In this article, we traverse through the GST Audit lanes and try to bring out a clearer view of the Audit Provisions under GST. The GST is self-assessing by nature while more than 1 crore Taxpayers are registered under GST. Self-assessment is necessary to determine tax liabilities. Among the seven types of tax assessments under GST, only one has to be done by the taxpayer.
However, in a complex indirect tax system like GST self-assessments are not error-free. To ensure a smoother and more robust taxation system, the GST has provisions for audits. Audits help in ensuring efficient compliance in the light of the complex as well as manifold GST provisions, rules & regulations as well as curb wilful discrepancies.
Tax Audit Introduction
As per Section 2(13) of the CGST Act, Audit is basically the study of records, returns and other documents maintained or furnished by the taxpayer under this Act or under any other law for the time being in force. The scrutiny is to ensure the accuracy of the taxpayer’s yearly turnover, taxes paid by him, refund claimed, input tax credit availed and correct overall compliance under the Act.
Points to consider (by a GST Auditor) while performing a Tax Audit:
- The taxpayer’s Annual Turnover is evaluated on an India basis linked to the same PAN.
- The registered taxpayer who is liable to get the accounts audited as per section 35 (5) of the GST Act then each registration obtained under the same PAN would also be liable for a GST Audit.
- The prime responsibility of CA/CMA is to arrange the values declared in the annual return with the audited annual accounts of the taxpayer.
- The ITC claimed for the expenses in GSTR-9 shall be reconciled with expenses in audited financial statements in Table 14 of GSTR-9C.
Steps to an Oriented GST Audit (to be adopted by an auditor)
- Critically evaluate the risk involved and mention the status accurately to the auditee/taxpayer on reporting aspects.
- The offer should clearly feature scope, management responsibility and limitations.
- Take an engagement letter or appointment letter.
- Ask for a Management Representation Letter (if necessary).
- Have an audit program & checklist.
- Observations should be solid and should not rely only on the oral statements of an auditee/assessee. Verify ISD mechanism & cross charge including valuation mechanism.
Types of Audit Provisions under GST
Audit under GST enables Tax Authorities or Chartered Accountants to examine records, returns and other documents maintained or furnished by the registered person. Section 2(13) of the CGST Act, 2017 necessitates scrutiny and examination of tax records to ensure the validity of taxes paid, ITC and Refunds claimed as well as turnovers declared. The CGST Act, 2017 prescribes three types of Audits.
These are:
- An audit by a Chartered Accountant or a Cost Accountant
- Section 35 of the CGST Act 2017 prescribes an audit by a chartered accountant or a cost accountant. This is parallel to the standard audits that are in practice among most if not all taxpayers.
- An audit by Tax Authorities
- Section 65 of the CGST Act enables Tax Authorities to carry out audits if they deem it appropriate to do so.
- Special Audit on request of Higher Authority GST Officials
- Section 66 of the CGST Act makes way for special audits carried out by a professional Chartered Accountant or a Cost Accountant who is nominated by the GST Commissioner in light of the accounting complexities uncovered during a government audit.
1. GST Audit Based on Assessee Turnover By CA or Cost Accountant
Taxpayers whose turnover in the current financial year crosses the threshold limit of 2 crores need to hire the services of a chartered accountant or a cost accountant to audit their accounts. The threshold limit is prescribed in Rule 80 (3) of CGST Rules 2017 u/s 35(5). Under section 44 (2) of CGST Act 2017, the assessee needs to submit a copy of the following documents
- Audited Annual Accounts
- Reconciliation Statements
- Other prescribed documents
Under the Reconciliation Statement, the return filed by the assessee for a given FY must be in tune with the audited annual financial statement.
The term “turnover” used in Section 35(5) will refer to “aggregate turnover“. Aggregate Turnover is defined under Section 2(6) of the CGST Act/SGST Act. While calculating Aggregate turnover following supplies are considered:
- Taxable supplies exclude values of inward supplies that attract a reverse charge.
- Exempted Supplies.
- Exports of goods or services or both.
- Inter-State supplies of persons having the same Permanent Account Number, to be computed on an India basis but excludes central tax, State tax, Union territory tax, integrated tax, and cess
Under Rule 80(3), each and every unit of the taxpayer has to be considered irrespective of its location until and unless there is some clarification from the department.
Annual returns GSTR 9 have to be filed by the taxpayer on or before 31 December of the preceding year of the current financial year. This is mentioned in Section 44 of the CGST Act of 2017. An implication of this is that the u/s 35 audit report has to be submitted with annual returns.
2. GST Audit by Tax Authorities
An audit by Tax authorities is an administrative means in GST to ensure minimum discrepancies in tax compliances. Section 65 of the CGST Act, 2017 has provisions for audit by Tax Authorities. The GST Commissioner enjoys the right to perform audits or authorize other officials to do so.
Audit Types
The nature of the audit depends on the Commissioner’s general or specific order.
- A General order would mean that the predefined standard criteria by the Commissioner or Authorized official would be followed during the audit. The audit may be limited to one or many people at a time.
- In case of a specific order, the audit will be carried out on a specific registered person and the reason can be very specific like Input-output relationship/matching, total defaults, monetary limit of Input availed etc.
Audit Information and Time Frame
The time frame for carrying out the Audit is three months. Respective TaxPayers or Registered Person is served an advance notice at least 15 days prior to the Audit commencement. Starting from this day, the audit has to be completed within three months. In special cases, the time frame for audit completion can be extended by not more than 6 months.
Audit Conclusion
The registered person or taxpayers will be informed within 30 days of audit completion. Post Completion all findings and their reasons, as well as the registered taxpayer’s rights and obligations, have to be communicated within these thirty days period.
Depending on the findings section 73 or section 74 under CGST ACT 2017 have provisions that empower a proper GST Official to order immediate stern action against miscredited or wrongly claimed ITC as well as underpaid or wrongly refunded or not paid tax credit.
3. Special Audit By Higher Authority GST Officials
Section 66 of CGST Act, 2017 equips the Assistant Commissioner or any higher rank officer in the GST Department to nominate a chartered accountant or a cost accountant (Auditor) in light of any discrepancies noted in liability as well as manipulation in a transaction to evade tax. These manipulations include practices like:
- Dubious Revenue Declaration
- Complex Third-Party Transactions
- Wrong ITC claim
- Excess ITC claim as well as no reverse input of credit
The above conditions will attract the privy eyes of the GST officials. As such with the approval of the GST Commissioner, a notice can be sent to the taxpayer in question or the individual registered person to get an audit done by one of the CA’s or the Cost accountant (Auditor) nominated by the Commissioner. The CA will then carry a thorough audit of the record and account books of the individual or group under scrutiny.
Read Also: Quick Guide: How to Register for a GST Practitioner on GSTN Portal?
The complete audit report has to be submitted within 90 days of the commencement of the audit. An extension of 90 days for report submission can be sought if the auditor feels so necessary.
Procedure For Special Audit Under GST
- The registered person in FORM GST ADT-03 can get direction from the Assistant Commissioner or any officer senior, for the auditing of books of account by the CA nominated by the commissioner itself
- The Assistant Commissioner or any senior officer is required to be judgemental regarding the value input and credit availed is also wrong given by the taxpayer
- Under the special audit, the chartered accountant or cost accountant is required to submit the whole report of the special audit to the Assistant Commissioner during the ninety days of investigation which is duly signed and certified by him
- If in case any application is applied by the registered person, chartered accountant or cost accountant for any valid reason then the Assistant Commissioner has the authority to extend the timeline further for ninety days
- If the Assistant Commissioner is investigating the financial accounts of a registered person then the actions or results will be taken on the basis of the current special audit, not on the previous one
- As per the GST rules, the registered person is allowed to showcase their problems or issues in front of the Assistant Commissioner under the Special Audit. It is proposed to be used in any proceedings against him under this Act or the rules made thereunder
- The Assistant Commissioner is entitled to bear all the expenses of scrutiny, and investigation, including the remuneration of a Chartered Accountant or cost accountant
- The results or findings of the special audit would be informed by FORM GST ADT-04 to the registered person
- The special audit will be conducted against the registered person who has not paid taxes on time, short paid, refunded incorrectly and input tax credit wrongly availed or utilized. The government would take strict actions against the registered person
Audit/Reviews is Not An Obligation As Per GST Law
Audits/reviews are not mandatory under GST Law but will be done when requested by the company. The process will be monitored by experts in the field (CA and CMA). They will ensure that everything is on the right track related to GST Compliance.
- Management or compliance reviews/health checks under GST
- Area-specific audits such as sales, ITC, RCM (Reverse Charge Mechanism), documentation IT/ERP systems exports and refunds, disputes and litigation management etc.
- Digital Audit: The technology-centric GST Audit is going to come up with an ‘End-to-End IT solution ‘ to digitally audit GST Compliance.
Penalties Post Special Audit by GST Appointed Expert
Section 66 of the CGST Act, 2017 also gives the registered taxpayer to offer an explanation for any evidence gathered against the taxpayer. The evidence can be later used against the taxpayer during penalty proceedings. Section 73 or section 74 of the CGST Act allows for initiating penalty proceedings against proven tax discrepancies that include non-payment of taxes, underpayment of taxes, dubious ITC claims, and other such practices. There are provisions for initiating penalty proceedings u/s 66 in the light of tax fraud and evasions.
The GST Commissioner is also the final authority on payment of the expenses incurred during the scrutiny, investigation, and proceedings as well as approving the remuneration of the third-party auditor during cases where the taxpayers under scrutiny have been convicted of tax fraud.
| Differences | Statutory Audit | Departmental Audit | Special Audit | Management Audits/reviews |
|---|---|---|---|---|
| Scope | Examination of Books of Accounts | Examination of Books of Accounts | Examination of Books of Accounts keeping in mind the notice received by the tax officer. | Verification of books of accounts or investigating any other special issue on the assessee’s demands. |
| Appointment (Auditors) | Appointed by the taxpayer | Appointed by the department | Appointed by the scrutiny officers | Appointed by the taxpayer |
| Fee | Paid by the taxpayer hiring the auditor | NA | Paid by the officer hiring the auditor. | Paid by the taxpayer hiring the auditor |
| Time allotment for the audit | On or before 31 Dec of the following year | 3 months (may extend further but not more than 6 months) | 90 days may extend to a further 90 days. | As mentioned in the audit engagement letter |
Conclusion: GST is new and complex. Transition to the GST within a short period is not going to be easy for small-scale Indian business owners who are neither hands-on with technology nor well-versed with the various provisions under GST.
We are still in the first year of India’s newly implemented Indirect Tax law and hence can expect a few relaxations on behalf of the Government. Audits are not a means to deter potential taxpayers, they are just a means to maintain transparency in a complex tax system driven by technology from behind the curtains.
