A tax Audit means an in-depth analysis of taxpayer’s business or professional accounts. The scrutiny is done particularly for businesses with gross receipts of more than Rs. 1 Crore which involves a detailed investigation of the accounts and verification of documents with respect to filing a correct income tax return. The scrutiny which was earlier a transaction audit has now become more of a risk-based one.
The legislation, following the concept of self-assessment, gives taxpayers total flexibility in self-evaluating their tax liabilities and paying taxes accordingly. Well, this opens doors to multiple challenges as the assessee is prone to make mistakes in the process. Some find tax audits bothering but this is a solution to know your own tax liabilities and will help you escape the chances of mistakes and high-level scrutiny.
Latest Updates
16th May 2023
- A new guidance document prepared by the Committee of Officers on GST Audit procedures and compliance requirements. Read PDF
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 annual turnover between July’17 to Mar’18 of all the registrations having the same PAN is considered for the year 2017-18.
- 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 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.
Three Types of Tax Audits
The current legislation allows three kinds of Tax Audits and a taxpayer may get subjected to one or more tax audits at a time.
Statutory Audit (Section 35(5) & Rule 80(3)
If the taxpayer’s aggregate turnover during a financial year exceeds Rs. 2 Crores then he will invite either an in-house CA or an outsourced CA firm to get his accounts audited.
The taxpayer must submit:
- A copy of the audited annual accounts,
- The reconciliation statement under section 44 (2)
- Duly certified, in audit form GSTR 9C, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner
Quoted by Section 44AB, any taxpayer who is obliged to tax audits under section 35(5) shall on or before 31 December electronically furnish the following verified documents:
- Annual Return Form GSTR 9
- Audited annual accounts
- Reconciliation Statement GSTR 9C
- Such other particulars as may be prescribed.
Departmental audit or audit by tax authorities (Section 65 & Rule 101)
The audit is designated as a reassurance that the company/assessee is maintaining proper financial records. The audit is practised under section 65 of the IT Act, which authorizes the Commissioner or any other official to conduct an audit.
External auditors (Commissioner or tax officer) visit the place of business to conduct the audit. form ADT 01 is filed by a company as an intimation to ROC regarding the appointment of an auditor. The audit should be completed within 3 months from the date of commencement of the audit (may get extended by the Commissioner if needed but not exceeding 6 months).
The taxpayer with his team shall verify all the prescribed documents. While concluding the audit the designated officer shall inform within thirty days about all the findings and obligations with reasons in form GST ADT-02.
Special Audit (Section 66 & Rule 102)
Under section 66, an expert/officer on the designation of Asst. Commissioner may enter into any stage of the scrutiny and may avail the services of a CA or CMA by considering the nature & complexity of the business and in the interest of revenue value has not been correctly declared or credit availed is not within the normal limits.
By issuing form GST ADT-03 the asst commissioner directs the taxpayer to get his records audited. The asst. Commissioner needs permission from the commissioner before issuing form GST ADT- 03.
Read Also: Steps to Generate ICAI UDIN Registration for GST & Tax Audit Reports
CA and CMA then need to furnish their reports to the authorities within 90 days (maybe extended to a further 90 days) in accordance with the provision of Rule 102(2) in form GST ADT-04.
The taxpayer will get the chance of being heard related to any document gathered in the special audit as proposed in the provision of the act.
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 themselves 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, 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.
| 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 |
