Tax due diligence checklist

Define the tax perimeter

List the entities, registrations, locations, historical periods and proposed transaction structure. Include taxes relevant to the actual business: direct tax, withholding, GST, customs and applicable state or local levies. Explain any excluded period or tax rather than describing a limited review as comprehensive.

Separate historic compliance from tax consequences of the proposed transaction. A review of past returns does not establish the tax treatment of a share sale, asset transfer or future restructuring. Apply the law governing each period; current legislation should not be used indiscriminately to reassess older filings.

Collect evidence in reconciled sets

• Signed financial statements, trial balances and current management accounts.
• Filed returns, computations, audit reports and submission acknowledgements.
• Tax-payment challans and ledger balances matched to the relevant registration and period.
• Withholding calculations, statements, certificates and correction records.
• Notices, assessment orders, appeals, stay orders and authority correspondence.
• Refund claims, carried-forward attributes and supporting eligibility calculations.

Bridge book profit to taxable income

Trace material adjustments from the accounts to the tax computation and return. Examine recurring losses, large deductions, related-party charges, provisions and unusual transactions using the supporting evidence.

Identify the assumptions behind tax assets and benefits. A balance in the accounts does not prove that a loss, credit or refund can be used after the transaction. Assess the relevant conditions and any ownership or business-continuity implications before including that value in the investment case.

Reconcile GST and withholding

For GST, reconcile books, outward reporting, tax payment and credit treatment by registration and period. Investigate timing differences, credit reversals, refunds, exports and significant classification or place-of-supply positions. A matched total does not establish the legal eligibility of every credit.

For withholding, sample the underlying payment categories and timing against deductions, deposits and statements. Include cross-border payments and employee compensation where relevant. Explain exceptions and quantify unresolved items separately from corrected differences.

Inspect demands and proceedings

The Income Tax Department provides an outstanding-demand response service. Obtain current portal information and reconcile it to orders, payment evidence, rectification requests and appeals. An entry disputed by management is not automatically extinguished, and a payment receipt may need matching to the correct demand.

GST electronic liability records provide another source of recorded dues. Reconcile those records to returns and proceedings, while recognising that an unassessed exposure may not yet appear in a portal balance. Preserve deadlines and responsibility for every open case.

Example: tax shown as paid but demand remains open

Suppose the target records a demand as settled, but the portal still shows it outstanding. Match the challan, tax type, period and demand reference to the order. Obtain evidence of any response or correction request and determine whether the issue is payment allocation, a remaining balance or an unresolved dispute.

Report the documentary gap and current status rather than simply accepting either the ledger or management’s statement. The transaction response may involve a closing action, a specific protection or retained funds, depending on the facts and negotiated terms.

Quantify findings without false precision

Separate principal tax, potential interest and penalties, assumptions and unquantified exposure. Avoid double-counting the same issue across tax periods or workstreams. State where the legal position is uncertain or the records prevent a reliable estimate.

Compare the finding with provisions already in the accounts and the transaction’s pricing mechanism. A tax provision, an indemnity and a payment are different responses; none should be described as the others.

Carry actions into the transaction

Prepare an issue register with evidence, affected periods, amount or range, owner and proposed resolution. Identify pre-closing corrections, disclosures, negotiated protections and post-closing deadlines.

Preserve access to historical records and agree who controls continuing proceedings and refund claims. Refresh material balances before closing and retain the final report’s scope and limitations with the decision record.