Goods & Services tax (GST) Audit - An Overview, Annual Return & Audit Report by CA. S K Mishra


INTRODUCTION

Goods & Services tax (GST), is a comprehensive, destination based indirect tax levied on manufacture, sale and consumption of goods & services as well as on import of goods & services, except on zero rated and exempt supplies.

The registered person under GST is required to assess his own tax liability, utilize ITC & pay his GST liability within due date & file return & require to comply with the provision of GST law. GST being in the nature of a self-assessment tax, audit procedures have been introduced for error correction and ensuring proper tax compliance & to facilitate tax administration. Audit is a check & balance mechanism to validate correctness of data & compliance of laws.



STATUTORY PROVISION

As per Sec 35(5) of CGST Act, 2017,  every registered person ( whether compulsory or voluntarily registered) & whose aggregate turnover (i.e. the turnover of all the registrations having the same Permanent Account Number ) during a financial year exceeds two crores rupees  shall get his accounts audited by a CA/CMA and shall furnish electronically a copy of audited annual accounts and a reconciliation statement, duly certified in FORM GSTR -9C [ Rule 80(3)].

The GST auditor is required to prepare a reconciliation statement (FORM GSTR -9C) based upon audited annual accounts & annual account (GSTR 9). So, if the annual account of the registered person is not audited under any law, GST audit cannot be done.

GST audit is not only for reconciliation of tax liability and payment thereof but, it also encompasses the verification of compliance of the provisions of the GST Acts, laws etc. by a registered person.

The registered person upon conclusion of the Audit shall furnish the following documents electronically through the common portal either directly or through a facilitation centre notified by the commissioner.:

  1. a) Annual Return
  2. b) Copy of Audited annual accounts
  3. c) Reconciliation statement, reconciling the value of supplies declared in the return (GST Annual Return) furnished for the financial year with the audited annual financial statement in FORM GSTR 9C, duly certified,
  4. d) such other particulars, as may be prescribed

While Rule 80(3) of the CGST Rules speaks of the prescribed threshold limit at Rs. 2 Crore which is attributed to the ‘aggregate turnover’, section 35(5) speaks of the turnover in the State / turnover attributable to a GSTIN. Therefore, if a registered person is liable to get his accounts audited under Section 35(5), all the registrations obtained under the same PAN will also be liable for such audit, regardless of the turnover in each State in which the other registrations have been obtained.

For example, if the aggregate turnover (PAN based) is at Rs.4 crores and the registered person is carrying on business in two different States having a turnover of Rs.2.75 crores (in Delhi) and Rs. 1.25 crores respectively, the law mandates that audit is required to be carried out in both the States.

The provision relating to Audit by tax authority & Special audit under GST is covered under Chapter XI (Rule 101 & 102) of CGST Rules,2017.

GST envisages three types of Audit.

Sections

Nature of audit

Remarks

35(5)

Statutory Audit by CA/CMA

If “aggregate turnover” (i.e. the turnover of all the registrations having the same Permanent Account Number) exceeds Rs.2 Crores in a F.Y

65

Audit by Tax authority

It could be for a F.Y or multiples thereof

(to ascertain correctness of the turnover, exemptions and deductions claimed, the rate of tax applied in respect of the supply of goods or services or both, the input tax credit availed and utilised, refund claimed etc.)

66

Special Audit by CA/CMA

 

(with the approval of Commissioner, in the interest of revenue)

If at any stage of scrutiny, enquiry, investigation or any other proceedings, the proper officer is of the opinion that the value has not been correctly declared or the credit availed is not within the normal limits, the commissioner may order Special Audit of a registered person through CA/CMA.


Note :

1) “Aggregate turnover” to be computed on all India basis against a single PAN.

2) Any department of the Central Government or a State Government or a local authority, whose books of account are subject to audit by the Comptroller and Auditor General of India (C&AG) or an auditor appointed for auditing the accounts of local authorities under any law for the time being in force shall be exempted from audit U/s 35(5).

3)The council of the ICAI in its 378th meeting stated that an Internal auditor of an entity can not undertake GST Audit of the same entity, since GST Audit is a statutory audit.

MEANING AND OBJECTIVE OF GST AUDIT

As per Sec 2(13) of the CGST Act ,2017  “Audit” means the examination of records, returns and other documents maintained or furnished by the registered person under GST Act or the rules made there under or under any other law for the time being in force to verify :-

  • the correctness of turnover declared,
  • taxes paid,
  • refund claimed
  • input tax credit availed, and
  • to assess his compliance with the provisions of this Act or the rules made there under.

OBJECTIVE OF AUDIT

The objective of GST audit is “to verify” i.e to prove the accuracy/correctness of whether registered person has correctly:

1) declared his turnover

2) assessed his liability & paid taxes thereon

3) claimed eligible Input Tax Credit

4) claimed the refund, if any

5) maintained accounts and records/documents

6) filed his return as per the provisions of the law

7) complied with all the provisions of the law, rules and Notifications

KEY ASPECTS IN GST AUDIT

The Central Govt vide press release dated 03-07-2019 has clarified that role of chartered accountant or a cost accountant in certifying reconciliation statement (FORM GSTR-9C), is limited to reconciling the values declared in annual return (FORM GSTR-9) with the audited annual accounts of the taxpayer.

GST Annual Return is primarily based on GSTR 1/ GSTR 3B file during the year. In addition, supply/ transfer of business assets after useful life without consideration, goods sent for job work not returned within specified time limit, import of service by a taxable person without consideration, stock transfer/branch transfer within the same entity having different GSTIN (distinct person ) is a taxable supply under GST & supplies those which are missed /not reported in monthly return also need to be reported in GST Annual Return (GSTR 9) and differential tax liability to be deposited through a separate challan DRC 03. Therefore, each & every transactions appearing in the books of accounts and other relevant documents such as E-Way bill/ delivery challan/Fixed assets register etc. also needs to be verified to ascertain GST implications thereon. Hence, GST audit required signification preparation from both Auditor & Auditee end and it is not merely confined to reconciling GSTR 9 with Audited Annual Accounts.

Following are the key aspects which need to be taken care of during GST audit :

1) Reconciliation of turnover & Tax paid

All taxable supplies are not necessarily part of turnover. There are certain supplies which are made without consideration and does not form part of turnover but GST payable thereon, so need to be reported in GSTR 9. The total  turnover need to be bifurcated among Exempted/Nil/Non GST supply, Zero rated supply & supply on which tax to be paid on Reverse charge basis. Rate wise taxable value & GST payable thereon along with GST already paid need to be disclosed in Table 9 & Reconciliation of Input Tax Credit (ITC) need to be disclosed in Table 12 of FORM GSTR 9C. Any output liability which has not been discharge through monthly return (GSTR-3B) or Annual Return (GSTR-9) and which has been observed & recommended by the auditor may be discharge along with interest through DRC 03.

2) Review of Accounts/GST Return

The GST Annual Return is the summary of all monthly returns filed during the year, where as Reconciliation statement (FORM GSTR 9C) is based on audited annual accounts & GST Annual Return. So, if the GST Annual return is correctly not prepared, reconciliation statement (GSTR 9C) will give misleading figure. Therefore , prior to finalising FORM GSTR 9C , annual return (GSTR 9) should be reconciled with all the monthly return filed during the year & supplies which are left out need to be reported in GSTR 9. Amount appearing under the head “Advance received” need to be reviewed carefully since GST applicable on “Advance received” against future “supply of services” and not on “supply of goods”, vide Notification No 66/2017-Central tax, dated 15th Nov 2017.

Trade discounts which are accounted for in the audited Annual Financial Statement but on which GST is leviable (being not permissible) need to be reported in Table F.

3) Classification of Supply

A supply need to classified as either goods or service. There is no concept of part supply of goods & part supply of service. The GST rate of goods are based on HSN classification, while GST rate of services are based on SAC classification. Therefore, tax invoices of inward & outward supply need to be reviewed to ascertain whether GST has been paid at correct rate. Further, the categorisation of Nil rated/exempted/ Zero rated/Non GST supply need to be reviewed. It may be possible that taxable supply is treated as exempted/Nil rated supply and GST not paid thereon. Intra state/inter statesupply based o place of supply also require careful examination. Taxes deposited under wrong head due to incorrect interpretation of place of supply should be dealt with as per Sec 77 of the CGST Act.

4) Compliance of Reverse Charge Mechanism (RCM)

In respect of inward supply of notified goods & services covered U/s 9(3) of CGST Act & U/s 5(3) of IGST Act, the recipient is required to discharge GST liability thereon & also required to issue tax invoice. Further, RCM tax liability need to be discharge through electronic cash ledger only  & not by utilisation of ITC. Auditor should ensure that, the auditee has complied with RCM provision & has discharge tax liability thereon correctly & timely. It is pertinent to mentioned that RCM provision U/s 9(4) of CGST Act & U/s 5(4) of IGST Act, where recipient was required to discharge GST liability on all inward supply from un-registered persons, was in force only during the period from 1st July 2017 to 12th Oct 2017.

Reverse charge in respect of Financial Year 2017-18 paid during Financial Year 2018-19 will not be declared in the annual return for the FY 2017-18 and will be declared in the annual return for FY 2018-19.

5) Review of amount booked under head “other income”

Amount appearing under account head “other income” need special attention. Income in the nature of sale of waste & scraps, insurance claim receipts, profit on sale of fixed assets, freight & insurance recovered, bank interest, LD/Penalty recovered for non performance of contract, bond money/notice pay recoveries from ex-employees and house rent recoveries/electricity recoveries/miscellaneous receipt,  etc. are normally reported under this head in annual accounts. Some of the income are taxable supply while others are Nil/exempted supply. So, each & every entry appearing under this account group should be scrutinised to ascertain GST implications thereon. 

6) Admissibility of Input Tax Credit

Eligibility & Conditions for availing ITC has been prescribed in Sec 16(1) & Sec 16(2) of the CGST Act. The auditor should check whether the entity has claimed ITC in accordance with Law or not & all the documents required for availing ITC as prescribed in Rule 36 are available or not. While checking admissibility of ITC, factors such as use of goods or services for business purpose & inward supplies which are covered under blocked credit Us/17(5), on which ITC not available  should be kept in mind.

Transitional credit carried forward to GST regime from pre-GST regime using FORM GST TRAN-1, TRAN-2 & TRAN-3 in accordance with the provision laid down in Section 141-143 of the CGST Act 2017 also need to be reviewed to ascertain their correctness.

GST paid on all inward supplies are not eligible for ITC. Eligible & ineligible credits need to be segregated. No input tax credit can be reversed or availed through the annual return. If taxpayers find themselves liable for reversing any input tax credit, they may do the same through FORM GST DRC-03.

7) Review of Creditors outstanding for more than 180 days

As per the proviso to Section 16(2) of the CGST Act, the recipient of supply is required to reverse ITC availed, if payment is not made to the supplier within 180 days from the date of issue of tax invoice. Therefore, during GST Audit, the auditor should ask for list of creditors appearing in the books of accounts of the client at the close of the relevant F.Y and review the same. If, payment has not been made to the supplier within the stipulated time period against the tax invoice on which ITC has been availed, the same need to be reversed & GST liability to be discharged along with interest@18%.

8) Review of Sale/disposal of business assets

As per Para 4(a) of Schedule II of the CGST Act, Transfer of business assets will be treated as supply of Goods , “where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person”.

Further, as per Para 1 of Schedule I of the CGST Act, Permanent transfer or disposal of business assets where input tax credit has been availed on such assets, to be treated as supply even if made without consideration.

On combined reading of Para 1 of Schedule I & Para 4(a) of Schedule II, it can be safely conclude that all cases of transfer or disposal or business assets will attract GST. But the method of arriving at taxable value for the purpose of levy of GST is different for assets on which ITC is availed & on which ITC not availed. Therefore, each such cases of sale/disposal of business assets should be reviewed carefully & GST liability thereon should be assessed accordingly. Fixed Assets register (FAR) is an idle document to verify such transaction.

9) Review of transactions not forming part of annual accounts

Supplies made without consideration do not find place in Annual accounts. However, Schedule I of CGST Act, specifies certain transactions which are to be treated as supply, even if made without consideration & GST applicable thereon.

There is no requirement of actual sale of goods under GST. The alternative methods of supply of goods could be in the form of:

  1. a) Inter State or distinct person stock transfer;
  2. b) captive consumption in another State location;
  3. c) supply on consignment basis or any other basis by the principal to his agent;
  4. d) supply on job work basis (if working under returnable basis- GST need not to be paid);
  5. e) any other supply such as donation, free sample, gift etc.

E Way bill/ Delivery challan raised during the F.Y may be reviewed to identify above transactions. Due care must be exercise by the auditor to identify such transactions & assess GST liability thereon.

10) Treatment of Credit Notes / Debit Notes issued during FY 2018-19 for FY 2017-18:  Credit note which has a tax implication can not be issued after the month of September 2018 for any supply pertaining to FY 2017-18; a financial/commercial credit note can, however, be issued. If the credit or debit note for any supply was issued and declared in returns of FY 2018-19 and the provision for the same has been made in the books of accounts for FY 2017-18, the same shall be declared in Pt. V of the annual return. Where adjustment in turnover in lieu of debit notes issued during FY 2018-19 in respect of provision made in the books of accounts for FY 2017-18, such adjustment should be shown in Table 5O of the reconciliation statement in FORM GSTR-9C.

DUE DATE OF FILING GST ANNUAL RETURN & AUDIT REPORT


The due date of filing of GST Annual return & GST Audit Report is on or before 31st December following the end of the financial year. However, F.Y 2017-18 being the first year of implementation of GST, considering the difficulties faced by the businessmen & professional, the Govt has extended the due date of filing of GST Annual return & GST Audit Report  for the F.Y 2017-18 up to 31st  August 2019, Vide Removal of Difficulty Order N0. 06/2019-Central Tax Dated 28th June 2019.

The Central Government Vide Notification No.74/2018-Central Tax Dated 31st December, 2018 has notified GST Annual Return Format (GSTR 9) & Audit Report format (FORM GSTR-9C). The GST Audit Report format comprises of two parts i.e  PART A- Reconciliation Statement and PART B- Certification, which has to be certified by the GST auditor.

CONSEQUENCE OF NON FILING OF GST ANNUAL RETURN/FAILURE TO GET ACCOUNTS AUDITED AS PER GST LAW

As per Sec 47(2), in case of failure to submit the GST Annual Return within the specified time, a late fee shall be leviable @ Rs.100/day during which such failure continues subject to a maximum of 0.25% of the turnover in the State/UT.

There is no specific penalty prescribed in the GST law for not getting the accounts audited by a CA/CMA U/s 35(5). Therefore, in terms of Sec 125 of the CGST Act, general penalty of upto Rs.25,000/- shall be leviable.
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The author CA. S K Mishra, FCA, LL.B is a Fellow Member of The Institute of Chartered Accountants of India, New Delhi & Author of Flipkart Best seller book on GST “Students’ Guide to GST” published by Mewar University Press. He can be reached at gstresolve@gmail.com, Mob.9805072910

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