All about GST Assessment, Provisional Assessment and Audit

ASSESSMENT

1. Preamble

1.1 Assessment is the process of determination of the tax liability of a tax payer. Section 6203 of the Revenue and Taxation Code of the Internal Revenue Service of the USA defines it as the “statutorily required recording of tax liability“. Analysis of this definition reveals that assessment is a–

• statutory requirement (laid down in the law) which provides that
• tax liability by recorded

Fiscal Statutes lay down a code for assessment which, inter alia, encapsulates–

• the person whose liability is to be recorded i.e. the tax payer
• the person who is empowered/authorised to undertake such determination i.e. the assessing
• the manner in which the tax liabilities is to be determined, and
• the procedure to be followed for recording the tax liability.

2. Kinds of assessment

Based on the manner in which and the circumstances under which, it is carried out, assessments can be classified in the following categories:‑

1) Self Assessment: In this case the tax liability is determined/ascertained by the assessee himself since he is in possession of the records/documents, facts/information and circumstances of his transactions. Based on his records the assessee assesses his liability for a tax period and declares the same in the return filed by him.

2) Summary Assessment: The assessing officer determines the liability of the assessee on the basis of returns filed by the tax payer and other evidence in the possession of the assessing officer without calling for either the tax payer or his records. The liability determined is communicated to the tax payer.

3) Provisional Assessment: Where tax liability is to be discharged on a continuing and regular/recurrent basis and certain determinants of the tax liability (primarily the applicable tax rate or value or nature of the transaction) are subject to the outcome of a process that requires deliberation and time, the law provides for provisional assessment. The assessing officer provisionally determines the amount of tax payable by the assessee but this is subject to the final determination. Any amount that has been paid on the basis of such assessment is to be adjusted against the amount finally determined as payable and the short/excess is to be paid by/refunded to the tax payer.

4) Regular Assessment: Such assessments are made after examination of all the relevant records/returns/documents/material and are made after hearing him/his authorized representative. Assessments of this kind were the norm prior to the era of self assessment.

5) Protective Assessment: The charge created under the law can be actualized either through admission of liability in a return or through a demand made in pursuance of an order. There could be cases where there is no admission of a liability and yet the assessee does not dispute the liability. Further, there could be cases where it is difficult to secure the continued presence of the assessee for purposes of realization. It is in view of such situation that the law could provide for protective assessment. A protective assessment is an assessment by which the amount of tax owed is determined, but usually not collected. For example, the income tax owed on the income subject to a protective assessment is calculated separately and shown in a protective assessment. If matters take a course which are considered in contravention of the law – e.g., if taxable income has accrued to the assessee and he migrates from the country -the protective assessment will be implemented retrospectively.

6) Best Judgment: Such assessments are made either ex parte or by rejecting the accounts/records/documents/plea of the assessee. In such cases either no documents or records are furnished/claims are not substantiated or the records and/or evidence produced before the Assessing Officer are rejected as being unreliable or in complete/incorrect, either wholly or in part.

2. Under the GST Law the assessment scheme is pre dominantly self assessment which is the different rule. The other modes of assessment are:-

• Provisional Assessment
• Assessment of non-filers (which may be regular or best judgment assessment)
• Assessment of un-registered persons (which may again be regular or best judgment assessment)
• Protective Assessment

2.1 Self Assessment: Section 44 of the Act provides for self assessment of tax liability by the tax payer. A plain reading of the said provisions would reveal that self assessment is available to every registered taxable person who is authorized by law to assess the tax payable by him under this Act for any tax period. Thus, determination of tax liability is to be undertaken by the tax payer himself and stated in the return to be filed by him. The return under Section 27 is required to primarily contain inward and outward supplies of goods and/or services, ITC, tax payable and tax paid. Hence, furnishing of the return required by Section 27 shall operate as the assessment of the tax payer.

Further, the aforesaid self assessment also includes, by way of tax payable for the tax period, amount of ITC that has been availed by the person on any receipt of goods if the goods have been returned by the recipient within six months of the date of the invoice.

Illustration

Goods worth Rs.1000 are supplied to A by B on 15th May, 2017 on which SGST of Rs.110 and CGST of Rs.100 are charged. B returns goods worth Rs.500 from this consignment to A on or before 14th November, 2017 then B will have to add Rs.55 and Rs.50 on account of SGST and CGST respectively to his output liability in respect of the month of November, 2017.

2.2 Provisional Assessment: Section 44A of the Model GST Law deals with provisional assessment and this provision is structured along the lines of Rule 7 of the Central Excise Rule, 2002. Provisional assessment can be invoked by a taxable person by making a request/application to the assessing officer and such request can made only under the following two circumstances:-

• if he is not able to determine the value of the supplies, or
• if he is not certain about the tax rate applicable to such supplies.

Thus, wherever an assessee finds that he is not able to ascertain the value of a supply or the tax rate applicable to it he will make a detailed request in writing to the proper officer, indicating:-

• Specific grounds/reasons, and the documents or information’s, for want of which the tax payable cannot be ascertained
• Period for which provisional assessment is required
• The rate of duty or the value or both, as the case may be, proposed to be applied by the assessee, for provisional payment of tax
• An undertaking to appear before the proper officer on the date fixed by him, and furnish all relevant information and documents within the time specified by the proper officer so as to enable the proper officer to finalise the provisional assessment

Where the proper officer is satisfied with the genuineness of the assessee’s request he will issue a specific order directing provisional assessment clearly stating:-

• The grounds on which Provisional Assessment has been ordered
• The rate and /or value at which the tax has to be provisionally paid
• The amount of differential tax for which bond is to be executed
• The amount of security or surety as may be fixed by the proper officer.

The final assessment order has to be passed within six months from the date of communication of the provisional order. This period of six months may be extended by the Additional/Joint Commissioner if sufficient cause is shown that the order cannot be finalized in six month; such extension will be for a period not exceeding six months. The Commissioner may extend this period (after the first extension) to such other period that he may deem fit.

2.3 Scrutiny of Returns: Section 45 of the Model GST Law provides that the proper officer may scrutinize a return and the related particulars with a view to verifying the correctness thereof. The return contains information regarding, inter-alia, details and classes of supply and receipts during a tax period, the output tax, input tax credit, tax payable, tax deducted at source, etc. The related particulars primarily include the details of inward and outward supplies containing invoice-wise details along with commodity codes.

The scrutiny is to be conducted with a view to ascertain and verify the correctness of the said return and related particulars. The words “correctness” or “correct” have not been defined in the Act. Webster’s Encyclopaedic Unabridged Dictionary of the English Language defines the word “correct” as “conforming to fact or truth; free from error; accurate”. In this view of the matter, the process of scrutiny should be undertaken to ensure that all transactions undertaken by the assessee during the tax period have been disclosed fully and classified in the manner that has been mandated by, and is in conformity with, the provisions of law. The Rules may lay down a set of parameters along with the bench-mark in respect of each such parameter. The objective of the process of scrutiny would be to assess or verify the level of compliance of the return and related particulars with regard to such bench-marks. For this purpose the proper officer will also make use of any other relevant information regarding the transactions of the assessee.

If, upon scrutiny, any discrepancies in the return or related particulars are discovered by the proper officer the assessee shall be informed in the prescribed manner and the assessee shall be asked to provide his explanation for the same. If the explanation offered is found acceptable by the proper officer, the proceeding shall be dropped, the assessee shall be informed and no further action in the matter shall be taken. If, however, the assessee

• does not furnish a satisfactory explanation within 30 days of being informed (extendable by the proper officer), or
• does not take any corrective action permitted by law or does not pay the tax along with interest,
• the proper officer can proceed to initiate
• departmental audit proceedings under section 49
• special audit under section 50
• inspection, search/seizure under section 60
• adjudication proceedings for determining the tax liability under section 51.

2.4 Assessment of non-filers: Any assessment or determination of tax liability can be recorded in the following two manners:-

• by the assessee himself i.e. through self-assessment, or
• by the assessing officer i.e. through an assessment order.

It follows that if the assessee does not furnish a self-assessment then the assessing officer is left with no recourse but to pass an assessment order. Section 46 of the Act provides for such an eventuality. Accordingly, if a registered taxable person fails to file

• the monthly return under section 27 (in case of a normal taxable person)
• the quarterly return under section 27 (in case of a person opting for composition)
• the monthly return under section 27 (in case of a person deducting tax at source)
• the monthly return under section 27 (in case of an ISD)
• the final return under section 31 (in case of a person applying for cancellation)

even after service of a notice under section 32 then the proper officer can proceed to assess such person to the best of his judgment after a period of 15 days from the date of the service of notice under section 32. Such assessment order can be passed within

• a period of 5 years from the due date of the annual return for the relevant year or the actual date of filing of the annual return for that year, whichever is earlier, in case there is evidence of any fraud or any wilful misstatement or suppression of fact to evade tax,
• a period of 3 years from the due date of the annual return for the relevant year or the actual date of filing of the annual return for that year, whichever is earlier, in any other case.

Such an order has to be passed after considering the material available on record and other relevant material. Best judgment assessments are though completed on the basis of information and documents available with the assessing officer and in accordance with his best judgement, there are certain guidelines which need to be followed. These guidelines are set in judicial decisions from time to time.

• In CST vs. H.M. Esufali H.M. Abdulali (1970) 90 ITR 271 (SC) it has been observed by the Supreme Court that the assessing authority while making the “best judgment” assessment, no doubt, should arrive at its conclusion without any bias and on rational basis and that the said authority should not be vindictive or capricious and that basis adopted in estimating the turnover should have a reasonable nexus with the estimate made.
• In State of Kerala vs. C. Velukutty (1966) 60 ITR 239 (SC), it has been observed that limits of powers are implicit in the expression “best of his Judgment”. Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon arbitrary caprice of a judge, but on settled and invariable principles of justice and though there is an element of guesswork in a “best judgment” assessment, it shall not be a wild one but shall have a reasonable nexus to the available material and the circumstances of each case.
• The decision of Privy Council in CIT vs. Laxminarayan Badridas (1937) 5 ITR 170 (PC) rendered on the provisions of the Indian Income Tax Act, 1922 is a classic one in which it was observed that the officer making best judgment assessment should not act dishonestly, vindictively or capriciously because he must exercise “judgment” in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose, he must take into account local knowledge and repute in regard to the assessee’s circumstances and all other matters which he thinks will assist him in arriving at a fair and proper estimate and though there must necessary be a guesswork in the matter it must be a honest guesswork.

The assessment order that has been passed is required to be served on the assessee and if the assessee files a valid return within 30 days of such service, the said assessment order shall be deemed to have been withdrawn. It is to be noted that in terms of section 27(3) a return shall be considered as a valid return only if the tax due according to such return has been paid. It must further be noted that, upon filing of the return, the assessing officer is not required to pass an order to the effect that the assessment order is being withdrawn; the law deems the order to have been withdrawn once the return is filed within 30 days of the service of the assessment order.

2.5 Assessment of un-registered person: If any taxable person fails to apply for and obtain registration despite being liable to be registered in terms of Schedule III of the Act, the proper officer shall assess the tax payable by such person during the period he remains un-registered. Such order shall be passed

• after serving a notice on and giving an opportunity of being heard to the assessee
• according to the best of the judgment of the assessing officer
• within 5 years from the due date for filing of the annual return of the relevant year.

2.6 Summary Assessment: If the proper officer is in possession of any evidence that any person is liable to pay any tax under the provisions of this Act and he has sufficient reason to believe that any delay in assessment will adversely affect the interest of revenue (i.e. the officer has reason to believe that the person would fail to discharge liability of the tax) then the officer may proceed to determine the tax liability of such a person. Such an order can be passed only after

the prior sanction of the Additional/Joint Commissioner and it is not mandatory to hear the person whose liability is being assessed.

However, if the liability relates to goods and it is difficult to ascertain the person liable to tax then the person in-charge of the goods shall be deemed to be liable to pay the tax and such person shall be assessed to tax under this provision.

If the person assessed to tax files an application to the Additional/Joint Commissioner within 30 days of the receipt of the order, or if such Additional/Joint Commissioner himself is of the view that the said order is erroneous then such order may be withdrawn by the said Additional/Joint Commissioner. Once such order is withdrawn, the authority is to follow the procedure laid down in the w with regard to adjudication if he comes to a finding that any tax due under the Act has not been paid, whether fully or partly, or any ineligible input tax credit has been availed irregularly or any refund of tax has been erroneously obtained.

It has been held by the Courts that the assessing officer cannot be expected to be a silent spectator of the uncertainty as the inherent power given to him in the law is to protect the interest of the revenue which will be frustrated if he fails to act within the time of limitation.

There are two essential conditions that must be fulfilled before this provision is invoked. Firstly, the proper officer must have evidence in his position that the person has incurred, or is likely to incur, a liability to pay tax under this Act and, secondly, the proper officer must have sufficient ground or reason to believe that any delay in assessment will adversely impact the interest of revenue.

DEPARTMENTAL VAT AUDIT

3.1 Any system of tax administration that relies on self-assessment has to put in place a robust audit mechanism to measure and ensure compliance with the provisions of the Act. Tax administrations have, over the years, evolved from mandatory assessment of virtually all tax payers without an institutionalized audit mechanism to a system of self assessment for virtually every tax payer coupled with risk profiling of tax payers and their audit.

3.2 The word “audit” has been defined in section 2(14) of the Model GST Law and it involves a detailed examination of all records, accounts and returns of the tax payer to test their reliability, to verify the correctness of information disclosed in them and to assess the degree of compliance with the provisions of the Act and the Rules. Every information disclosed in a record or any return or document has to be assessed, cross verified and tested in terms of the internal and external evidence available. Internal evidence includes such documents or records as are maintained by the person being audited while, external evidence means such documents or records regarding the person being audited as are generated by other persons with whom he has business dealings. Audit involves examining the evidence, ascertaining its reliability and establishing the relevance or applicability of such evidence to the affairs of the person being audited and testing or verifying the information disclosed in the records, accounts or returns of the person. Thus, audit is an activity that calls for the application of specialize skills.

3.3 In terms of section 49 of the Act, the Commissioner, or any officer authorized by the Commissioner in this behalf, may undertake the audit of the business transaction of any taxable person. Such an audit may be done by a general order, in which case many taxable persons, selected on the basis of pre­defined parameters, may be required to be audited. An audit may also be conducted upon a special order in which case, a particular person may be required to be audited in the context of certain transactions/class of transactions that this person may have undertaken. The order authorizing the audit will also contain the frequency at which any audit is to be conducted and the audit shall be conducted in accordance with a standardized audit manual that will be issued in this behalf.

3.4 It is imperative to adopt a scientific method for selecting persons to be subjected to audit. A study undertaken in this regard has shown that the very best of auditors could produce only average result while auditing persons selected randomly whereas even average auditors performed above par while auditing persons selected on the basis of risk profiling. Hence, a model containing parameters which are indicative of, or have strong and demonstrated co-relation to, tax evasion should be developed for the purpose of selecting persons for audit. The past history regarding compliance should also be a decisive factor in selection for audit along with the scale of operations of the taxable person. Some of the following criteria may be adopted for selection:

• Total tax/tax throughput
• Refund claim
• Export/zero rating
• Ratio analysis
• Cash dealings
• History of delinquency
• Unusual deviations from “norms”/”standards”.

3.5 Once selection for audit has been made, the auditee has to be informed by a notice issued at-least 15 working days before the proposed audit is to be undertaken and the notice shall also specify the place where the audit is proposed to be conducted; the audit can be conducted at either the place of business of the taxable person or the office of the audit authority or at both places.

3.6 Before undertaking the audit, the authorities have to prepare for such audit and this involves gathering evidence and other information that is considered to be relevant for, or related to, the business transactions of the auditee. This may include the past records of the person, comparative information regarding similar persons in the same trade or industry, trends of economic activity which are relevant in the context of the business of the auditee, business processes adopted by the auditee and generally a profile that gives a 3600 view of the business activities of the auditee.

3.7 During the conduct of the audit every class of transactions undertaken by the taxable person should be thoroughly examined and scrutinized by the audit authority. But before doing so, the internal control mechanism put in place by the person should be examined and tested and probable areas of weakness in the system should be identified. Internal controls encompass a set of rules, policies, and procedures an organization implements to provide reasonable assurance that:

• its financial reports are reliable,
• its operations are effective and efficient, and
• its activities comply with applicable laws and regulations.

How rigorous an audit should be and the degree of detail which the auditor has to adopt while examination would largely depend on the effectiveness of the internal control mechanisms and systems put in place by the auditee. 3.8 The audit is to be conducted in a transparent manner and is to be completed within 3 months from the date of commencement of the audit and if the Commissioner is satisfied that the audit can’t be completed in the said period of 3 months, he may extend it by any period not exceeding 6 months. In this context an audit shall be deemed to have commenced on the earlier of the following:

• the date on which the records have been furnished to the audit authority, or
• the date on which the audit has been instituted at the place of business of the auditee.

Even though the Act does not elaborate on the issue of what constitutes “a transparent manner” An audit shall be deemed to have been conducted in a transparent manner if it is carried out in accordance with standardized, pre­defined and well understood operating procedures. Accordingly, the auditee should the afforded sufficient opportunity to present his views on every evidence collected and that the auditee may not be burdened with the task of providing any evidence/document that is not within his control. During the course of audit, it shall be the duty of the auditee to arrange for necessary facilities to verify the records and documents that are produce and also to furnish such evidence/documents/information that may be required in the context of the audit. The auditee should also render all assistance to complete the audit in a timely manner.

3.9 Upon the completion of the audit, the audit authority shall prepare a report of such audit and also informed the auditee of

• the findings of such audit,
• the reasons for such findings, and
• the rights and obligations of the person who has been audited.

3.10 The proper officer may initiate proceeding for determination of tax, levy of interest and/or penalty if the audit conducted reveals any evidence of

• tax not paid or short paid
• input tax credit erroneously availed
• amount erroneously refunded.

SPECIAL AUDIT

4.1 Special audit is actually an audit conducted with a definite objective or focus. Such an audit is confined to only certain aspects of the transactions which are examined in great detail. This provision under section 50 of the Act takes off from section 233A of the Companies Act, 1956. Under the Model GST Law it has been proposed that special audit can be ordered in writing by Deputy/Assistant Commissioner of GST, (with the prior approval of the Commissioner), if such officer is of the view that

• the value has not been correctly declared, or
• the credit availed is not within normal limits.

4.2 The said officer must have come to this view on the basis of any scrutiny, enquiry, investigation or any other proceeding that is being conducted with regard to the taxable person and that it is not the outcome of any subjective assessment of such authority. The audit, once ordered, is to be conducted by such Chartered Accountant or Cost Accountant that the Commissioner may nominate for this purpose.

4.3 The audit report, duly signed and certified by the auditor, is to be submitted within a period of 90 days. The aforesaid period may be extended by the proper officer by a further period of 90 days on the basis of

• an application by the auditor or the auditee, or
• any material and sufficient reason.

4.4 The special audit, if ordered, shall be in addition to any other audit that may be required to be conducted under this Act or under any other law and the expanses of the audit shall be fixed by the Commissioner and be borne by the Government.

4.5 Proceedings under section 51 to be initiated for determination of tax, levy of interest and/or penalty if the audit reveals any evidence of

• tax not paid/short paid or
• ITC erroneously availed or
• tax erroneously refunded.

The auditee is to be afforded an opportunity of hearing if the findings of special audit are proposed to be used in any proceeding against him.

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