regarded as a global directory, which can greatly enhance transparency in the global marketplace. Introducing LEI in a phased manner RBI shows that it is cautious and has thoughtfully planned the implementation to avoid chaos and confusion. It is assumed that LEI will not only enhance transparency but will also contribute to ease in doing business encouraging foreign entities to invest more in Indian markets. DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

Mandatory to have Audit Trail feature in Accounting Software with effect from 1st April 2023

The Ministry of Company Affairs (MCA) in India is responsible for regulating and overseeing corporates and Limited liability partnership firms in the country. Bookkeeping is an important part of an entity and any manipulation in the same can lead to fraud and huge losses. So Far, Companies are free to enter any transaction at any point of time and can change the same multiple times without any record of modification or deletion. In many cases, companies get their accounting done after the end of the complete year, at the time of preparation or financial statement, or they change transactions as and when required unless such transaction is reported somewhere. To improve the transparency in books of accounts, MCA has made it mandatory for every company to have an audit trail feature in their accounting software. This requirement was initially proposed for implementation with effect from 1st April 2021. However, considering the representations received, MCA initially deferred the implementation till 1st April 2022 and further deferred the same till 1st April 2023. Now, with effect from 01.04.2023, every company is required to issue a feature of an audit trail in their accounting software. In this article a detailed analysis is made of how the audit trail tool works, what the implications are, what challenges a company may face in implementing the same etc. 1. Amendment in Companies Act, 2013 to incorporate Audit Trail Provisions Companies (Accounts) Amendment Rules, 2021 amended Rule 3 of Companies (Accounts) Rules, 2014 by inserting the following proviso: “Provided that for the financial year commencing on or after the 1st day of April 2021, every Company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.” Date of implementation was further deferred to 1st April 2022 and finally implemented w.e.f. 1st April 2023. Therefore, Rule 3 created an obligation on the company to implement an audit trail feature in accounting software. Along with Rule 3 of the Companies (Accounts) Rules, a corresponding amendment was also made in The Companies (Audit and Auditors) Rules, 2014. A following new clause (g) was inserted in Sub-rule 11: “(g) Whether the company, in respect of financial years commencing on or after the 1st April 2022, has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention.]” Therefore, while reporting on Financial statements, the auditor is required to comment on whether the company has implemented an audit trail (edit log) in accounting software and whether the same has operated throughout the year. 2. What is an Audit Trail (Edit Log) Audit Trail (also called audit log) is a security-relevant chronological record, set of records, and/or destination and source of records that provide documentary evidence of the sequence of activities that have affected at any time a specific operation, procedure, event, or device. Audit Trail (Edit Log) feature is a tool that helps companies to maintain a record of all the changes made to their financial data. It is a mechanism that allows companies to track and monitor changes to financial transactions and helps in identifying any unauthorized or fraudulent activities that might occur. A new audit trail (edit Log) feature is required to keep track of all activities in books of accounts such as the creation, alteration, and deletion of all transactions recorded in accounting software. Such a feature is required not only for accounting transactions but also for all the masters, such as ledgers, stock items, and groups, including the details edited in company masters. Therefore, through the edit log, the auditor and company can easily identify: Who created the transaction and when, whether any further modification was made and who made the such modification, What modifications are made in accounting transaction 3. Challenges in the Implementation of Audit Trail Migration from one accounting software to another: If existing accounting software does not provide features of the audit trail then the company is required to migrate data into another accounting software which can be a big challenge as well as a costly affair. Roles and Responsibilities need to be defined: Presently, generally, companies do not create specific profiles of users to define their rights and responsibilities, and transactions are entered through a general profile. However, Companies are now required to define the roles and responsibilities of users to identify who has recorded or modified the transactions. Implementation on Data of earlier years: The feature of the audit trail is to be implemented on software that contains data of earlier years as well. Therefore, this feature will automatically get implemented for earlier years, specially for FY 2022-23 which is yet to be finalized. Therefore, the edit log feature will automatically get implemented for FY 2022-23 wherein finalization entries are to be entered after 01.04.2023. Higher Storage Cost: Since the software is keeping track of all transactions and every modification, therefore, now the system needs more storage space. Further, bulk data can enhance processing time in software and slow down the transaction processing time. Increase Compliance Cost: Small Companies generally don’t prefer to keep detailed books of accounts in any accounting software as it involves software cost as well as the cost of accounting staff and they maintain a summary of their accounting in Excel or some other tools. However, companies with less transactions or no transactions are now required to maintain books of accounts in software having the feature of an audit trail throughout the year on a real-time basis. This will increase the cost of compliance. 4. Benefit of Audit Trail Fraud Detection and Prevention: Fraud is something carried out with complete planning and all efforts are made to hide it. There can be a possibility when the company or accounting team may enter the transaction and later on delete the same to hide the such transaction. However, any malicious act can be easily identified with the Audit Trail feature. Accountability: Incorporating an audit trail helps managers maintain individual accountability. It promotes appropriate user behavior and encourages users to take personal responsibility for their actions, recorded in an audit trail. This protects the system from insufficiently used data and unauthorized database changes. Higher Accuracy: Many times transactions are recorded without proper review thinking that modification will be made on a later date. However, now that the audit trail will keep track of all the modifications, therefore, companies will be required to record the transaction with more accuracy and on real-time basis. 5. Frequently Asked Questions 5.1 Whether all forms of business are required to keep audit trail features in accounting software? Companies Act has mandatory incorporation of edit logs in accounting software. Therefore, all companies, whether Limited or private limited, are required to enable edit log feature. Edit Log is not required to be maintained by the following: 1. Limited Liability Partnership Firms 2. Partnership Firm 3. Proprietorship/ Individual 4. Trust 5. Society etc. 5.2 Whether there be any reporting of non-maintenance of the Audit Trail feature? As per Companies (Audit and Auditors) Rules, 2014, the auditor is required to report on the following matter of audit trail in his audit report: 1. Whether the accounting software of the company has the feature of recording an Audit trail (Edit log); 2. Whether such feature was operated throughout the year for all the transactions recorded in software; 3. Whether the Audit trail feature has been tampered; 4. Whether the audit trail has been preserved by the company or not Therefore, if the answer to any of the above-mentioned points is negative, the auditor is required to report the same in his audit report 5.3 What are the penalties for non-compliance? As per Section 128 of the Companies Act, 2013, If the managing director, the whole-time director in charge of finance, the Chief Financial Officer, or any other person in charge contravenes provisions with respect to books of accounts then such managing director, whole-time director in charge of finance, Chief Financial officer or such other person in charge shall be punishable with fine which shall not be less than INR 50,000 but which may extend to INR 5,00,000. The penalty will be levied based on the nature and extent of the violation. 6. Conclusion The audit trail is indeed a commendable step taken by the government to improvise transparency in accounting transactions. However, such an amendment has been implemented with the least clarification. Considering the impact, MCA is required to address various issues such as the definition of Audit Trail, Edit Logs, Class of companies on which such amendment is applicable, how to deal with data of earlier Financial years to be finalized after 01.04.2023, etc. DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.