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If you’re a foreign company operating in India, be it through a subsidiary, branch, project office or Permanent Establishment, you deal with tax compliance daily. India continues to be a favourite investment destination for many abroad, and new businesses venture out here each year. However, tax compliance here is complicated and has recently undergone major revision with the introduction of the Income-tax Act, 2025, replacing the aged 1961 Act with changes to section numbers, forms and even vocabulary.
With so much changing around us, missing an audit deadline or filing the wrong form can land your business in trouble.
The government may charge penalties, deny your deductions, or check your transactions more intently, all this irrespective of the intention of non-compliance. This article takes the time to explain tax audits for foreign companies in India in simple language, completely refreshed to align with the Income-tax Act, 2025, so you’ll have a fair idea about who needs the audit, which form needs to be filed and ways to avoid penalties.
Table of Contents
- Understanding Tax Audits Under the Income Tax Act
- Who needs a tax audit? Applicability of Foreign Companies
- Due Date & Filing Process for Tax Audit in India
- Key Documents and Compliance Required for Tax Audits
- Which Form Do You File?
- Common Challenges Foreign Companies Face with Tax Compliance in India
- Penalties for Missing or Failing a Tax Audit
- Conclusion
- How can Mercurius Help?
Understanding Tax Audits Under the Income Tax Act
A tax audit is essentially a verification of your company’s financial statements and ledgers, with the intention of ensuring that you follow India’s tax laws. This requires a chartered accountant to perform a verification of your company’s accounts, as prescribed under Section 63 of the Income-tax Act, 2025. The objective is as simple as it sounds – ensuring that you report your income, expenditure, deductions, depreciation, TDS, etc. Accurately.
Small mistakes will be identified by your auditors long before you receive a notice from the tax department.
However, foreign companies operating in India may trigger two types of audits – one is the statutory audit (an annual financial audit), while another one is the tax audit.
Who needs a tax audit? Applicability of Foreign Companies
The belief is that every overseas company that conducts business in India needs a tax audit. But not every overseas company that sets foot in India requires a tax audit, although some do.
Whether you need a tax audit mainly depends on your business turnover and the nature of your business.
Whether your Indian entity is a Wholly Owned Subsidiary, Branch Office, Project Office or a Permanent Establishment (PE) of your company in India, a tax audit, typically under Section 63 of the Income-tax Act, 2025 (the successor to Section 44AB), applies if:
- Your annual turnover exceeds ₹1 crore (approximately $105,000 as of July 2026). However, a higher threshold of ₹10 crore (approximately $1.05 million) applies if your cash receipts and cash payments each do not exceed 5% of total turnover — an incentive for digital transactions that could work in your favour.
- A tax audit is now also triggered when a business covered by the expected framework (Section 58) declares profits below the prescribed deemed rates. This is a key change under the new Act: earlier, a business could keep regular books, declare low profits, and avoid an audit if it never opted into presumptive taxation. Under Section 63, that exemption is gone — the audit is now linked to the level of profit declared, not to whether presumptive taxation was ever chosen. Foreign subsidiaries and PEs declaring thin margins should factor this in.
(For those who are engaged in professions, the threshold limit of ₹50 lakh (approximately $52,000) in gross receipts comes into effect.)
Even if there is no mandatory requirement for a tax audit, you need to comply with bookkeeping requirements and other compliances with respect to taxes.
Due Date & Filing Process for Tax Audit in India
Missing a tax audit deadline can be costly, so it’s worth keeping a close eye on due dates. Since the Income-tax Department sometimes revises these dates, it’s always a good idea to double-check the latest deadlines for the relevant assessment year rather than assuming last year’s dates still apply.
The process is simple:
- Finalize your books of accounts and financial statements.
- Appoint a Chartered Accountant to carry out the audit.
- The Chartered Accountant prepares and files the audit report in Form No. 26 on the e-filing portal.
- You review and accept the report online.
- You file the Income Tax Return (ITR) before the deadline.
For most businesses, the tax audit report is generally due by 30 September, with the ITR following by 31 October of the relevant tax year. Companies with transfer pricing obligations follow a later timeline, so check which one applies to you.
Key Documents and Compliance Required for Tax Audits
A smooth tax audit starts with good preparation. Keep these documents organised well in advance, rather than rushing at the last minute:
- Balance Sheet and Profit & Loss Account
- Books of accounts — ledger, cash book, and journals
- Bank statements and reconciliations
- Goods and Services Tax (GST) returns (GSTR-1 and GSTR-3B) with invoices, if registered
- TDS challans, returns, and certificates
- Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), and past income tax returns
- Purchase bills, expense vouchers, and revenue invoices
- Fixed asset and depreciation details
- Related-party and international transaction records
- Transfer pricing documentation, including the accountant’s report in Form No. 48, if applicable
- Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) filings, if applicable
Regular reconciliation helps too. Fixing mismatches early makes the handover to your auditor far easier.
Which Form Do You File?
Under the Income-tax Act, 2025, the tax audit report is filed in a single unified form — Form No. 26. This applies from Tax Year 2026-27 onwards, and it replaces the earlier Forms 3CA, 3CB, and 3CD used up to Assessment Year 2026-27.
Form No. 26 pulls the auditor’s opinion, the detailed tax particulars, and the auditor’s certification into one report. The report still reflects whether your accounts are already audited under another law — for example, a statutory audit under the Companies Act, 2013. This matters for most foreign subsidiaries, which are separately audited under company law.
Common Challenges Foreign Companies Face with Tax Compliance in India
Operating in a new country always comes with a learning curve, and India’s tax and regulatory landscape is no exception. Many foreign companies find these requirements harder to manage simply because they’re unfamiliar territory — and getting them wrong can mean delays, penalties, or unwanted tax disputes.
Some of the challenges we see most often include:
- Figuring out which Indian tax laws apply, based on the company’s structure and operations
- Keeping books of accounts aligned with Indian accounting and tax standards
- Managing transfer pricing documentation for international and related-party transactions
- Staying on top of GST, TDS, and other statutory deadlines
- Coordinating financial information between the overseas head office and the Indian entity
- Juggling multiple compliance deadlines while keeping pace with regulatory changes
As a business grows in India, these challenges tend to grow with it. A delayed document, an inaccurate report, or a missed deadline can quickly snowball into tax notices, closer scrutiny, and extra compliance costs.
This is where having the right support really pays off. Working with experienced tax professionals means foreign companies can navigate India’s regulations with confidence, keep their records accurate, and sail through tax audits — all while staying focused on what matters most: growing the business.
Penalties for Missing or Failing a Tax Audit
Getting your tax audit wrong isn’t just inconvenient, it’s costly. Under section 446 of the Income-tax Act, 2025 (the direct replacement of section 271B), the penalty is equivalent to whichever of the following is lower:
- 5 per cent of total turnover or ₹ 1,50,000 (approximately USD 1,600 as of July 2026). But not all cases will be penalised! Where a genuine excuse, such as a natural disaster, loss of records, or an auditor withdrawing from a case, prevented a company from carrying out the required procedures, a waiver from penalties can be granted under section 470 (the direct replacement of section 273B).
- Beyond financial penalties, missing a tax audit can also result in more stringent checks on the tax return; lost allowable deductions; previously allowable exemptions that require audit evidence; being bombarded with notices rather than working on your business The foreign tax audit risk. Foreign-based businesses face an additional risk in that an incomplete audit may raise concerns about inter-company transactions and transfer pricing, resulting in lengthy and in-depth investigations.
In summary, it makes far more financial and logistical sense to ensure that your audit process is correctly completed, on time, every time, than to be forced to deal with the aftermath of a failed one.
Conclusion
As foreign investment in India continues to grow, staying on top of Indian tax regulations has become a key part of doing business here. A tax audit isn’t just a box to tick — it genuinely helps businesses keep their financial records accurate, report income correctly, and steer clear of penalties and disputes down the line.
Whatever structure a foreign company operates through — a wholly owned subsidiary, branch office, project office, or Permanent Establishment (PE) — understanding when tax audit rules apply, keeping the right documentation ready, and meeting filing deadlines all go a long way toward smoother operations.
With a bit of planning and timely compliance, foreign businesses can spend less time worrying about tax notices and more time doing what they came to India to do — grow.
How can Mercurius Help?
Navigating India’s tax rules can feel overwhelming — especially with a brand-new tax code and cross-border operations to manage. At Mercurius, we offer end-to-end tax audit and compliance support built around the needs of international businesses in India.
Our Chartered Accountants handle tax audits under Section 63, prepare and file Form No. 26, file income tax returns, provide transfer pricing support (including Form No. 48), and offer income tax return filing, transfer pricing support (including Form No. 48), and GST, TDS, and FEMA advisory. We help you keep documentation in order, spot gaps early, and meet every deadline without the last-minute rush.
Whether you are just entering India or already established here, Mercurius makes your tax compliance journey simpler — so you can focus on growing your business with confidence.
