To
The Competent Authority
Office of the Comptroller & Auditor General of India
New Delhi

Subject: Comprehensive Professional Representation on Draft C&AG Empanelment Policy 2026–27 – Issues Affecting Small & Medium Chartered Accountant Firms and Suggested Policy Interventions

Respected Sir/Madam,

With due respect, this comprehensive professional representation is submitted on the Draft C&AG Empanelment Policy 2026–27 from the perspective of Small and Medium Chartered Accountant Firms (SMPs), particularly those operating in non-metro cities, small towns, and non-corporate locations.

While the intent of the Draft Policy to enhance audit quality, accountability, and governance is fully appreciated, certain provisions—if implemented in their present form—are likely to result in unintended, inequitable, and structural exclusion of competent and experienced SMPs due to factors entirely beyond their control. The following submissions are respectfully made for kind consideration.

 

1. Unequal Economic and Professional Ecosystem Across Locations

India exhibits significant inter-State and intra-State economic diversity. Even within the same State, all cities and stations do not offer equal professional opportunities or contribute equally to public sector or corporate activity.

Metropolitan and business-hub cities host corporate headquarters, Maharatna/Navratna PSUs, and high-value statutory audits. In contrast, small and mid-sized cities often have negligible corporate presence and limited PSUs. Consequently, the professional turnover and income potential of CA firms is largely location-driven rather than capability-driven.

Uniform turnover- and income-based benchmarks therefore disproportionately disadvantage SMPs located in non-corporate and non-metro areas.

2. Principle of Natural Justice – Like Must Be Compared with Like

As per settled principles of natural justice, similarly situated entities must be treated alike. Comparing firms operating in economically constrained locations with those in metropolitan business hubs results in unequal and inequitable classification.

Professional empanelment must therefore be location-sensitive and opportunity-adjusted, ensuring fairness and equity.

3. Long Association of Partners – Experience Over Financial Size

Long-standing association of partners reflects professional continuity, institutional memory, and deep familiarity with public sector audits—key determinants of audit quality and professional judgment.

However, the Draft Policy significantly reduces the relative importance of partner experience and long association, while increasing emphasis on financial and structural parameters that do not necessarily correlate with audit competence.

4. Progressive Reduction of Partner-Related Weightage in Recent Years – Structural Disadvantage

Over successive empanelment cycles, the Office of the C&AG has progressively reduced scoring weightage for partner-related parameters, such as:

• Number of partners
• Professional qualifications (FCA status)
• Length and continuity of association

Simultaneously, weightage for parameters such as aggregate turnover, income benchmarks, aggregation/network strength, and manpower size has been increased.

Impact

As a result, Small, Medium, and growing CA firms are structurally unable to compete with large and big CA firms, irrespective of professional capability. Partner-driven merit is overshadowed by scale-driven metrics, effectively freezing progression and defeating inclusiveness and fair competition. 

5. Audit Fees – Known to C&AG but Beyond Auditor’s Control

The Office of the C&AG has complete visibility over audit scope, audit risk, man-days involved, firm strength, and audit fees. However, audit fees are neither regulated nor benchmarked by C&AG, and fee fixation remains solely with the auditee PSU.

Low audit fees coupled with high statutory responsibility adversely affect audit independence and sustainability of SMPs.

6. Need for a Rational Audit Fee Framework

Given the data already available with C&AG, a structured audit fee mechanism is essential.

Audit fees should be benchmarked considering:
• PSU turnover
• Nature and complexity of operations
• Risk involvement
• Number of audit locations
• Audit man-days
• AQMM and enhanced compliance requirements

Recommendation:
For major audits, a minimum audit fee of ₹15 lakh, subject to upward revision, should be prescribed.

7. Absence of Any Mechanism for Turnover Growth of SMPs

While the Draft Policy progressively increases minimum income thresholds for partners, no corresponding mechanism exists to enhance turnover through rationalised fees or assured audit allotment. In such circumstances, achieving rising income benchmarks becomes commercially unrealistic.

8. Allotment of Audits That Do Not Carry Scoring or Experience Value

In several cases, statutory audits allotted by the Office of the C&AG do not carry scoring or experience value, despite full statutory responsibility. This occurs where:

• PSUs fall below prescribed scoring thresholds, or
• Certain statutory audits, though allotted through C&AG (e.g., statutory audit of J&K Bank), are not treated as PSU audits for scoring purposes

In all such cases, audit risk, accountability, and compliance obligations remain unchanged, yet no scoring or eligibility benefit accrues—depriving SMPs of progression pathways.

9. Partner Income / Profit Share – Not a Valid Eligibility Criterion

Partner remuneration and profit-sharing arrangements are internal commercial matters governed by partnership deeds and firm profitability. Partner income is not a proxy for audit competence, particularly when audit fees and audit allotment are outside the auditor’s control.

Income benchmarks, if considered, should be indicative, non-disqualifying, and applied prospectively.

10. Differential Income Recognised but Inconsistently Applied

The Draft Policy recognises metro and non-metro disparity. However, applying uniformly escalating income thresholds without enabling turnover growth results in inconsistency and inequity.

11. Multiple-Layer Taxation on CA Firms – Practical Illustration

A non-metro firm with 10 FCA partners, assume turnover of ₹1.50 crore, and partner remuneration of ₹90 lakh suffers:

• TDS on professional receipts – ₹15,00,000
• TDS on partner remuneration – ₹9,00,000
• Income tax due to disallowance under Section 40(b) – ₹11,46,000

Total tax and TDS burden: ₹35,46,000, against statutory audit fees as low as ₹6,00,000 (assumption, may be change), rendering empanelment commercially unsustainable.

12. Request to Hon’ble Finance Ministry & Hon’ble Prime Minister – Rationalisation of Section 40(b) and Tax Parity

Partnership firms predominantly represent Small & Medium / MSME entities in the professional services sector. These firms operate with limited capital base and constrained pricing power and therefore cannot absorb excessive or cascading taxation.

The ceiling on allowability of partner remuneration under Section 40(b) results in artificial inflation of taxable income and multiple layers of taxation on the same earnings.

Further, it is respectfully submitted that while domestic corporate entities are taxed at a concessional rate of approximately 25%, partnership firms continue to be taxed at a higher rate of 30%, notwithstanding the fact that partnership firms largely fall within the MSME category.

This differential tax treatment, coupled with restrictive deductibility of partner remuneration, places partnership firms at a clear competitive disadvantage vis-à-vis corporate entities operating in similar professional environments.

It is therefore humbly requested that the Hon’ble Finance Ministry and the Hon’ble Prime Minister of India consider:

• Withdrawing or rationalising the ceiling prescribed under Section 40(b),
• Providing parity between partner remuneration and directors’ remuneration, which is allowable as a business expenditure without restrictive limits, and
• Re-examining the higher tax rate applicable to partnership firms, with a view to aligning MSME partnership taxation with the concessional corporate tax regime.

13. Intervention by Ministry of Corporate Affairs (MCA) – Data-Driven Policy Framework

The Ministry of Corporate Affairs maintains comprehensive area-wise corporate data, as all companies mandatorily file annual returns on the MCA portal.

This data objectively establishes the availability of corporate audit opportunities across regions. It is respectfully submitted that such data should be utilised to calibrate empanelment benchmarks, ensuring firms are not penalised for lack of corporate audits in regions where corporates do not exist

14. Abolition of Back-Dated / Retrospective Application of Terms

All back-dated or retrospective application of eligibility conditions, income criteria, scoring parameters, or compliance requirements must be abolished.

Retrospective application violates the principle of legitimate expectation and adversely affects professional livelihood. All conditions must operate prospectively with reasonable transition periods.

15. Cumulative Structural Bias in Favour of Large Firms

The combined effect of reduced partner-related scoring, increased size-based parameters, AQMM burden, escalating income thresholds, restrictive tax provisions, and absence of fee rationalisation has structurally tilted the framework in favour of large firms, marginalising Small, Medium, and growing firms despite competence and experience.

Key Suggestions

  1. Restore meaningful weightage for number of partners, qualifications, and long association
  2. Introduce location-sensitive benchmarks using MCA data
  3. Abolish retrospective or back-dated application of all terms
  4. Treat partner income as non-disqualifying
  5. Introduce a rational audit fee framework (₹15 lakh minimum for major audits)
  6. Ensure all audits allotted by C&AG carry appropriate scoring/experience value
  7. Provide reasonable transition period for existing SMPs
  8. Recommend rationalisation or withdrawal of Section 40(b) and alignment of tax rates for MSME partnership firms

 Conclusion

While the objective of enhancing audit quality is fully appreciated, the Draft C&AG Empanelment Policy 2026–27, when read in conjunction with existing tax and structural constraints, risks systematic exclusion of capable, ethical, and experienced Small and Medium Chartered Accountant Firms, particularly from non-metro locations.

A data-driven, inclusive, experience-sensitive, and prospective policy framework, supported by inter-ministerial coordination, would better serve public interest, audit quality, and the long-term sustainability of the profession.

The above submissions are respectfully made for kind consideration and appropriate modification of the Draft Policy.

Attachment
https://mytaxexpert.co.in/uploads/1768355534_CAGREPRESENTATION.docx 

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