In terms of section 65 of the CGST Act, the Commissioner or any officer authorized by him may undertake audit of any registered person for such period and frequency, in the manner as be prescribed. The Government may prescribe provisions for selection of taxable persons for audit based on factors such as risk element, total tax payment, turnover, business segment, etc.
In this article, the paper writer has examined the provisions of Audit under section 65 as well as best practices in facing GST dept audit.
GST Audit u/s 65
Section 65 authorizes conduct of audit by the Commissioner or any other officer authorized by him of the transactions of the registered persons only. The Commissioner may issue a general order or a specific order, to authorize officers to conduct such audit.
Such general or specific order must be specific to the auditee and for a selected tax period.
The audit can be conducted by the authorities either at the place of business of registered person or at the department's Office.
When it is decided to undertake the audit of a registered person in accordance with the provisions of section 65, the proper officer shall issue a notice in FORM GST ADT-01 not less than 15 working days prior to the conduct of audit.
The audit shall be completed within 3 months from the date of commencement of audit. However, where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within 3 months, he may, for the reason to be recorded in writing, extend the period by a further period not exceeding 6 months.
The expression ‘commencement of audit' shall mean the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later. Thus, if the information or documents are furnished belatedly to the audit team, the time limit to conclude the audit would automatically get extended.
During the course of audit, the authorized officer may require the taxable 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.
The proper officer would, with the assistance of the team of officers and officials accompanying him, verify the documents on the basis of which the books of account are maintained and the returns and statements furnished under the Act and the rules made thereunder, the correctness of the turnover, classification and valuation, exemptions and deductions claimed, the rate of tax applied in respect of supply of goods or services or both, the input tax credit availed and utilized, refund claimed, and other relevant issues and record the observations in his audit notes.
The proper officer should inform the registered person of the discrepancies, if any, noticed as observations of the audit and the said person can file his reply and the proper officer shall finalize the findings of the audit only after due consideration of the reply furnished. On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, and the reasons for such findings, his rights and obligations in FORM GST ADT-02.
The auditee should make use of this opportunity to provide a proper explanation with supporting evidence.
Once the audit is concluded, the auditee is explained the audit findings/ observations and is given an opportunity to pay the disputed amount - on the spot/ before issuance of audit report.
However show cause notice under section 73 or 74 to recover such not paid/short paid amountis a must in case the audit observation about non-payment or short payment of the tax is not acceptable by the auditee.
Pre-SCN consultation is mandatory under Central Excise and Service Tax in case where demand is more than Rs. 50 lakhs and not giving Pre SCN consultation fatal to subsequent proceedings [Back office IT solutions - Del. H C 2021 SCC Online Del 2742.Under GST it was mandatory through Rule 142 (1A)under GST [Form DRC-01A] upto 15.10.2020, thereafter optional.Show cause notice once it is issued thereafter contested as per law.
Preparation and approach by taxpayer towards GST dept audit
- When audit notice is issued by the jurisdictional officer check if empowered to issue the notice?
- Any other parallel Audit/ investigation already conducted then can ask for waiver [refer R.P. Buildcon Private Limited & Anr v. The Superintendent, CGST & CX [WPA 20025 of 2022 explained further].
- Seek adjournment if information/ documents not ready - MH Trade Circular. 13T of 2020.;
- Identity of the each and every member of the audit team must be verified;
- Keeping the information in an organized manner ready prior to the visit by the audit party; These may include financial statements, GST returns, details of inward and outward supplies, ITC availed and RCM paid, invoices, debit note/credit note/Eway bills generated.
- Get pre-audit done internally / externally by competent professional CA's.
- During pre-audit if any valid tax liability omitted/ unpaid found out [such as RCM on import of services/GTA services], discharge voluntarily with interest[to avoid penalty- if found in course of dept audit].
- Be clear in facts and documentation during the audit. Right person for handling audit who is thoroughly conversant with the business activities and understanding of GST compliances.
- Professional can be involved as an authorized representative to handle the audit and represent the taxpayer;
- Providing all the necessary information/documents called for by audit team;
- If department asks for original documents - Make available on a sample basis backed by a CA certificate;
- Submit the relevant information called for with the acknowledged covering letter.
- Replying all the queries to the audit team in writing
- Explain in brief & submit in writing - Mention view based on advice of expert GST consultants
- Never deposit any amount under pressure - if paid file a letter intimating such payment, mention specifically that “the payment is made under the directions of audit team under protest”
- Unofficial demands by the aggressive officers in the course of audits - Payment must not be demanded under coercion/ harassment - Gujarat High CourtHemani Intermediates Private Limited Vs UOI R/Special Civil Application No. 2618 of 2021
- Oral directions for payment/ reversals. It is suggested to keep everything in writing - Submit a letter stating the complete sequence of events with full facts &details;
- Type of replies given during the audit would make the foundation strong for future litigation;
- Reply to the audit note citing legal provisions+ decisions in depth and within time
- Pay Taxes voluntarily with interest - if audit observations are genuine
- Assessee could take Expert opinion / confirmation from expertsto understand strength of case, before reversing ITC / paying tax during audits
- Option of payment under protest. Payment can be made under protest wherein it involves areas of interpretation, where not agreed by assessee. Later if matter in favour of assessee can claim/refund without time limit. For instance, in case of ITC related to building for own use of tax payer as office premise/factory, which is capitalized to immoveable property block but used in business of making taxable supplies. Credit could be availed reversed under protest waiting for the apex court final judgment in Safari case. This case is now pending before SC in 2020 (32) G.S.T.L. J120 (S.C.) High Court had held that if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST then the assessee is eligible to an input credit of GST paid on inward supplies used for the construction of such property.[decision expected from Apex Court shortly];
Best practices in drafting replies to audit report observations
- Get the audit report in writing
- First check: Whether accompanied by DIN or not?When audit report is issued without a DIN and hence, is to be considered invalid. Reliance is placed on CBIC Circular No. 122/41/2019-GST dated 5th November 2019 and 128/47/2019. The Hon'ble Supreme Court in Pradeep Goyal v. Union of India &Ors. [Writ Petition (Civil) No. 320 of 2022 dated July 18, 2022] held that implementation of Document Identification Number (“DIN”) for intimating communications sent by the State Tax Officers/Other Officials, would be beneficial in the larger public interest to enhance good governance and to bring transparency and accountability in the indirect tax administration.
- Understand the business and activities from client+ going through the financials/website
- At outset reply to contain what is activity+ confirm compliances being done briefly- filing returns after payment in time, availing credit within time limit etc.
- Understand the issue raised. Common examples could be turnover reco in financials vs returns; difference in GSTR 1 vs 3B; ITC mismatch issue- in 2A/2B vs 3B; denial of eligible ITC citing to be ineligible u/s 17(5) such as travel/accommodation sales promotion expenses; Demands raised on corporate guarantee; exported services being treated as taxable to GST;
- Understand the transaction from underlyingdocumentary evidence such as agreement with clients.
- Putting across facts+legal position correctly at the stage of audit report reply is very critical. Eg: When GST demanded on security agency services under RCM for period prior to date of introduction of such levy[ when it is applicable only wef 1.1.2019 and not for prior periods from July 2017 onwards]
- Refer section/ rules/ circulars under GST law + case laws-not just under GST but erstwhile CE/Service tax laws which are relevant to issue raised.Submit such case laws and legal understanding to the audit team.
- Give specific answersset out broad defence for each issues raised. Example when there is a denial of ITC citing renovation expenses incurred for building meant for self-use as factory premises. It would be eligible when such expenses are written off to P&L and not capitalised to immoveable property block.
- If interpretation of law is involved - take sound written legal advice to confirm
- Send reply letter scanned signed set to official mail id of concerned officer. Also send the replyentire set with enclosures- print out signed by speed post and file communication proof. If no response is theresend confirmation letter after 1month, that hoped matter resolved.
Parallel proceedings can be conducted or not-jurisprudence
In the Calcutta High Court in M/s. R.P. Buildcon Private Limited &Anr v. The Superintendent, CGST & CX [WPA 20025 OF 2022 dated September 30, 2022] the Superintendent, CGST & CX issued notices relating to financial year 2017-2018 to 2019 - 2020 for which an audit under Section 65 of the CGST Act was conducted. In the meantime scrutiny of returns under Section 61 of the CGST Act, 2017 was conducted for the same tax period by the Anti Evasion wing as well as the Range Office.
M/s. R.P. Buildcon filed a writ petition contending that once an audit under Section 65 of the CGST Act, has been conducted, the scrutiny of returns under Section 61 of the CGST Act, 2017 cannot be done for the same tax period.
Further, the writ petition was dismissed by the Court in an order dated September 19, 2022 on the ground that the notice issued by the Respondent was in the form of SCN and cannot be quashed.Therefore, being aggrieved by the Impugned order, the Appellant filed this appeal.
Whether or not parallel proceeding for the same tax period can be conducted?
The Hon'ble Calcutta High Court held as under:
- We are of the view that since the audit proceedings under Section 65 of the Act has already commenced, it is but appropriate that the proceedings should be taken to the logical end. The proceedings initiated by the Anti Evasion and Range Office for the very same period shall not be proceeded with any further…..
The different offices of the same department not to initiate parallel proceedings if one office of the same department is already proceeding against the same assessee on the same subject matter.
In this article the paper writer has given practical aspects on the handling of GST audit by department. Such approach would help to avoid/reduce frivolous objections and relief by way of dropping of demands at the stage of audititself[prior to SCN].
The author can also be reached at email@example.com