GST Audit - Applicability and Procedure

GST is a trust based taxation regime wherein, the registered person has to compute and declare the turnover, tax liability, ITC available and refund that can be claimed, on his own. In such a process, a robust mechanism is required to oversee the compliance by the registered persons with the provisions of the law. This gave rise to various types of assessments and audits under the GST Act.

S.2(13) of CGST Act, 2017 defines the term "Audit".

1. What is Audit?

Audit means an examination of

• records,
• returns and
• other documents

maintained or furnished by the registered person under this Act or the rules made thereunder or under any other law for the time being in force.

2. Why is it done?

To verify the correctness of

• turnover declared,
• taxes paid,
• refund claimed and
• ITC availed.

And

To assess the registered person’s compliance with the provisions of this Act or the rules made thereunder.

Types of Audits under GST

Audit by Professional- S.35(5) read with S 44(2) and Rule 80

• Audit under this section is applicable to every registered person whose aggregate turnover during the Financial Year has exceeded Rs. 2Cr for FY 2017-18 and Rs. 5Cr from FY 2018-19 onwards.

• Such an audit should be done only by a Chartered Accountant or a Cost Accountant.

• After the completion of the audit the registered person should furnish the following documents:

○ Audited annual accounts.
○ Annual Return.
○ Reconciliation statement in Form GSTR 9C along with a certificate from the auditor and
○ Such other particulars as may be prescribed.

Note: GSTR 9C reconciles the value of supplies, tax paid and ITC availed declared in the annual return i.e; GSTR 9 with the annual audited financial statements.

• The auditor shall report on the following matters:

1. Whether the required accounts have been maintained properly?
2. Any observation of discrepancies, comments to be made by the auditor.
3. Whether the financial statements and the books have been maintained at the principal place of business?
4. Whether the information provided in GSTR 9C is true and fair?

• The above said documents should be furnished either electronically through the common portal or through the facilitation centre notified by the commissioner.

• The registered person shall file these documents on or before 31st December following the end of the financial year.

• Aggregate Turnover: Turnover shall be computed on all India basis.

• Annual Returns for various types of taxpayers

• Is this audit applicable to a non-filer?

A non-filer is a Registered person under the GST Act who is liable to file the returns under this Act but fails to do so. The section states that the audit is applicable to all the registered persons who satisfy the criteria. Hence, if the non-filer satisfies the criteria specified under the Act, they are liable to get their books audited under this section.

• GST Audit of Multi-Locational Entities

1. There are more than one kind of multi-location units to be considered, namely

a. Registered branches in two different States / UTs;
b. Registrants within the same State, as business verticals or otherwise;
c. Business locations outside India;
d. Branches in a State that are found liable to register but are not registered.

2. Following "Registrations" of the taxable person are not required to be audited:

a. Input Service Distributor
b. A person paying tax under Section 51 or Section 52
c. A casual taxable person
d. A non-resident taxable person

3. Various aspects such as the location of accounts, stock transfers, cross-utilization of services, cost-sharing, income bifurcation, E-way bill tracking, bifurcation of credits into ISD’s, cross charges needs to be given special attention in multi locational entity’s audits.

4. Some of the important procedures and checks are:

a. Extracting GSTIN-wise trial balance (duly validated that all such GSTIN-level trial balance add-up to the entity-level trial balance;
b. Ensuring relevant GSTR 1 and GSTR 2A are matched,
c. Securing confirmation letters where GSTR 1 and GSTR 2A remain unmatched
d. Valuation of inter-locational transactions where there can be an input tax restriction in the hands of the recipient

e. Importantly, in respect of transactions relating to the import of services (where IGST becomes payable by the importer) and such transactions are subject to valuation by the GST authorities at a later date which has already been included in the cost of services provided to a customer. Change in the cost component due to valuation review can adversely impact the reporting results of the registered person. For example, HR services utilized by an Indian entity from an overseas provider.

• Points to be noted

1. An internal auditor cannot be appointed as GST Auditor.

2. The GST Act does not allow a GST practitioner to perform the audit.

3. In case of an organisation with multiple branches, the turnover of all the branches should be considered as it is computed on all India basis. Hence, if the aggregate turnover exceeds the limit prescribed, all the registrations under such PAN are liable for audit under this section even if the individual turnover does not exceed the limit prescribed.

Audit by Tax Authorities- S.65 read with Rule 101

• GST authorities have started sending notices to various registered persons for the FY 2017-18 at the beginning of the year 2020. The authorities are using the Risk Scores assigned by the Directorate General of Audit to select the taxpayers for the audit.

• Audits by the tax authorities can be conducted only by the Commissioner or any officer authorised by him and a general or specific order must have been issued by the officer in this regard.

• This audit can be conducted either at the place of business of the registered person or at the office of the authorised officer.

• Issue of notice: The proper officer shall issue a notice to the registered person in Form GST ADT-01, 15 days prior to the conduct of the audit.

• Conducting the Audit: The proper officer shall verify

○ the documents on the basis of which the books of accounts are maintained and the returns and statements furnished under this Act.

○ the correctness of the

- turnover,
- exemptions,
- deductions claimed
- rate of tax applied in respect of the supply of goods or services or both
- input tax credit availed and utilised
- refund claimed and other relevant issues

• Informing discrepancies: The officer shall inform any discrepancies found to the registered person for which the registered person may file his reply.

• Informing final findings of the audit: The officer, after considering the reply filed by the registered person, shall inform the findings of the audit to the registered person within 30days in Form GST ADT-02.

• Time limit for completion of the audit: This audit shall be completed within 3m from the date of commencement of the audit.

Note:Date of commencement of audit is the day on which the records and documents called by the tax authorities are made available by the registered person.

• This period of 3m may be extended further for a further period of 6m by the commissioner if he is satisfied for the reasons recorded in writing

• Cooperation by the registered person: During the course of the audit, the authorised officer may require the registered person,—

○ to afford him the necessary facility to verify the books of account or other documents as he may require;
○ to furnish such information as he may require and render assistance for timely completion of the audit.

• If the officer has found any cases of tax not being paid or wrong availment or utilisation of ITC, he may initiate proceedings under S.73 and 74 which relate to demand and recovery of the tax.

Special Audit- S.66 read with Rule 102

• S.66 of CGST Act, 2017 has an overriding effect over other laws. Hence, even if the audit has been conducted under any other law(Ex: Companies Act, Income Tax Act etc.,), this does not stop the officer from issuing an order to conduct an audit under this section.

• Audit under this section can be conducted during the process of scrutiny, inquiry, investigation or under any other proceedings under this act i.e; after the commencement and before the completion of the above said processes.

• If the officer not below the rank of Assistant Commissioner, considering the nature and complexity of the business and in the interest of the revenue, is of opinion that:

○ Value has not been correctly declared or
○ Credit availed is not within the limits,

• He can avail the services of an expert to conduct a detailed examination of the areas specified by him in the operations of the registered person.

• The expert mentioned above should be either a Chartered Accountant or a Cost Accountant.

• It is to be noted that the Assistant Commissioner should obtain approval of the Commissioner before issuing an order under this section.

• The officer shall issue a notice in Form GST ADT-03 to the registered person to get his books of accounts audited by the CA/CMA nominated by the Commissioner.

• The registered person shall be given an opportunity of being heard in respect of any material gathered, which is proposed to be used against him in the proceedings of this audit.

• The CA/CMA shall submit the report on such audit to the Assistant Commissioner within 90days from the commencement of the audit in Form GST ADT-04 which is duly signed and certified by them.

• The time limit of 90days may be extended by the Assistant Commissioner on an application made to him on this behalf by the CA/CMA/the registered person if he is satisfied that there is a material and sufficient reason.

• The expenses of examination and audit including the remuneration payable to the expert shall be determined and borne by the Commissioner.

• On completion of the audit, the officer shall give his findings to the registered person.

• If the officer finds that tax was not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, he may invoke the provisions of Section 73 or Section 74 of CGST Act, 2017.