Ratio Disclosure: Complete Compliance Guide for Small Companies, OPCs, and LLPs under the Companies Act, 2013

 In modern corporate reporting, ratios are not merely analytical indicators—they are statutory transparency instruments.

The Ministry of Corporate Affairs (MCA), through Notification G.S.R. 207(E) dated 24 March 2021, amended Schedule III to the Companies Act, 2013, mandating disclosure of specified financial ratios in company financial statements from 1 April 2021 onwards.

The intent behind this reform is threefold:

• To standardize financial disclosures across entities,

• To enhance comparability and investor confidence, and

• To strengthen corporate governance and audit trail reliability.

Legal Foundation

Primary Statutory Provisions:

• Section 129(1) – Every company’s financial statements shall give a true and fair view and comply with accounting standards notified under Section 133 and the format prescribed in Schedule III.

• Schedule III, Division I (Accounting Standards) / Division II (Ind AS) – Specifies the structure and disclosure requirements of financial statements.

• General Instructions for the Preparation of the Balance Sheet and Statement of Profit & Loss (Clause 6, post-amendment) mandates:

  “The company shall disclose the following ratios. If there is a change of more than 25% as compared to the previous year, the company shall provide an explanation for the same.”

Thus, ratio disclosure is a statutory requirement—not a management choice.

List of Ratios to Be Disclosed

All companies (except LLPs) preparing accounts per Schedule III must disclose the following eleven ratios:

1. Current Ratio

2. Debt-Equity Ratio

3. Debt Service Coverage Ratio (DSCR)

4. Return on Equity Ratio (ROE)

5. Inventory Turnover Ratio

6. Trade Receivables Turnover Ratio

7. Trade Payables Turnover Ratio

8. Net Capital Turnover Ratio

9. Net Profit Ratio

10. Return on Capital Employed (ROCE)

11. Return on Investment (ROI)

If any ratio shows a change of more than 25% compared to the preceding year, the company must explain the variance in its notes to accounts (e.g., due to capital structure changes, business restructuring, or extraordinary income/expense).

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4. Applicability by Entity Type

Entity Type	Governing Statute	Financial Framework	Ratio Disclosure	Exemption / Notes
Small Company (Sec. 2(85))	Companies Act, 2013	Schedule III, Division I	✅ Mandatory	Exempt only from Cash Flow Statement under Rule 2(1)(t) of the Companies (Accounts) Rules, 2014. Ratio disclosure not exempted.
One Person Company (OPC)	Companies Act, 2013	Schedule III, Division I	✅ Mandatory	No exemption for ratios. Other compliance relaxations (Board meetings, AGMs) continue.
Private/Public Company (non-small)	Companies Act, 2013	Schedule III, Division I or II	✅ Mandatory	No exemption. Required for Ind AS as well as AS-compliant entities.
Limited Liability Partnership (LLP)	LLP Act, 2008	Not governed by Schedule III	❌ Not Mandatory	LLPs prepare Statement of Account & Solvency (Form 8) under Section 34. Ratio disclosure not required.

Interpretation and Law Analysis

(a) Mandatory Nature

• Since Schedule III is a statutory schedule to the Companies Act, non-disclosure of ratios constitutes non-compliance with Section 129(1).

• Under Section 129(7), contravention may attract penalties:

  Company – up to ₹10,00,000;
  Every officer in default – up to ₹1,00,000 or imprisonment up to 1 year, or both.

(b) Applicability Threshold

• Applies to all companies—public or private, listed or unlisted—preparing accounts under Schedule III.

• Small Companies and OPCs, though exempt from cash flow statements, must disclose ratios in notes to accounts.

• LLPs remain outside Schedule III and are not statutorily bound by these disclosure norms.

(c) Ratio Inapplicability Clarification

Where a ratio is not meaningful (e.g., DSCR in a debt-free company), the note should specify:

“Debt Service Coverage Ratio is not applicable as the company has no borrowings during the year.”

This ensures completeness without misleading users of financial statements.

Auditor’s Perspective

Under CARO 2020 (Clause 19) and SA 720 (Revised), auditors are expected to verify and evaluate disclosures, including ratio consistency and reasonableness.

• Incorrect computation or non-disclosure may lead to qualifications or emphasis of matter.

• Auditors may seek management representation on assumptions, formulae used, and justification for >25% variance explanations.

Practical Compliance Guidance

(a) Stepwise Compliance Process

1. Compile ratio list from Schedule III Division I/II.

2. Compute ratios using uniform formulae (refer to ICAI Guidance Note on Schedule III).

3. Compare each ratio with prior year and identify >25% changes.

4. Prepare management explanation for significant variances.

5. Document workings—data source, formula used, and validation check.

6. Include ratio disclosures in Notes to Accounts, preferably after significant accounting policies.

7. Cross-verify consistency with financial statements, cash flow, and auditor’s review.

(b) Key Caution Points

• ⚠ Inconsistent Calculation Basis:
  Ratios must be computed using consistent denominators across years (e.g., average vs. closing balances).

• ⚠ Accounting Policy Changes:
  Policy or Ind AS transition may distort comparability—add disclosure note if applicable.

• ⚠ First-Year Reporting:
  In the first year of incorporation or operation, ratios may not be comparable. Clarify in notes.

• ⚠ Misstatement or Omission:
  Can attract auditor qualification and penalties under Section 129(7).

• ⚠ Unexplained Variations:

  25% ratio change without explanation is a direct non-compliance with Schedule III instructions.

• ⚠ Data Consistency Errors:
  Mismatch between ratios and balance sheet/P&L figures (e.g., inventory vs. turnover) undermines credibility.

• ⚠ Non-Disclosure by Small Companies:
  Despite simplified reporting, ratio omission by small companies or OPCs still violates Schedule III—no automatic exemption applies.

Recommended Best Practices for Professionals

• Document Assumptions: Maintain a Ratio Computation Sheet in audit files with precise formulae and supporting data.

• Use Average Balances: Wherever relevant (e.g., turnover ratios), use average opening and closing figures for accuracy.

• Provide Context: Include concise management commentary explaining business or operational drivers behind ratio changes.

• Internal Review: Implement pre-audit ratio validation to ensure all explanations are ready before financial closure.

• LLPs: Though not required, LLPs may voluntarily adopt ratio disclosures for internal benchmarking and investor presentations.

• Comparative Presentation: For companies with multi-year data, present ratio trends to improve analytical clarity.

Illustrative Example

If the Current Ratio increased from 1.8 (FY 2023–24) to 2.5 (FY 2024–25) (a 38.8% change):

Disclosure Example:
“The Current Ratio has increased due to higher realization of trade receivables and repayment of current borrowings during the year.”

If Debt-Equity Ratio declined significantly:

“The Debt-Equity Ratio reduced due to repayment of term loans and increase in retained earnings.”

Such disclosures satisfy both numerical and narrative transparency requirements.

Penalty and Enforcement Risk

• Legal Reference: Section 129(7) – Penalty for contravention of financial statement requirements.

• Quantum:

  • Company: Fine up to ₹10,00,000

  • Officer in default: Fine up to ₹1,00,000 or imprisonment up to 1 year or both

• Regulatory Risk: Non-compliance may invite adverse auditor comments, qualification in CARO report, or scrutiny during MCA/ROC inspection under Section 206–207.

Quick Reference Summary

Entity Type	Ratio Disclosure	Cash Flow Statement	Statutory Reference	Exemption
Small Company	✅ Yes	❌ Exempt	Sec. 2(85), Sch. III Div. I	Only cash flow exempt
OPC	✅ Yes	❌ Exempt	Sec. 2(62), Sch. III Div. I	No ratio exemption
Private/Public Company	✅ Yes	✅ Required	Sch. III Div. I / II	None
LLP	❌ No	❌ No	LLP Act, 2008	Not governed by Schedule III

Final Professional Takeaway

Ratio disclosure is not a compliance checkbox—it is a credibility statement.
For Small Companies and OPCs, it symbolizes governance parity with larger corporates; for LLPs, though not mandated, voluntary disclosure signals financial discipline.

Professionals should:

• Stay updated with MCA circulars or future exemptions,

• Maintain ratio computation documentation for audit integrity, and

• Treat variance explanations as narrative transparency, not formality.

In today’s compliance ecosystem, clarity is credibility—and ratio disclosure is its most measurable reflection.

International Taxation Insight: Network Fees from Indian AE – Nature of Income under India–Netherlands DTAA

A Netherlands-based company received network fees from its Indian Associated Enterprise (AE) for services including:

• IT systems maintenance,

• Accounting and finance support, and

• Human resources services.

The central question: Are these network fees taxable in India as royalty or fees for technical services (FTS) under the India–Netherlands DTAA?

Legal Thresholds and Definitions

A. Royalty

• Indian Law: Section 9(1)(vi) of the Income-tax Act, 1961, covers payments for:

  • Use of patents, trademarks, designs, secret formulas, or technical know-how, or

  • Transfer of copyrights.

• DTAA (India–Netherlands, Article 12): Requires consideration for right to use, or for technical know-how.
  Threshold: Payment must involve transfer or right to use intellectual property or technical knowledge.

B. Fees for Technical Services (FTS)

• Indian Law: Section 9(1)(vii) defines FTS as consideration for:

  • Technical, managerial, or consultancy services; or

  • Provision of technical knowledge, experience, skill, or processes.

• DTAA: Services must be technical in nature, not merely administrative.
  Threshold: Actual technical know-how or skill transfer is necessary; routine support does not qualify.

Facts vs. Thresholds

Aspect	Facts in Case	Threshold for FTS/Royalty
Services rendered	IT maintenance, accounting, HR support	Must involve technical know-how or IP
Provision of knowledge	None	Must transfer proprietary knowledge, methodology, or skill
Permanent Establishment (PE)	No PE in India	Business profits taxable in India only if PE exists

Analysis: Services provided are administrative/support in nature and do not meet thresholds for royalty or FTS.

Legislative Intent and Judicial Interpretation

• Intent: Sections 9(1)(vi) & 9(1)(vii) and the DTAA aim to tax cross-border payments where India receives economic benefit from technical knowledge or IP.

• Judicial precedent: Courts have clarified that:

  • Purely administrative/management services are outside FTS;

  • FTS requires actual technical skill/know-how transfer.

Implication: Routine network fees should not be taxed as FTS or royalty in India.

DTAA Implications

• Article 7 (Business Profits) & Article 12 (Royalties/FTS):

  • Network fees do not constitute royalty/FTS, hence treated as business profits.

  • Taxable in India only if PE exists.

• Condition: No taxation arises unless there is a fixed place of business or PE under Article 5.

Practical Flowchart: Determining Taxability of Network Fees

Step 1: Identify Nature of Service

• Technical knowledge / IP transferred? → Yes → Step 2

• Routine administrative/support service? → No → Not taxable in India

Step 2: Classify Payment

• Payment for use of IP / technical know-how → Royalty

• Payment for technical/managerial consultancy with know-how transfer → FTS

Step 3: Check Permanent Establishment (PE)

• Is there a PE in India?

  • Yes → Tax business profits or FTS/royalty as applicable

  • No → Business profits not taxable

Step 4: Documentation & Compliance

• Maintain records proving services are non-technical

• Ensure AE does not create PE risk

Key Insight: Administrative “network fees” without know-how/IP transfer → Not royalty/FTS → Not taxable in India.

Practical Takeaways for Multinationals

1. Substance over label: “Network fee” alone does not determine taxability.

2. Administrative vs. technical: Routine IT/HR/accounting support ≠ FTS/royalty.

3. PE review: Ensure no permanent establishment arises in India.

4. Maintain records: Proof that services are routine support is critical.

5. Threshold clarity: Only payments involving technical know-how or IP transfer are taxable.

Conclusion

Network fees received from an Indian AE for administrative, accounting, HR, or IT support—without transfer of technical know-how or IP—are:

• Not royalty or FTS under Indian law or DTAA,

• Not taxable in India without a PE, and

• Aligned with legislative intent, focusing on taxing technical knowledge/IP, not routine operational support.

This analytical approach with flowchart logic allows multinational enterprises to structure cross-border network fees and back-office arrangements in a DTAA-compliant manner.

How Hostels, PGs, and Budget Shelters Can Navigate GST Without Losing Margins

 The GST 2.0 structure has simplified tax rates but created a paradox for hostel and budget accommodation operators: for units priced at ₹7,500/day or less, the government mandates 5% GST without ITC, explicitly forbidding the option to charge 18% with ITC. While this keeps guest pricing low, it compresses margins and embeds cascading tax costs for operators.

The good news: with smart operational structuring, you can recover 3–5% of margins without violating GST law. This guide provides practical do’s & don’ts, illustrative examples, and a visual cheat sheet for hostels, PGs, and budget shelters to optimize GST efficiency.

Mandatory GST Rule

• Accommodation ≤ ₹7,500/day → GST 5% without ITC

• 18% with ITC is explicitly not allowed, even for agent bookings

• Applies to hotels, hostels, PGs, and shelters

Illustrative Example:

• 150-bed PG, ₹15,000/month per bed

• Annual revenue: ₹3.69 Cr

• Output GST at 5%: ₹18.45 L

• Input GST on rent/utilities: ₹5.4 L (non-recoverable)

• Margin impact: -1.46%

Bottom line: Operators must work within 5% GST; no higher rate option exists.

Why 18% With ITC Sounds Better But Is Blocked

• Removes cascading GST, improves operator margins

• Guests would pay slightly more → government avoids this to maintain “affordability” narrative

• Mandatory 5% compresses margins but keeps guest pricing low

Practical Alternatives (Do’s & Don’ts With Examples)

A. Leave-and-License Agreement

Do:

• Convert leases to leave-and-license

• Ensure property is residential dwelling

• Maintain written agreements with landlords/agents

Example:

• Annual rent ₹12 L

• GST under lease (18%) → ₹2.16 L lost

• GST under leave-and-license → ₹0

• Margin gain: +1.2%

Don’t:

• Treat temporary stays as lease

• Skip proper documentation

B. Entry 12AA Exemption (Long Stay ≥90 Days)

Do:

• Minimum stay ≥90 days

• Charges ≤ ₹20,000/month/person

• Supply to individuals only

Example:

• Revenue ₹3.69 Cr, 70% occupancy

• Output GST 5% = ₹18.45 L

• Entry 12AA exemption → GST = 0

• Margin recovery: +5–6%

Don’t:

• Split stays into short-term stays

• Offer daily-variable rates to claim exemption

C. Separate Optional Services (Meals, Laundry)

Do:

• Invoice optional services separately from accommodation

Example:

• Accommodation ₹12,000/month → 0% GST

• Meals ₹3,000/month → 5% GST = ₹150

• Guest only paying for meals → core room remains exempt

Don’t:

• Bundle meals with rent → entire supply taxed

D. Agent Bookings

Do:

• Agents handle bookings/facilitation separately

• Room structured under leave-and-license + Entry 12AA

Example:

• Agent fee ₹500/month per bed → GST 5% = ₹25

• Room rent remains exempt

Don’t:

• Mix agent fee with rent

• Circumvent minimum stay rules

Stepwise Strategy & Illustrative Margin Impact

Step	Do	Savings/Impact	Don’t	Margin Effect
1	Leave-and-license	Rent ₹12 L → save ₹2.16 L	Keep as lease	+1.2%
2	Entry 12AA ≥90-day stay	GST 0 on ₹3.69 Cr revenue	Split stays	+3–5%
3	Separate optional services	Meals ₹3,000 → GST ₹150 only	Bundle meals	+0.5–1%
4	Agent bookings	GST only on agent fee	Mix agent fee with rent	Operational simplicity

Combined effect: Recover 3–5% of lost margins, reduce cascading GST, remain compliant.

How it works in practice:

• Room rent structured as residential leave-and-license → GST 0

• Guests staying 90+ days → Entry 12AA exemption → GST 0

• Optional meals/laundry → taxed separately → minimal GST

• Agent booking fees → taxed separately → compliance-friendly

• Result: 3–5% margin recovery without violating GST law

Key Takeaways

1. Mandatory 5% GST without ITC; 18% with ITC not allowed

2. Margin recovery strategies:

   • Leave-and-license agreements

   • Long stay exemption (Entry 12AA)

   • Separate optional services

   • Agent facilitation fees

3. Document everything – agreements, invoices, policies

4. Adjust policies to guarantee long-term stays

5. Optional services separation avoids cascading GST

Bottom Line:
Even under mandatory 5% GST, hostels, PGs, and budget shelters can recover 3–5% of margins, reduce cascading costs, and remain fully compliant by combining these strategies.

GST Advisory on Invoice Management System (IMS) and ITC Auto-Population

On 8 October 2025, the Goods and Services Tax (GST) Network, under the aegis of the Ministry of Finance, Government of India, issued an important advisory titled “Advisory on GST Return and Invoice Management System (IMS)”. The advisory reaffirms the procedural framework for Input Tax Credit (ITC) auto-population, GSTR-2B generation, and credit note handling, following the implementation of IMS.

This clarification is crucial for taxpayers and professionals managing high transaction volumes, as it ensures continuity in ITC reporting while introducing procedural flexibility for real-time invoice management.

No Change in ITC Auto-Population Mechanism

The advisory categorically confirms that the auto-population of ITC from GSTR-2B to GSTR-3B remains unchanged. The transition to IMS does not alter the existing mechanism or data flow process.

Key points:

• ITC will continue to auto-populate from Form GSTR-2B to Form GSTR-3B.

• The process is fully system-driven, eliminating any requirement for manual data entry or validation at this stage.

• All existing provisions under Section 16 and Section 17 of the CGST Act, 2017, and Rules 42 and 43 of the CGST Rules, remain fully applicable for determining eligibility, reversals, and apportionment of ITC.

• The IMS merely acts as an interface for viewing, reconciling, and tracking supplier invoices, and does not interfere with the credit flow between 2B and 3B.

This ensures data integrity, compliance uniformity, and consistency in monthly ITC computation.

GSTR-2B Generation and Flexibility in Regeneration

The advisory reiterates that GSTR-2B will continue to be generated automatically on the 14th day of each month, based on suppliers’ GSTR-1 and IFF filings. However, under the IMS framework, taxpayers now gain procedural flexibility:

• Automatic generation: GSTR-2B will be system-generated every month on the 14th, without any manual intervention.

• Post-generation actions: Taxpayers may perform reconciliation activities in IMS even after the 2B is generated—such as marking invoice mismatches, tagging disputed invoices, or tracking delayed filings.

• Regeneration window: Based on the updates made in IMS after the initial 2B generation, taxpayers can regenerate GSTR-2B any time before filing GSTR-3B.

• The regenerated GSTR-2B will reflect the latest invoice data, ensuring precision in ITC reporting and reconciliation.

This controlled flexibility promotes data transparency and allows taxpayers to align GSTR-3B with the most accurate, supplier-validated data available.

Credit Note Handling – Effective from October 2025 Tax Period

The advisory introduces procedural clarity for credit note reflection and reconciliation from the October 2025 return period onward.

• Credit note data filed by suppliers will continue to be captured automatically in GSTR-2B generated on the 14th of the subsequent month.

• Taxpayers can perform credit note-related actions in IMS—such as acceptance, reconciliation, or dispute marking—until the date of GSTR-3B filing.

• Upon any such post-generation actions, GSTR-2B can be regenerated to include updated credit note data prior to 3B submission.

• This ensures that both the ITC ledger and liability adjustments are synchronized with the most current data set.

For professionals, this update reinforces that timely supplier coordination remains critical to ensure accurate reflection of credit notes and prevent mismatched credit reversals under Rule 37A.

Compliance and Systemic Implications for Taxpayers

This advisory is not a procedural overhaul but a digital synchronization enhancement. The IMS serves as a facilitative tool for real-time invoice and credit management. The following implications merit professional attention:

a. Automation Continuity:
Auto-population remains system-driven, safeguarding uniformity across returns and reducing manual discrepancies.

b. Enhanced Reconciliation Discipline:
IMS allows continuous reconciliation between supplier-uploaded invoices and recipient records, enabling proactive dispute management before filing GSTR-3B.

c. Regeneration Flexibility as a Safeguard:
The regeneration feature ensures last-mile correction of data, thereby reducing audit risks and potential mismatches during departmental verification.

d. Record-Keeping and Audit Trail:
Taxpayers should maintain detailed logs of IMS actions, regenerated GSTR-2B files, and correspondence with suppliers, as these will serve as key evidence in GST audits or adjudication.

e. Governance Alignment:
Enterprises should update their internal GST SOPs to include IMS-based reconciliation workflows, ensuring alignment between accounting systems (ERP) and the GST portal data.

Conclusion

The GST Advisory dated 8 October 2025 underscores that the Invoice Management System (IMS) is a functional enhancement designed to strengthen transparency, control, and synchronization across GST returns. It introduces greater operational flexibility without altering the core statutory process of ITC auto-population from GSTR-2B to GSTR-3B.

GST Refunds Made Faster: CBIC’s New Instruction on Provisional Sanction – What Businesses Must Know

The Central Board of Indirect Taxes and Customs (CBIC) has issued Instruction No. 06/2025-GST dated 3 October 2025, introducing a significant improvement in the way GST refund claims are processed.

Starting 1 October 2025, refund applications identified as low-risk by the GST system will receive 90% of the refund amount provisionally, usually within a few days of acknowledgment. This aims to reduce working capital blockage for exporters, manufacturers, and service providers while ensuring faster and transparent refund processing.

The change also extends this benefit to Inverted Duty Structure (IDS) refunds as an interim measure until the formal amendment to the CGST Act is enacted.

For many businesses, delayed GST refunds create severe liquidity pressure. Exporters and units operating under the inverted duty structure (where input tax is higher than output tax) often wait weeks or months to receive their refunds.

The new instruction bridges this gap by combining risk-based automation with simplified processing. Compliant taxpayers with consistent filing history and accurate records will now enjoy faster refund release with minimal manual scrutiny.

How the New Refund Process Works

When a taxpayer files a refund claim in FORM GST RFD-01, the GST system automatically assigns a risk score based on parameters such as filing consistency, compliance record, data match between returns, and prior refund history.

• Low-Risk Cases:

  1. System categorizes the claim as “low-risk.”

  2. The proper officer issues an acknowledgment (FORM GST RFD-02) within 15 days.

  3. 90% of the claimed refund is released on a provisional basis through FORM GST RFD-04 within 7 days of acknowledgment.

  4. The payment order (FORM GST RFD-05) follows immediately, and the refund is credited directly to the taxpayer’s bank account.

  5. The balance 10% is sanctioned later through FORM GST RFD-06 after final verification.

• Other Cases:
  Refund claims not classified as low-risk will undergo detailed scrutiny under the existing refund guidelines before any payment is made.

When Provisional Refund Will Not Be Granted

Businesses should note that provisional refund will not be granted in certain situations, including:

1. If a previous refund claim is under appeal or pending before an appellate authority.

2. If a show cause notice (SCN) has been issued for any refund matter.

3. If an order has been passed but not attained finality (still open to appeal).

4. If the officer expects adjustment or withholding of refund against dues under Section 54(10) or (11) of the CGST Act.

In such cases, the officer will process and sanction the refund on a final basis after verification rather than provisionally.

Refund Categories 

The risk-based provisional refund system applies to all refund applications filed on or after 1 October 2025.

Initially, it covers:

• Zero-rated supplies (exports or supplies to SEZs).

• Refunds due to inverted duty structure (IDS) – temporarily extended until the formal legislative amendment.

This brings parity between exporters and domestic manufacturers facing accumulated input tax credits due to rate inversion.

Step-Wise Timeline Summary

Step	Process	Form	Timeline (Maximum)
Filing of refund application	Refund claim submission	RFD-01	—
System risk evaluation	Categorization as low-risk / others	Auto	Instant
Acknowledgment / deficiency memo	RFD-02 / RFD-03	15 days
Provisional refund sanction (for low-risk)	RFD-04	7 days from acknowledgment
Payment order and credit	RFD-05	Immediate
Final refund / balance sanction	RFD-06	Within 60 days of filing

This streamlined process aims to ensure that low-risk refunds are provisionally credited within 10–12 working days from the date of filing.

Practical Guidance 

(a) To Qualify as a Low-Risk Taxpayer

• File all GST returns (GSTR-1, GSTR-3B) on time with full consistency.

• Ensure reconciliation between returns and books of accounts.

• Avoid mismatches between outward supply, inward credit, and e-invoice data.

• Maintain clear documentation—export invoices, shipping bills, bank realization certificates, and input credit records.

• Rectify any pending deficiency memos or unresolved refund disputes before filing new claims.

(b) During Refund Filing

• Use the latest version of FORM GST RFD-01 available on the GST portal.

• Validate bank details through PFMS before filing.

• Choose the correct refund type—zero-rated supply, inverted duty structure, etc.

• Retain digital acknowledgment copies and ARN tracking for each application.

(c) After Provisional Refund

• Retain the refund sanction order (RFD-04) and payment order (RFD-05) for record.

• Track the final order (RFD-06) and ensure proper accounting treatment in books once the refund is finalized.

• Respond promptly to any further clarification sought by the department.

Points to remember

• Refunds may still be withheld in cases of pending dues, fraud detection, or non-compliance.

• Incorrect or duplicate claims may attract penalties under Section 73 or 74 of the CGST Act.

• Businesses should regularly monitor the refund ARN status and maintain correspondence records.

• Interest is payable by the department for delay beyond 60 days under Section 56, but only for admissible claims.

The risk-based provisional refund system under Instruction No. 06/2025-GST is a major stride toward ease of doing business and trust-based compliance. It reflects the Government’s commitment to improving liquidity and transparency while using technology to ensure fiscal prudence.

Selecting the Right Auditor’s Opinion: A Comprehensive Guide under SA 700, 705, and 706

The auditor’s opinion represents the ultimate expression of professional judgment in an audit engagement. It conveys whether the financial statements present a true and fair view in accordance with the applicable financial reporting framework. The form, structure, and accuracy of the opinion determine the audit report’s credibility and the stakeholders’ confidence in financial statements.

With enhanced emphasis on quality reporting, peer review, and UDIN validation by ICAI, the responsibility of selecting and drafting the correct auditor’s opinion has become both technical and judgmental. This guidance note provides a structured framework, illustrative language, and practical insights for members to determine the appropriate opinion in conformity with Standards on Auditing (SAs 700, 705, and 706).

Classification of Auditor’s Opinions under SA 700 and SA 705

a) Unmodified (Clean) Opinion

When Applicable:

• The auditor concludes that the financial statements are free from material misstatement.

• All applicable Accounting Standards (Ind AS/AS) and the Companies Act, 2013 requirements are duly complied with.

• No scope limitations or significant uncertainties exist.

Illustrative Language:

“In our opinion, the financial statements give a true and fair view of the state of affairs of the Company as at [date], and of its profit/loss and cash flows for the year then ended, in accordance with the applicable Indian Accounting Standards and the Companies Act, 2013.”

Professional Focus:
Before concluding an unmodified opinion, verify that disclosures are exhaustive, accounting treatments conform to standards, and there are no unadjusted misstatements exceeding materiality thresholds.

b) Unmodified Opinion with Emphasis of Matter (SA 706)

When Applicable:

• Certain matters (e.g., litigation, going concern uncertainty, or restatement) are appropriately disclosed but require emphasis for user awareness.

• The disclosure is adequate and does not undermine the overall fairness of the statements.

Illustrative Language:

“We draw attention to Note X of the financial statements regarding uncertainties related to litigation which may affect the financial position. Our opinion is not modified in respect of this matter.”

Professional Focus:
Use the Emphasis of Matter paragraph judiciously. Frequent or unnecessary use may reduce the significance of genuinely important disclosures and impair readability.

c) Qualified Opinion

When Applicable:

• The auditor identifies material misstatements or scope limitations that are not pervasive.

• The issue can be either quantifiable (valuation error, revenue recognition, etc.) or non-quantifiable (restricted access to evidence).

Illustrative Language (Quantifiable):

“Except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view.”

Example of Basis:

“The Company’s inventory has been valued at Rs. X instead of Rs. Y as required under AS 2. This results in an overstatement of profits by Rs. Z.”

Illustrative Language (Non-quantifiable):

“We were unable to obtain sufficient appropriate audit evidence regarding the investment in XYZ Limited due to management-imposed restrictions, and hence cannot determine whether adjustments are necessary.”

Professional Focus:
Wherever feasible, quantify the impact of misstatements. Unquantified qualifications should be strongly justified and supported by documentation, especially for peer review or NFRA scrutiny.

d) Adverse Opinion

When Applicable:

• The auditor determines that misstatements are both material and pervasive to the financial statements as a whole.

• The entity’s accounting framework has been fundamentally compromised.

Illustrative Language:

“In our opinion, because of the significance of the matters described in the Basis for Adverse Opinion paragraph, the financial statements do not give a true and fair view of the financial position, financial performance, and cash flows of the Company.”

Examples:

• Non-consolidation of subsidiaries or associates.

• Failure to comply with fundamental Ind AS principles.

Professional Focus:
Adverse opinions carry serious implications and should only be issued after conclusive evaluation of pervasiveness and with appropriate partner-level concurrence.

e) Disclaimer of Opinion

When Applicable:

• The auditor is unable to obtain sufficient appropriate evidence due to pervasive scope limitations or uncertainties.

• The auditor cannot form an opinion because of extensive non-availability of records or management-imposed restrictions.

Illustrative Language:

“Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, we have not obtained sufficient appropriate audit evidence to provide a basis for an audit opinion.”

Examples:

• Loss of accounting records due to fire or technical failure.

• Management denial of access to data or premises.

Professional Focus:
A disclaimer should be the last resort after documenting all audit efforts made to obtain evidence. It protects the auditor’s integrity when expressing an opinion is genuinely impossible.

Structuring the Auditor’s Report – Practical Model Framework

Type of Opinion	Key Circumstances	Essential Clauses	Disclosure Focus
Unmodified	No material misstatements	Opinion + Basis for Opinion	Full compliance with Ind AS/AS
Unmodified with EoM	Significant uncertainties disclosed	Opinion + Basis + Emphasis of Matter	Litigation, going concern, prior period adjustments
Qualified	Material but not pervasive misstatement	Basis for Qualified Opinion + Opinion	Quantify or describe limitation
Adverse	Material and pervasive misstatements	Basis for Adverse Opinion + Opinion	Fundamental non-compliance
Disclaimer	Unable to obtain sufficient evidence	Basis for Disclaimer + Disclaimer of Opinion	Pervasive scope limitation

Drafting Tip:
Under SA 700 (Revised), the “Basis for Opinion” section must immediately precede the “Opinion” paragraph. Cross-references (Note numbers, issue descriptions) must be verified for accuracy.

Best Practice Checklist for Members

1. Apply professional skepticism throughout the audit, ensuring that opinion type aligns with evidence obtained.

2. Document reasoning for opinion selection within audit working papers.

3. Refer to ICAI illustrative formats (2025 edition) for structure and terminology consistency.

4. Quantify the effect of qualifications or misstatements wherever possible.

5. Perform partner-level review before report finalization and UDIN generation.

6. Maintain ethical independence in all opinion determinations, particularly in related-party or management-driven audits.

7. Ensure cross-consistency between the main audit report, CARO reporting, and UDIN records.

Legal and Professional Consequences of Incorrect Opinion

Issuing an inappropriate or unsupported opinion can attract:

• Regulatory Sanctions: Action under ICAI disciplinary mechanisms or NFRA oversight.

• UDIN Rejection: Mismatch between declared and reported opinion type.

• Civil or Criminal Exposure: Under Section 147 of the Companies Act, 2013 for willful misstatement.

• Reputational Damage: Erosion of stakeholder confidence and firm credibility during peer review.

Members must therefore ensure that every audit opinion is defensible, evidence-backed, and consistent with professional standards.

Conclusion

The auditor’s opinion is not a mechanical statement but a reasoned professional conclusion reflecting diligence, independence, and ethical conduct. The accuracy of the opinion type directly influences the trustworthiness of India’s financial reporting ecosystem. Chartered Accountants must approach opinion selection with structured reasoning, precise documentation, and faithful adherence to SAs.

By ensuring proper classification, drafting precision, and full compliance with ICAI guidance, every auditor upholds the core professional value that defines the audit profession — integrity in assurance.

References and Resources

• ICAI Guidance Note on Audit Reports (2025)

• Standard on Auditing (SA) 700 (Revised) – Forming an Opinion and Reporting on Financial Statements

• Standard on Auditing (SA) 705 (Revised) – Modifications to the Opinion in the Independent Auditor’s Report

• Standard on Auditing (SA) 706 (Revised) – Emphasis of Matter and Other Matter Paragraphs

• ICAI e-Guidance Portal: https://www.icai.org