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Physical Verification in Indian GST: A Comprehensive Guide - My Experiences

Abhishek Raja , Last updated: 18 May 2023  
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The Indian GST (Goods and Services Tax) Department has issued a new advisory for the verification of suspicious GST registrations (Instruction No. 01/2023-GST dated 04-May-2023 titled "Guidelines for Special All-India Drive against fake registrations". In an effort to combat tax evasion and ensure the genuineness of businesses, the government has introduced mandatory physical verification of business premises which are suspicious entities as per there software's. In this comprehensive guide, we will explore the various aspects of physical verification in Indian GST, the standard operating procedures, and the implications for businesses.

1. Introduction to Physical Verification in Indian GST

1.1 Why Physical Verification is Needed

Physical verification of business premises is a necessary measure to ascertain the authenticity of businesses. The Indian government has introduced this step to control the menace of fake invoice frauds and protect the revenue by ensuring that only genuine businesses are registered under the GST regime.

1.2 Deemed Registration and the Need for Post-Registration Verification

Deemed registration is a provision under the GST law that grants registration to an applicant if the proper officer has not issued any notice within 21 days of the application. However, this has led to instances where registration is granted even though physical verification has not been completed. To address this issue, the Central Board of Indirect Taxes and Customs (CBIC) has issued a Standard Operating Procedure (SOP) for post-registration verification of deemed registrations.

Physical Verification in Indian GST: A Comprehensive Guide - My Experiences

2. Aadhaar Authentication and Physical Verification

2.1 Aadhaar Authentication for GST Registration

Businesses registering under GST can opt for Aadhaar authentication during the application process. Aadhaar authentication involves linking the applicant's Aadhaar number with their GST and PAN (Permanent Account Number) details. This creates a centralized database that facilitates data analytics and helps in checking tax evasion.

2.2 Physical Verification for Businesses without Aadhaar Authentication

Businesses that do not opt for Aadhaar authentication or fail to complete the process will have to undergo physical verification of their premises. The registration will be granted only after the successful completion of the physical verification process.

3. Standard Operating Procedure (SOP) for Physical Verification

3.1 Mandatory Physical Verification

According to the SOP issued by the CBIC, all businesses seeking GST registration without Aadhaar authentication must undergo a mandatory physical verification of their principal place of business. Wherever possible, the additional place of business should also be verified.

3.2 Post-Registration Verification for Deemed Registrations

In cases of deemed registration, the authorized officer must conduct a compulsory post-registration verification to ascertain the genuineness of the business. If the officer believes that the registration needs to be cancelled, they can initiate cancellation proceedings under Rule 22 of the CGST Rules.

4. Risk Parameters for Physical Verification

The authorized officer may issue a notice in FORM REG-17 to the taxpayer based on the following risk parameters:

  • FORM GSTR-1 is filed, and FORM GSTR-3B is not filed 
  • There is a difference in tax amount reported in FORM GSTR-1 and FORM GSTR-3B (Tax shown in GSTR-1 is more than that shown in GSTR-3B). This has led to a situation where credit (ITC) pass on to the recipient is more than the tax paid (cash + itc). GST Department has recently introduced Form GSTR-01B to handle such situation but this is prospective. What about transactions or events happened say 6-9 months before?

The notice in FORM REG-17 seeks an explanation from the taxpayer regarding the differences and anomalies noticed. The verification should be completed within three weeks.

5. Physical Verification Process

5.1 Verification of Principal and Additional Place of Business

The authorized officer should conduct physical verification of the principal place of business and, if possible, the additional place of business. This is done to ensure that the business operations are genuine and comply with the GST requirements.

 

5.2 Verification of Business Details

My experience says that during the physical verification process, the officer usually verify the following details:

  • Capital goods installed
  • Electricity connection and bills paid in the relevant period
  • Size of the premises
  • Ownership or rental details of the premises
  • Number of employees and the record of their employment
  • Aadhaar and PAN of the taxpayer and their Proprietor, Partners, Karta, Directors, and authorized signatories
  • Confirmation from the bank that the taxpayer's KYC is up to date

6. Preliminary Financial Verification

In addition to the physical verification, the authorized officer may carry out a preliminary financial verification of the taxpayer. Note: Again this list is purely based upon my experience and it may vary from place to place. And this list is no where mentioned in any law or Procedure.

This process requires the following documents:

  • Income Tax Returns of the Proprietor, Partners, Karta, Company, or LLP from the date of incorporation or the last three financial years, whichever is lesser
  • The status of activity of all linked bank accounts, obtained through a letter or undertaking from the taxpayer. For example the business has three bank accounts but they have declared only one bank account to the department.
  • Phone numbers declared or linked to each of the bank accounts. You might raise the voice why this needed but to stop GST frauds, specially the GST ITC Refunds, this is needed. [This is needed because in the verification advisory itself the case is quoted where Mobile numbers were changed in Aadhar after allegedly giving some money to the Aadhar Centre).   
  • Quantum of capital employed or proposed to be employed. (There has been instances where the entity exists only on papers and have only turnover without actually operating)
  • Details of capital employed (own funds or loan funds). [This is needed to check whether you are the actual owner or there is some mastermind behind the whole business.]
  • Audited balance sheet for the previous financial year (if capital includes own funds). [Many Professionals may raise the voice that this is beyond the scope but this is needed to weed out Fake GST Firms. There has been instances where entity was filing GST Returns but never filled their Income Tax or/and ROC Returns and after passing huge credits surrendered their GST Registrations.]
  • Proposal submitted to the Bank or FI for approval (if capital includes loan funds). [Instances has been observed where Stock mentioned in Returns does not match with the stock details submitted to the Banks.]
 

7. Cancellation Proceedings under Rule 22

Based on the physical verification, the authorized officer can initiate cancellation proceedings under Rule 22 of the CGST Rules if they have reason to believe that the GST registration is liable to be cancelled. This can happen if the business is found to be non-genuine or involved in fraudulent activities. During this drive the Officer has the power to suspend/cancel GST Registration immediately. 

8. Issuance of Notice in Form GST REG-17

During the pendency of physical verification, the authorized officer can issue a notice in Form GST REG-17 if they find that the entity is suspicious.

9. Impact on Businesses

The new physical verification process may cause delays in GST registration for businesses that do not opt for Aadhaar authentication. However, it is essential to ensure that only genuine businesses are registered under the GST regime, protecting the revenue and curbing tax evasion.

If the registration of the party whose verification is done is cancelled and it's ITC is blocked under Rule 86A but the total amount passed on to other parties is more than GST Department may start recovery proceedings from the recipient and therefore a large number of entities might be effected. For example, GST Registration is cancelled of Mr. X as during the physical verification his business was found suspicious and Mr. X has passed on the Credit to Mr. A, Mr. B and Mr. C then Department might start recovery proceedings against Mr. A, Mr. B and Mr. C. 

10. Conclusion

The introduction of mandatory physical verification in Indian GST aims to control fake invoice frauds and ensure the genuineness of businesses seeking GST registration. While this may cause some trouble to the businesses but, it is a necessary measure to protect the revenue and maintain the integrity of the GST regime. By understanding the standard operating procedures and implications of physical verification, businesses can better prepare for the process and ensure their compliance with the GST law.

If the drive is taken in true spirit this may weed out Fake GST Registrations and remove the menace of Fake ITC. Whereas, if the drive is not done in true spirit and create trouble to honest taxpayers it may bring tsunami of litigation both for GST Revocation and ITC block/reversal.

What will happen that lies in future but I'm hopeful that this drive will definitely reduce, if not completly remove, the bogus firms passing on the credit. And if Government is able to reduce the firms then I wish the strict procedures for ITC might also be relaxed.  

Again my friends, please read this article as my experience not as per supporting law position and would invite you all to comment what are your views on this.

Disclaimer: This article is written on the basis of my experience gathered in last 2 decades practicing in Indirect Taxes may be Sales Tax/Commercial Trade & Taxes, VAT, Service Tax, Excise and/or the new GST Regime. Physical Verification of business premises is different practically then what is written in the books. Specially in VAT not only it varies from state to state but within state also it varies. There were many practices which had been developed over period of times and which have been imported to GST without backing of law. I believe that these practices would be imported to Special All India Drive against fake registrations and would act as a shocker to many businesses and/or Tax Professionals. They might raise the voice that these are not the documents and/or information you are seeking mentioned in the GST Laws or Procedures but to be honest I believe that GST Department Officers will follow the established practices and will Suspend/Cancel the GST Registration. Whether the Suspension/Cancellation is valid or not that Appellate Authority/Court may decide but till then you are in trouble. Therefore I request you to go thought this article considering it as my experience without questioning my understanding of the law or procedures. Trust me friends, Practical what happens is never written in the book.

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Published by

Abhishek Raja
(Practising CA)
Category GST   Report

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