DPDP Act Compliance for Tax and Accounting Firms in India: Data Protection, Cloud Risks and Professional Confidentiality

Introduction: When Confidentiality Meets Statutory Data Protection

Tax advisors, chartered accountants, auditors and professional services firms operate on trust. Clients share highly sensitive financial and personal information with the expectation that professional confidentiality will protect it.

However, the shift to cloud accounting, remote audits, AI tools and global delivery models has transformed how client data is collected, stored and shared. Information that was once confined to physical files now moves across digital systems and jurisdictions.

With the introduction of the Digital Personal Data Protection Act, 2023 (DPDP Act) and the DPDP Rules, 2025, confidentiality is no longer governed only by professional ethics. It is now a statutory obligation to fulfill DPDP compliance which is backed by penalties and regulatory enforcement. For professional services firms, this means confidentiality must be supported by structured, documented and demonstrable data protection compliance.

Applicability of the DPDP Act to Professional Services Firms

A. Entities Within Scope

The DPDP Act applies to any entity that processes digital personal data. This includes chartered accountancy firms, audit and assurance practices, tax advisory and compliance firms, consulting and transaction advisory firms, insolvency professionals, valuers, family offices, wealth advisory firms, global professional services networks, and offshore or shared service centres. Both Indian firms and foreign networks handling personal data of individuals in India fall within its scope.

Most professional services firms qualify as Data Fiduciaries under the DPDP Act because they decide what personal data is collected, how it is used, how long it is retained, and with whom it is shared, including regulators or affiliates. Technology vendors such as cloud accounting platforms or document management providers typically act as Data Processors, but the primary legal responsibility remains with the firm. Larger firms that process high volumes of sensitive financial data may also be classified as Significant Data Fiduciaries, attracting enhanced compliance obligations.

B. Nature of Data Processed by Tax and Accounting Firms

Tax and accounting firms handle a wide range of sensitive personal data. This includes PAN and Aadhaar details (where provided), passport information, bank statements, income records, assets and liabilities, transaction histories, valuation reports, estate and succession planning documents, and employee or payroll data for corporate clients. Such information provides a detailed picture of an individual’s financial position and personal circumstances, making it highly sensitive from a data protection perspective.

Firms often differentiate between “client data” (belonging to companies) and “personal data” (belonging to individuals). However, under the DPDP Act, this distinction is limited. If corporate records contain identifiable individuals such as directors, partners, promoters or employees the information qualifies as personal data. As a result, most datasets handled by professional services firms fall within the scope of the DPDP framework.

Consent, Contractual Necessity and Professional Engagements

A. Consent Is Often the Wrong Basis

Under the DPDP Act, consent must be free, informed, specific, unambiguous and capable of withdrawal. In professional engagements, relying on consent can be legally weak because services such as audits or tax filings cannot be delivered without processing personal data. If consent is withdrawn, the engagement itself may become impossible to perform. For this reason, data processing by tax and accounting firms is usually better justified on the basis of contractual necessity (through engagement letters) or legal and regulatory obligations, such as statutory filings and audits.

B. Engagement Letters as Compliance Instruments

Engagement letters must now serve as key compliance documents, not just agreements on scope and fees. They should clearly describe the categories of personal data being processed, the purpose of processing, how data may be shared with affiliates, regulators or vendors, and how long it will be retained. Simple confidentiality clauses are no longer enough to meet the notice and transparency requirements under the DPDP Act.

Purpose Limitation and Secondary Use Risks

A. Advisory vs Analytics

Professional firms increasingly use client data for benchmarking, trend analysis, AI-assisted advisory tools and internal knowledge management. While these practices may improve efficiency and insights, they can go beyond the original purpose for which the data was collected. Under the DPDP Act, any secondary use of personal data must have a valid legal basis. Firms should not assume that “internal use” is automatically permitted if it was not clearly disclosed at the time of engagement.

B. Marketing and Cross-Selling

Using client data to cross-sell additional services, identify new transaction opportunities, or approach related group companies or family members can raise compliance risks. If such use was not clearly disclosed and justified, it may violate the principles of purpose limitation and fairness under the DPDP framework. Transparency and proper documentation are essential before using client data for marketing or business development activities.

Cloud Accounting, Remote Audits and Technology Risk

A. Cloud Platforms as Structural Risk

Modern tax and accounting firms depend on cloud accounting software, virtual data rooms, document management systems and digital collaboration tools. These platforms often store data across jurisdictions and may involve multiple sub-processors. Under the DPDP Act, firms remain responsible for ensuring that such vendors comply with data protection requirements. This includes putting in place strong contractual safeguards, monitoring processor compliance, and maintaining robust security and access controls.

B. Remote Audits and Access Creep

Remote audits and shared digital workspaces can unintentionally expand access to client data. Teams may gain broader visibility than necessary, information may be shared informally, and data may be retained longer than required. These practices increase the risk of data breaches and make it harder for firms to defend their processes if questioned under the DPDP framework. Strict access management and disciplined data retention practices are therefore essential.

Cross-Border Data Transfers and Global Networks

A. Global Delivery Models

Many large professional services firms operate through offshore shared service centres, global centres of excellence and cross-border review or sign-off processes. In such models, personal data may routinely move outside India for processing or analysis. Under the DPDP Act, cross-border transfers are allowed only to jurisdictions permitted by the Government of India. Firms must therefore carefully review how and where client data is transferred as part of their global operations.

B. Network vs Firm Liability

Global professional networks often maintain that local member firms are legally independent. However, where data systems are integrated, technology platforms are shared, and methodologies are centrally managed, this separation may not eliminate liability. In practice, Indian firms may still bear primary responsibility as Data Fiduciaries for unlawful or non-compliant data transfers under the DPDP framework.

Regulatory Disclosures, Audits and Compelled Sharing

A. Statutory Disclosures

Professional services firms regularly share client information with tax authorities, regulators, courts and tribunals as part of legal or regulatory requirements. While such disclosures may be mandatory, firms must still ensure that only the necessary data is shared. They should maintain proper records and audit trails of disclosures and ensure that data is transmitted securely to reduce the risk of misuse or breach.

B. Conflict Between Client Confidentiality and DPDP Rights

Under the DPDP Act, individuals have the right to access, correct or request deletion of their personal data. At the same time, firms may be required to retain certain records under tax laws, professional standards or litigation hold obligations. Balancing these competing requirements can be complex. Clear internal policies and governance mechanisms are essential to manage such situations lawfully and consistently.

Data Breaches and Professional Liability

A. Mandatory Breach Notification

Under the DPDP Act and Rules, any personal data breach must be reported to the Data Protection Board of India and to the affected individuals. This obligation applies even if the data relates to professional engagements and even where no immediate financial loss is visible. Firms cannot assume that confidentiality or absence of harm removes the duty to notify.

B. Amplified Consequences for Professionals

For tax, audit and consulting firms, a data breach can have serious consequences. These include regulatory penalties, possible disciplinary action by professional bodies, loss of client confidence, litigation exposure and reputational damage. In advisory professions, reputation is often the most valuable asset, and a breach can undermine years of trust-building.

Penalties, Enforcement and Overlapping Obligations

A. Monetary Penalties

The DPDP Act allows for monetary penalties of up to INR 250 crore per contravention, depending on factors such as the nature and sensitivity of the data involved, the scale of processing, and the mitigation steps taken by the firm. Given the highly sensitive nature of financial and tax information, breaches in professional services firms are likely to be viewed as high-risk under the enforcement framework.

B. Multiple Regulators and Standards

Professional services firms operate under multiple regulatory frameworks, including DPDP enforcement, professional institute standards, and sector-specific regulations where applicable. Managing compliance across these overlapping regimes can be complex. Weak or inconsistent governance increases regulatory exposure and can significantly raise remediation and compliance costs.

Compliance Roadmap for Professional Services Firms

1. Data Mapping and Engagement Review: Identify all personal data processed across services and engagements.

2. Engagement Letter Modernisation: Align engagement terms with DPDP notice and purpose requirements.

3. Cloud and Vendor Governance: Audit platforms, sub-processors and access controls.

4. Cross-Border Transfer Strategy: Map global flows; assess notifications; update network arrangements.

5. Training and Culture: Embed data protection into professional ethics and firm culture.

Conclusion: Reinforcing Trust in a Digital Profession

The DPDP Act and Rules do not replace professional confidentiality but strengthen it by turning ethical duties into clear legal obligations. Data protection is no longer just an internal IT function; it is now a core part of professional responsibility for tax, accounting and consulting firms.

Firms that actively align their practices with DPDP requirements through updated engagement terms, strong technology controls and clear internal policies shall be better placed to protect client trust, manage regulatory risk and maintain credibility in an increasingly digital and data-driven professional environment.