Audit by GST departments – Need for all India level SOP

1. Both Central and State GST departments have started issuing notices under Section 65 of CGST/SGST Acts for conduct of audit of tax payers records for the years 2017-18 and 2018-19.

2. Section 65 of the CGST Act is reproduced hereunder –

Section 65 – Audit by tax authorities

(1) The Commissioner or any officer authorised by him, by way of a general or a specific order, may undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed.

(2) The officers referred to in sub-section (1) may conduct audit at the place of business of the registered person or in their office.

(3) The registered person shall be informed by way of a notice not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.

(4) The audit under sub-section (1) shall be completed within a period of three months from the date of commencement of the audit:

Provided that where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within three months, he may, for the reasons to be recorded in writing, extend the period by a further period not exceeding six months.

Explanation.––For the purposes of this sub-section, the expression “commencement of audit” shall mean the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later.

(5) During the course of audit, the authorised officer may require the registered person,—

(i) to afford him the necessary facility to verify the books of account or other documents as he may require;

(ii) to furnish such information as he may require and render assistance for timely completion of the audit.

(6) On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings.

(7) Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, the proper officer may initiate action under section 73 or section 74.

3. The initiation of audit starts with issue of notice as per Section 65(3) which stipulates that the registered person shall be informed by way of a notice not less than fifteen working days prior to the conduct of audit.

But notices are issued to provide the data/documents and attend the audit within seven (7) days of the receipt of the notice issued under Section 65(3), which is in contravention of the Section. Some of the notices were issued calling for data within three (3) days from the date of receipt of the notice.  It appears that different audit teams of Central/State GST are issuing notices, with timelines as per their wish without adhering the provisions of Section 65(3) of the CGST/SGST Act, thus putting unnecessary pressure on the tax payers.

4. The next step involved is data/documents to be submitted for audit. It is seen in some of the cases, the audit team has called for submission of complete set of data/documents, invoices, books of accounts, which were already verified by the Chartered/Cost Accountant and GSTR-9 and GSTR-9C are filed only after thorough verification.

5. While the audit team is empowered to call for any of the data/documents, there should be Standard Operating Procedure (SOP) on all India basis, as to the documents/data that can be called for, issues that need be verified in detail, matters where they can rely upon GSTR-9 and GSTR-9C, rather than calling for voluminous data/documents, books of accounts again. Initially they should rely on GSTR-9 and GSTR-9C filed by the tax payer, that were filed after thorough verification of data/documents, books of accounts, by a Chartered/Cost Accountant. After first cut verification of the GSTR-9 and GSTR-9C, then the auditors can call for additional records that they may think relevant, mentioning the reasons for the same.

6. Reconciliation of turnover as per books of accounts and GST returns is one of the key areas which is thrust upon in GSTR-9C. Considering the professional competency of Chartered/Cost Accountant, Section 35(5) provides for audit by either of them and submission of GSTR-9 and GSTR-9C along with their certification. GSTR-9C contains reconciliation of turnover between books of accounts and GST returns and reasons therefor. After thorough verification, the reconciliation part is reported in GSTR-9C. However, the audit teams are seeking documents and data on the turnover reconciliation. It is better if the audit team goes through the reasons for difference between books of accounts and GST returns as recorded in GSTR-9C and call for explanation on specific points, instead of calling for records/data/documents again. Tax payer is required to put in lot of effort again in submitting the documents, explaining to the audit team and replying to their queries. Tax payer has already spent lot of time and money in getting the certification by Chartered/Cost Accountant. Verification of the certified data again in a routine manner would only result in duplication of effort on the part of tax payer. The audit should concentrate on analysis of the reasons for difference, as mentioned in the GSTR-9C, rather than calling basic documents.

7. If complete verification of documents/data, records, books of accounts is to be done by the audit teams, once again in addition to that of Chartered/Cost Accountant, then there is no need for audit by Chartered/Cost Accountant. Tax payers are putting lot of effort, time and money in getting the books of accounts audited by Chartered/Cost Accountant. If the audit under Section 35(5) by Chartered/Cost Accountant carries no value, then there is no need for such audit and can be dispensed with. Tax payers can spend that much of energy and time, involved in audit under Section 35(5), in attending to departmental audit under Section 65 as and when it is taken up.

8. Audit teams are also calling submission of invoices relating to outward and inward supplies. The invoices may run into thousands and lakhs depending upon the size and business of the company. The audit team can verify the data available on the ERP system of the company, analyse the outward supplies data and call for sample copies of documents. Invoices can be viewed and verified through ERP system on sample basis, rather than calling for copies of the invoices. Similarly, in case of inward supplies, audit teams are calling for submission of all invoice copies. Submission of documents is not required as all the data is available on GST Portal, as supplier has uploaded the data in his GSTR-1. Wherever there is mis-match and credit is availed by the tax payer, audit team can ask for copies of invoices to cross-check.

9. Different State GST departments are following different procedures of audit. Similarly, different Commissionerates of Central GST are following different procedures. Data and documents called for is differing from one another. There should be comprehensive SOP, guiding both the State and Central GST audit departments, as to the procedure to be followed, and categorization of verification i.e., issues which need thorough verification, issues for which GSTR-9 and GSTR-9C can be the basis, documents that can be called for etc.

10. Unless there is SOP, tax payers will be burdened with requisition for submission of huge data/documents in a routine manner, resulting in waste of lot of time, energy and money.

11. A sample case of data/documents called for by audit is as under –

(i) Draft Audit Report/Final Audit Report or Manual Scrutiny Report issued by Audit or Jurisdictional Range of CGST & Central Excise,

(ii) Transitional Credit Verification Report consequent to verification by CGST or State Authorities Statutory GST Returns-

(iii) GSTR-1

(iv) GSTR-2A

(v) GSTR-3B

(vi) GSTR-9

(vii) GSTR-9C

(viii) Financial Records (As Applicable)

(ix) Balance Sheet (with all schedules)

(x) Trial Balance

(xi) Annual Report

(xii) Income Tax Return

(xiii) Income Tax Audit Report Form 3CA/3CD

(xiv) Cost Audit Report

(xv) Internal Audit Report

(xvi) Income Tax Form 26AS

(xvii) Details of TDS deducted by Government, if any.

(xviii) Input Tax Credit Register along with Electronic Credit and Cash Ledger

(xix) Copies of Invoices Issued for Outward Supply of Goods or Services

(xx) Copies of Invoices on which Input Tax Credit (ITC) has been availed

(xxi) Copies of Work Order/Purchase Order/Agreement executed with the vendors.

(xxii) Reconciliation Between Total Turnover Reported in Profit & Loss Account with Turnover Report Reported in GSTR-1, GSTR-3B and GSTR-9 and Form 26AS

(xxiii) Reconciliation of Liabilities Paid Under ‘Reverse Charge’ Expenditure Booked in Books of Account

(xxiv) Reconciliation Between Input Tax Credit (ITC) Availed with Invoices Reflected GSTR-2A

(xxv) Details of Supply of Zero Rated Supplies

(xxvi) Details of Goods or Services Exported, if any, and Refund Claimed

(xxvii) Details of Goods or Services Imported, if any,

(xxviii) Details of Goods or Services on which Input Tax Credit (ITC) was not Availed;

(xxix) Any Other Records/Documents Maintained in Relation to Supply of Goods Services:

12. The list is too long and by seeing the list itself the tax payers gets tired. Some of the documents called for such as copies of work orders, purchase order, agreements executed with the vendors, may run into thousands. Printing and submission all the documents is an impossible task. Submission of soft copy also is an impossible task. Audit team can go through the ITC availed data of the tax payer and call for sample copies of the documents. Alternatively, they can verify the vendors data from ERP and select few of them wherever they feel verification is required and call for copies of documents.

13. Similarly, calling for financial records, which covers entire set of documents maintained by the tax payer. Audit should be specific about documents required. Once the balance sheet along with schedules are called for, there is no requirement for calling any other financial records, as everything is available in balance sheet and schedules thereto and auditors can call for specific and sample documents after going through the balance sheet and schedules thereto.

14. Further, any other documents and records maintained in relation to supply of goods and services is a very general, but not specific requirement. What is the exact requirement is not clear. This type of requirement should be avoided.

15. The list is very big and contains requirements which are not relevant if viewed from the tax payers angle.

16. It is humble request that the Central Board of Indirect Taxation and Customs (CBIC), in co-ordination with the State GST departments , to come out with a detailed SOP for conducting audit by departmental authorities.