CARO 2020 Clause 3(vii): Statutory Dues Audit Checklist for Undisputed and Disputed Amounts

CARO 2020 Clause 3(vii) is easy to misread as a simple “taxes paid on time” check. In practice, the auditor has to answer two different questions: whether the company is regular in depositing undisputed statutory dues, and whether any disputed statutory dues remain unpaid because a dispute is pending. The evidence, reporting trigger and working-paper structure are different for each limb.

The statutory reporting framework sits within section 143 of the Companies Act, 2013, available on the India Code page for the Companies Act, 2013. ICAI’s current guidance repository lists the Guidance Note on the Companies (Auditor’s Report) Order, 2020, and the detailed audit guidance is in the official Revised 2022 CARO 2020 Guidance Note.

What Clause 3(vii)(a) asks the auditor to report

Clause 3(vii)(a) requires reporting on whether the company is regular in depositing undisputed statutory dues with the appropriate authorities. The clause specifically names Goods and Services Tax, provident fund, employees’ state insurance, income-tax, sales-tax, service tax, customs duty, excise duty, value added tax and cess, and then extends the test to any other statutory dues applicable to the company.

If the company is not regular, the auditor must also identify arrears that are outstanding at the financial year-end for more than six months from the date they became payable. This creates an important distinction: the regularity conclusion covers the pattern of depositing dues during the year, while the six-month test identifies a narrower set of year-end arrears requiring specific reporting.

Regularity and six-month arrears are separate tests

A company can have payment delays during the year and still have no statutory due outstanding for more than six months at year-end. That does not make the regularity question disappear. ICAI’s guidance treats regularity as a separate assessment and illustrates that reporting can distinguish between regular deposits, occasional delays and a pattern that is not generally regular.

For working papers, therefore, keep two views: one showing due date versus actual deposit date throughout the year, and another showing amounts still outstanding at the balance-sheet date with ageing from the date they became payable.

What counts as a statutory due?

The words “any other statutory dues” make the scope wider than the taxes listed in the clause. ICAI’s guidance explains that the obligation should arise under a statute applicable to the company rather than merely from a contractual relationship. It gives examples such as municipal taxes, tax deducted at source and certain licensing fees as possible statutory dues.

A payment made to a statutory or government-owned body is therefore not automatically a statutory due. The Guidance Note explains, for example, that an ordinary electricity bill arises from the supply relationship and is not treated as a statutory due merely because the supplier was established under a statute. The audit team should identify the legal source of the obligation, not classify items only by the identity of the payee.

Practical audit workflow for undisputed statutory dues

1. Build the universe of applicable dues. Start from the company’s industry, registrations, locations, payroll obligations, tax ledgers and prior-year files. Do not restrict the list to taxes expressly named in CARO.
2. Obtain a statute-wise schedule. Capture the nature of due, period, amount, date payable, payment date and year-end balance.
3. Reconcile the schedule. Tie amounts to the general ledger, returns, challans, payroll records, tax ledgers and relevant financial-statement disclosures.
4. Test regularity. Compare statutory due dates with actual deposit dates and investigate recurring delays, reversals or unexplained balances.
5. Age year-end arrears. For every undisputed amount still unpaid at year-end, calculate the period from the date it became payable and separately identify amounts outstanding for more than six months.
6. Document the conclusion. The file should support both the overall regularity wording and any specific six-month arrears disclosure.

What Clause 3(vii)(b) asks for disputed dues

Clause 3(vii)(b) applies where statutory dues covered by the preceding limb have not been deposited because of a dispute. The auditor must state the amount involved and the forum where the dispute is pending. The clause expressly says that a mere representation to the concerned department is not treated as a dispute.

ICAI’s guidance also notes that disputed-dues reporting is not limited by a materiality threshold stated in the clause. The reporting should enable a reader to understand the nature of the dispute, amount involved and forum where it is pending.

How to audit the disputed-dues schedule

• Obtain a complete litigation and tax-demand register from management.
• Match items to notices, demand orders, appeal acknowledgements, stay orders and correspondence with the relevant authority.
• Confirm the amount remaining unpaid because of the dispute.
• Verify the forum and current stage instead of carrying forward an outdated prior-year description.
• Cross-check the schedule with legal confirmations, tax ledgers and provision or contingent-liability disclosures.
• Obtain management representation, but do not use it as a substitute for underlying documentary evidence.

Worked illustration

Assume a company has three items at 31 March. First, a monthly statutory contribution was repeatedly paid 10 to 20 days late during the year, but nothing remains outstanding at year-end. That pattern is relevant to the regularity conclusion even though there is no six-month year-end arrear.

Second, an undisputed GST-related amount became payable more than six months before 31 March and is still unpaid. It belongs in the arrears analysis under Clause 3(vii)(a), supported by the relevant period, due date and amount.

Third, an income-tax demand is under a valid appeal and remains unpaid because the dispute is pending. It belongs in the Clause 3(vii)(b) schedule with the amount and appellate forum. A letter merely asking the department to reconsider a demand should not automatically be treated as the same kind of dispute.

Common mistakes to avoid

• Checking only closing tax-payable balances and ignoring payment regularity during the year.
• Treating the six-month arrears test as the only trigger under Clause 3(vii)(a).
• Copying last year’s list of statutes without reconsidering new registrations, locations or activities.
• Calling every payment to a government or statutory entity a statutory due without identifying the legal obligation.
• Classifying informal departmental correspondence as a formal dispute.
• Reporting disputed dues without verifying the amount, period, forum and supporting proceedings.

Practical takeaway

The cleanest way to audit Clause 3(vii) is to keep three questions separate: Was the company regular in paying statutory dues? Which undisputed dues were still outstanding for more than six months at year-end? Which unpaid dues are genuinely under dispute, for what amount and before which forum? A working paper built around those three questions is stronger than a single year-end tax-payable reconciliation.