Audit/Assessment to Adjudication under GST and stealth comparison to the erstwhile tax regime-  Article explains Assessment/audit under GST, Key aspects concerning demand under the service tax law vis-a-vis GST law, Crucial aspects of GST demand provisions, Timeline for issuance of SCN & concluding adjudication, Limitation period under GST Law for GST Audit, How Taxpayer should Approach to the first GST, Myths under GST, How to Prepare for the GST audit and Submission which Taxpayer should keep Ready in case of dispute in Future.

Brief about the assessment/audit under GST

The GST law envisages various types of assessments (Provisional assessment, Best judgment assessment and Summary assessment) and audits (Audit by the GST department, Special audit ordered by the Commissioner, C&AG audit etc.). The monthly returns filed by the tax payers in Form GSTR 1 & GSTR 3B and annul return and reconciliation statement in Form 9/9A and Form 9C respectively would act as a base document for conducting the assessment or audit under the GST laws.

The assessment and audits would ultimately lead to demand.

Key aspects concerning demand under the service tax law vis-a-vis GST law

Particulars Service tax law GST law
Section dealing with the demand provisions  Section 73  – Both in the case of normal and cases involving fraud etc. Section 73  – Normal case

Section 74 – Cases involving fraud etc.

Reason for issuing show cause notice (‘SCN’) Service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded Tax has not been paid or short

paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised

Time limit for issuance of SCN 2.5 years  – Normal cases

5 years – Cases involving fraud etc

3 months before the time limit for passing order – Normal cases

6 months before the time limit for passing order – Cases involving fraud etc.

Time limit for issuance of order 6 month from the date of notice – Normal cases

One year – Cases involving fraud etc.

3 years from the due date of annual return – Normal cases

5 years from the due of annual return – Cases involving fraud etc.

Summary of crucial aspects of GST demand provisions

 The crucial aspects in the demand provisions are summarised below –

  • The very first evident departure under the GST law is that, there are two separate sections dealing with the cases involving fraud etc. and normal cases respectively, unlike the service tax laws, which had single section providing for the same.
  • Also, Section 73 of the service tax law talks about issuance of SCN only relating to service tax and the issue relating to input tax credit drew power from Rule 14 of the CENVAT Credit Rules, 2004. However, under the GST, the provision also includes input tax credit wrongly availed or wrongly utilised.
  • Another departure from the service tax laws is that, Section 75 (10) of the CGST Act, 2017 provides for deemed conclusion of adjudication proceedings if the order is not passed within a period of 3/5 years. Though service tax laws had similar provisions, however, the same was open ended, has it used the words – ‘where it is possible to do so’.
  • Further, the GST law keeps the annual return as the only key factor for determining the time limit for issuance of order. However, this creates an ambiguity as the, causal taxable person, non-resident person doesn’t not file the annual returns. Hence, the question is what would be the time limit for issuance of order in those cases.
  • Furthermore, in the cases where the amount is collected but not paid, in lines with the service tax regime, Section 76 of the CGST Act, 2017 doesn’t not provide for any time limit for issuance of SCN. However, one needs to keep in mind the judgment in the case of Inductotherm [2012 (283) ELT 359 (GUJ)], wherein the High court held that though there is no limit for issuance of SCN, however, the SCN shall be issued within a reasonable time.
  • Yet another aspect carried forward from the service tax regime is that, if the SCN issued under Section 74 on account of fraud etc. is held to unsustainable, then the tax payable in such cases will be determined under Section 73. In other words, the demand which was alleged for 5 years would automatically get reduced to 3 years period.

Also, for the first time the CGST Act, 2017 has defined the term “suppression” to mean – ‘non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer’.

Under the service tax laws, the department used to give a very wide interpretation to the word ‘Suppression’ and Courts were required to tone down the same. However, it is a welcome move to note that the essence of the judicial precedents are codified in the law.

Timeline for issuance of SCN & concluding adjudication

As discussed supra, the CGST Act, 2017 envisages various type of assessments/audits. However, not every assessment/audit would end up with issuance of show cause notice under Section 73/74 of the CGST Act, 2017 – For instance, in the case of assessment of non –filers of return/un-registered persons, assessment can be concluded even without issuance of SCN under Section 73/74 of the CGST Act, 2017. In such cases, the provision for issuance of notice and concluding the assessment is separately catered to in the respective sections.

The CGST Act, 2017 on the other hand envisages issuance of SCN under Section 73/74 of the CGST Act, 2017 in cases involving scrutiny of returns, summary assessment, audit by tax authorities, special audit etc.

Without prejudice to the above, in all the above cases, it is ought to be noted that the tax officers can do assessment/audit only up to 5 years from the date of furnishing the annual returns for a particular year.

In the case of service tax laws, the SCN shall be issued not later than 2.5 years/5 years from the due date of filing the service tax returns in Form ST-3 i.e. For instance – For the ST-3 period April 2017 to June 2017, the due date was August 15, 2017. Hence, the maximum period before which the SCN can be issued would be

  • Normal cases – Before 2.5 years i.e. on or before February 15, 2020
  • Cases involving fraud etc. – Before 5 years i.e. on or before August 15, 2022

Further, as discussed above, the service tax law does not provide for conclusive timelines for concluding the adjudication proceedings. However, the Higher Courts have time and again inferred that, the adjudication should be concluded within a reasonable time limit i.e. within 5 years from the date of SCN.

Limitation period under GST Law for GST Audit

Furthermore, in the case of GST laws, the limitation period would be as under –

The due date for filing Annual returns in Form GSTR 9/9A for the FY 2017-18 was February 7, 2020
Particulars Normal cases Cases involving fraud etc.
Last date for issuing the adjudication order for the FY 2017-18 5 years i.e. on or before February 7, 2025 3 years i.e. on or before  February 7, 2023
Last date for issuing the SCN for the FY 2017-18 6 months prior to passing of order August 7, 2024 3 months prior to passing of order November 7, 2022

Approach to the first GST audit by the tax payers

The attempt or intent here is to ensure that the tax payers are aptly prepared to handle the first GST audit. The tax payers should know in advance the open/litigative areas and there should not be any surprises during the course of departmental audit. Keep this in mind, the few aspects that requires attention are as under –

Few myths under GST

  • Definition of ‘Supply’ includes anything and everything under its ambit – The taxable event under GST is ‘Supply’. The CGST Act, 2017 does not attribute any definition to the word ‘Supply’. The meaning assigned to the term ‘Supply’ is an inclusive one. The GST law has assigned a very wide meaning to the term ‘Supply’. However, this does not mean that the every transaction is susceptible to GST. Consideration (can be in money or in any other form under GST) is a must for a valid contract (except for the transactions carved out in Schedule I of the CGST Act, 2017). The absence of consideration renders the contract void, ultimately leading ‘no supply’. Therefore, consideration is a must to qualify as supply, but every consideration/flow of money is not supply.
  • The dispute of classification of ‘Goods’ and ‘Services’ does not exist under GST – Unlike the Central Excise Act or the Service tax laws etc,, the Constitution as for the first time defined the meaning of the tax legislation – ‘ Goods and Service Tax’ under Article 366 (12A). Adding to this, the CGST Act, 2017 defines the meaning of the term ‘Goods’ and ‘Service’. The Schedule II to the CGST Act, 2017 provides for the classification the underlying transaction as Goods or Services. The rate of GST on Goods and Services are notified separately. All this clearly identifies that the, issue of Goods vis-à-vis Service is far from settled and the tax payers shall, for every transaction identify the nature of transaction to start with.
  • No cascading effect of taxes – Though the GST law has reduced the gap, however, the cascading effect of taxes still persists. For instance – The constitutional amendment subsumes only the entertainment taxes levied by the state government and not the Panchayat or a Municipality. Hence, tax on entertainment would still subsist.
  • There will be no breakage of credit chain – The GST law, as compared with the erstwhile tax regime, as reduced the restriction and minimised the gap. However, the GST law continues to borrow the negative list of service which on which input tax credit cannot be claimed. Section 17 of the GST laws carved out various list of services on which input tax credit is blocked. Further, even after all the precautions and compliance, if the vendor does not remit the GST, the recipient won’t be eligible to claim the credit.

Preparation for the GST audit

  • Inward and Outward Reconciliation – With too many returns to file and coupled with GSTIN glitches, it is advisable to prepare and keep the outward supply reconciliation handy between values disclosed in GSTR 3B Vs GSTR 1 Vs Books of accounts. The tax payer should also have the input tax credit reconciliation between the returns availed in GSTR 3B and transaction reflecting in GSTR 2A. Continuous monitoring and follow up on GSTR 2A is required to avoid ITC reversals and interest payouts.
  • GST positions – The tax payers would have taken various GST position during at the time of transition to GST. It been more than 3 years in GST and the law has undergone significant changes, various clarifications and notifications are issued. Hence, it is advisable to re-visit the tax positions and ring fence the same.
  • Impact of Advance Rulings under GST – Though the advance rulings pronounced by the authorities are binding only on the respective supplier and the jurisdictional authorities, however, the persuasive value of the said ruling cannot be ignored. Few advance rulings could have impact across all the sectors – like the ruling in the case of Columbia Asia Private Limited (2018-TIOL-31-AAAR-GST), wherein the appellate authority had confirmed that employee cost should be included as part of cross charge. Further, there could be industry specific rulings – like in the case of ID Fresh Private Foods ( 2020-TIOL-114-AAR-GST ), where in the authorities had held that parota cannot be equated with rotis and hence would be liable to GST at the rate of 18% (and not 5%).

Submission which Taxpayer should keep Ready in case of dispute in Future

The tax payer should be vary of the industry specific and general rulings and be ready with their submission to negate the claim of the revenue authorities, if challenged.

  • Documentation The GST law prescribes various documents to be maintained for availing credit, making taxable/exempt supply, receipt of advance, payment under reverse charge, movement of goods for job-work/repairs etc. The Company should ensure that all the documentation are in place. The penalty prescribed under the GST laws (both CGST and SGST law) is quite big and it can get aggravated with the increases in instances of non-compliance.
  • Claim of refund The Company should be vary of eligibility to refund under GST on various counts – i.e. on account of inverted duty structure, export of goods/services, incorrect tax payment (i.e. IGST paid as CGST & SGST and vice-versa), impact of judgements on constitutionality of levy etc. The tax payers should file the refund claim within 2 years from the relevant date. 

However, with respect to refunds claim based on the judgements of the higher courts quashing the provision of levy – like in the case of Mohit Minerals Private Limited (2020-TIOL-164-HC-AHM-GST), wherein the Honourable High Court struck down the reverse charge levy on the ocean freight. The author is of the view that for such refund claims, there should not be any time limit attached to it, as any amount paid without levy would partake the character of ‘deposit’ and not tax.

  • Carry forward of credit through TRAN -1 – It goes beyond doubt that the tax payers and also the Higher Courts have spent considerable amount in dealing with the carry forward of credit from erstwhile regime to GST by filing TRAN – 1. The recent ruling in the Brand Equity Treaties Limited [2020 (5) TMI 171 – DELHI HC] provided the relief to the assesse to file the TRAN -1 up to June 30, 2020. This order has been stayed by the Honourable Apex Court.

Further, in the case of Commercial Steel Engineering Corporation [2019 (7) TMI – 1452 – PATNA HC), the High Court on the question of invoking section 73/74 of the CGST Act, 2017 for recovery of transition credit has held that, “provision of section 73/74 talks about input tax credit wrongly availed or utilised. Availment is a positive act and unless carried out for reducing any tax liability by it refection in the return filed for any financial year, it could not be a case of either availment or utilisation”.

The judgement as vide ramifications, as on the one hand it holds that mere availment doesn’t not trigger recovery proceedings, rather the credit should be used for reducing the tax liability. On the other hand, the genesis of the ruling is also that transition of credit through TRAN – 1 does not amount to availment of credit and hence, Section 73/74 cannot be involved. The impact of this judgment is far reaching. Need to wait and watch on its implications.

  • Key legal aspects in the notice for conducting audit or issuance of SCN – Last but not the least, tax payers should ensure that any correspondence from the revenue authorities (whether through email/physical letter) contains Document Identification Number (DIN) as provided in Circular no. Circular No. 128/47/2019-GST dated December 23, 2019 and the letter/ SCN clearly conveys the section under which the officer is drawing his power to conduct the audit/issuance of SCN.

Concluding Notes

The GST law has codified various aspects of analogy drawn by the higher courts and general principles for issuance of SCN in the law. Further, many of the provisions are borrowed from the service tax/Central excise regime.

The first audit under the GST law is anywhere around the corner and many tax payers have already started receiving departmental audit notices. It is also coming up in a time, when the revenue collections to the Government is seeing a declining trend, business and also the economy at macro level is under severe stress. Hence, it is highly advisable for the tax payers to be vigilant and have matrix fixed to deal with the first GST audit with appropriate guards.


Disclaimer: The views expressed in this note are personal views of the authors and does not represent any authority under GST laws, nor does it represent any other person or group of persons of the organisation to which the authors relate to, also it does not bind any reader to abide to anything written or expressed in this note, unless they are also of same views.

“Take care of yourself and your dear ones. Stay indoors unless necessary and stay healthy”

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October 2021