When an Entity has registrations in more than one State / UT, each unit/branch is treated as a distinct person in terms of Section 25 of the CGST Act and each of these units is required to get its records audited under the GST Laws. (If falling under GST audit criteria).
However, the following taxable person are not required to be audited:
- Input Service Distributor
- A person paying tax under Section 51 or Section ( i.e. TCS and TDS)
- A casual taxable person
- A non-resident taxable person
There can be following type multi-location units
- Branch is registered in two different States/UTs;
- Branch is registered in same state when business verticals are different
- When Branch is located outside India
- Branches is in state and liable to register but are not registered
Following issues should keep in mind while doing audit of Multi-location entities:
a. According to Section 35 of CGST Act, every registered person is required to maintain books, records and other documents. However, problem arise when the principal place of business holds or maintains all the books and records because it will be very difficult to find specific transactions and file those in returns.
For example: Unit “A” transfers stock to unit “B”, the same has not been recorded in books of accounts. In this case, it has to find out from other sources like Delivery challan, E-way bill or any other documents maintained.
b. Another issue, when the common cost is incurred for all units and now it is required to allocate it among units, it can be done on the basis of turnover of each unit or manpower deployed in each unit. If any special manpower is employed in any unit then it should be allocated to that unit only.
c. Many enterprises use infrastructure facility, back-end support related to finance, accounts, Human resources, corporate management from centralized location/Head office. These costs should be allocated based on actual end use rather than turnover.
d. Where the transaction has been made with the branch (which fails to obtain registration under GST), it’s become a very tough task to ensure completeness of reporting by the registered head office
Key checks and balances:
- Extracting GSTIN wise Trial wise and verify the total of GSTIN is equal to entity-level GSTIN.
- Confirm GSTR-1 and GSTR-2A are matched, where applicable
- Take confirmation letter where GSTR-1 and GSTR-2A remains unmatched
- Valuation of inter-locational transactions where there can be an input tax restriction in the hands of the recipient;
- 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.
Accounts of Locations
- Audit should be started by taking separate Trial Balance for GSTIN under audit, through separate GSTIN we can ensure that all transactions are related to that particular GSTIN only.
- Trial balance can be generated by maintaining separate books of accounts of all the locations or another way if separate books of accounts is not maintained then by specific marking for a branch against each transaction ( Practically would be very challenging to implement).
- If separate trail balance is maintained against each branch, which falls under single GSTIN, same may be consolidated to eliminate, inter-branch transactions within the same GSTIN.
- Relevant ledger accounts as per trial balance should be reviewed with records and documents maintained at the respective locations.
- Balances should be verified figures declared in Form GSTR 1 and GSTR 3B of each GSTIN
- Best option would be if auditor received audited trial balance of each registered locations, however, in case GSTIN wise audited trial balance is not available then management-certified ‘trial balance’ of each registered location should be a base for performing GST Audit.
Importance of Registration wise Transaction
There are many contracts, which is signed by a legal entity with the third party; however, the supply of such contracts is made by different locations. In such cases calculation of correct tax payable or correct input available to a taxpayer is very important. Transaction between different GSTIN of same entity should be analyzed very carefully.
- Stock transfer of goods and /or
- Cross utilization of services.
Stock transfer is easy to identify and can be verified through stock records but cross utilization of services may not be clear from financial records. It could be identify through
- Analysis of purpose of each expenditure for each trail balance
- Segment Reporting AS 17 will be useful to identify such transactions
In case of inter-unit of transfer of goods and services, an auditor needs to see that valuation has been carried as per Rule 28 of CGST Rules.
Cost sharing/Cross charge between branches
Section 7(1) (c) read with Schedule I of the CGST Act considers transactions between distinct persons as supplies even when such transactions do not involve supply.
Accordingly, stock transfer of goods between branches being a transaction between distinct persons comes within the ambit of the GST Laws. Similarly, services between branches would also attract GST liability.
Audit of Multi-location entities requires examinations of following:
- Common cost incurred by head office example Marketing or brand building cost
- Identification of branches which have not been registered
- E-way bill to track supplies which have been marked as stock transfers
- Basis of bifurcation of credits into ISD
- Valuation of Supply especially when credits are not available in the hands of the receiving Branches.
- supply is State B (E.g. Accommodation Services of the employee of ‘State A’availed as credit in ‘State B’);
- Identify ‘location of employment’ of all employees and then map their costs and invoices in each branch etc.
On the basis of the above concept, it is clear that auditor must bear in mind that a lot may issues may arise in real time business environment Adequate checks should be exercised while reporting such transactions.