Checklist for GST Health Check

It’s been more than a year since GST, one of the biggest Indirect Tax reform was implemented in India. The new tax regime with its rigid compliance requirements strives to streamline the levy and collection of indirect tax in India. In the race to comply with the GST laws, as a business entity, you must assess yourself on the basis of the following key questions. Are you interpreting the laws correctly? Have you claimed maximum possible credit? Do you feel confident about your GST processes? If the answer is no, then we have just the right solution for you! This article on GST health check will guide you to sail through the year-end activities with ease.

The need for GST Health check

a. GST is a trust-based taxation regime wherein the registered taxpayer is required to self- assess his returns and determine tax liability. Therefore, the onus to prove correctness in procedures, compliance and calculations is cast on the registered taxpayer. Thus, in the case of wrong procedure or wrong calculation or non-compliance, the taxpayer is liable to pay a huge amount of interest/penalty.

b. Prevention is always better than cure, and therefore, corrective actions can be taken before it’s too late. This would certainly give confidence to the taxpayer about the level of compliance maintained by him.

c. We have just completed the first year of GST implementation. Taxpayers have either finalised their books of accounts or are in the process of finalisation, and therefore, this is the right time to cross-check the GST compliance and rectify the same as soon as possible.

d. The Government has made frequent changes in GST law which have created confusion in the mind of taxpayers which has further resulted in either non-compliance or wrong compliance. Due to non-availability of amended information/legal provision and knowledge on a timely basis, many taxpayers have either received undue benefits or incurred losses.

The possibility of Legal Actions

The GST Act prescribes various actions that the authorities have the power to undertake in case any provision of the Act is not duly complied with by the taxpayer. Let us understand a few scenarios where tax authorities can exercise such powers against the defaulters.

a. Scrutiny Returns

Tax authorities have the power to scrutinise those returns which have been furnished by the registered taxpayer. In a case where the relevant authority notices any discrepancies in any of the filed returns, an explanation may be sought thereto from such registered person in a manner as may be prescribed.

Where the explanation furnished by the registered person in response is found acceptable, no further action shall be taken in this regard.

However, the proper officer may initiate appropriate action against the defaulters in the following scenarios:

• The concerned taxpayer furnished no explaination within a period of 30 days after being informed by the A.O.
• The concerned taxpayer undertook no corrective measures after accepting the discrepancies.

b. Best Judgement Assessment of Unregistered Person

There are two cases in which the proper officer can undertake the best judgement assessment of an unregistered person under section 29(2):

• It can happen if a taxable person fails to apply for registration under GST despite being liable to do the same or
• It can also be done if the proper officer canceled a taxable person’s registration under section 29(2). The proper officer shall assess the tax liability of the person during the period for which he/she remains unregistered.

The order to conduct best judgement assessment shall be passed:

• After the proper officer serves a show cause notice which gives the person an opportunity to be heard.
• Such an order can be passed within 5 years from the due date for filing of the annual return of the relevant financial year to which the unpaid tax relates.

c. Best Judgement Assessment of Non-filers

In case of non-filers, the best judgement assessment can be initiated if the registered taxable person fails to file any of the below-mentioned returns (which apply to him considering the business structure and transactions):

• The monthly return for a normal taxable person (except SMEs & composite dealers);
• The quarterly return for a person opting for composition scheme;
• The monthly return for a person deducting tax at source;
• The monthly return in case of an Input Service Distributor;
• The return for a non-resident which is required to be filed within the time frame specified u/s 39(5) of the CGST Act
• The final return in case a person who was liable to file the return but has applied for cancellation of his registration

Then, the proper officer shall first issue notice u/s 46 of the CGST Act requiring the registered taxable person to furnish the return within a period of 15 days.

If, even after issuing such notice u/s 46, the registered taxable person fails to furnish the return, the proper officer may issue the order to the best of his judgement within a period of 5 years from the due date of the annual return for that particular year to which the tax not paid relates.

d. An audit by the tax authority

The Commissioner or any officer authorised by him can undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed.

• A notice shall be issued to the registered person at least 15 working days prior to the commencement of gst audit.
• A period of 3 months from the date of commencement is prescribed in the Act for completion of such audit
• Commissioner at his discretion may extend this period (not exceeding 6 months), provided he is satisfied the audit cannot be completed within 3 months.

GST Health check Activities

♠ Reconciliation of sales/revenue income with outward supply value in GSTR 1

A Registered Person must ensure that the sales recorded in their books of accounts and the outward supply disclosed in GSTR 1 are reconciled. Various crucial points to be kept in mind during this process are mentioned below:

• Inter-state stock transfer
• Recovery from employees
• Charging GST on free samples/FOC transactions
• Any penalty recovered from vendor or customer

♠ Reconciliation of GSTR-3B & GSTR-1 

GSTR 3B is a summary return of sales & purchases that every registered tax payer must file after paying taxes on monthly basis. GSTR 1 shows invoice wise details of outward supply. A tax payer must take utmost care to ensure that the amount disclosed as outward supply in GSTR 3B as well as that in GSTR 1 is the same. Notices have been sent by the department to many taxpayers whose outward supplies do not match in both these returns. Hence reconciliation between GSTR 3B & GSTR 1 is important.

♠ Classification of goods/services and respective rate

Appropriate classification of goods and services is another aspect which needs to be kept in mind. In case the classification is incorrect, it would lead to incorrect HSN code as well. HSN codes help in determining the rate of tax applicable for a supply. Short payment of taxes can lead to heavy interest and penalties. Ambiguity in the classification of supply is mainly noticed in Composite supplies. Hence extra precaution must be taken while classifying composite supplies.

♠ Admissibility of input tax credit (ITC) & “negative list” u/s 17(5) of CGST Act

There have been discussions on the eligibility of ITC regarding various inward supplies, and no clarification is available for the same. In that case, the opinion will differ from person to person. Examples of such supplies are mentioned below:

• Housekeeping services
• Mobile service
• Repairs & maintenance services related to an office building
• Canteen service

♠ Verification of “place of supply” to check whether correct GST is charged

Place of supply (POS) provisions help you to decide if CGST/SGST or IGST must be charged for a given supply. In case of incorrect head of GST, the taxpayer will have to bear interest as high as 18%. Taxpayers dealing with “Bill To” and “Ship To” transactions must take utmost care while determining the POS.

♠ Precaution regarding availment of Input Tax Credit

There are five conditions that must be fulfilled before availing ITC:

• Receipt of Tax Invoice
• Receipt of goods/services
• Payment of GST by the vendor to the Government
• The vendor has filed GST Return with correct details of Tax Invoice
• Payment against Tax Invoice made to the vendor within 180 days

♠ Reverse charge liability

RCM provisions for supplies u/s 9(3) have been suspended up to 30^th September 2019. However, taxpayer must ensure that the tax was paid under reverse charge on all such supplies undertaken up to 13^th October 2018.

RCM provisions for supplies u/s 9(4) are still applicable, and the registered taxpayer must pay taxes on all such inward supplies. Few of such supplies are mentioned below:

• Import of service – 15CB
• GTA – Transport Charges/ Inward Carriage/ Outward Carriage
• Legal service – Professional Fees/ Legal Fees
• Arbitration service – Legal Fees
• Sponsorship service – Selling & Distribution/ Advertisement Expenses
• Director’s Service – independent directors/sitting fees
• Transport of goods by sea – import freight

♠ Adjustment of advance in an earlier month

Advances paid must be adjusted against the final liability in the invoice. There may be instances where a registered taxpayer may forget to adjust these advances thereby leading to the excess payment of taxes.

♠ Supply of services free of cost to branches located to other States – Schedule – I

♠ All service transactions with group companies

Intergroup transactions always attract the valuation issues. This is mainly since the amount charged may be free of cost or below the market price.

♠ Any recovery from employees

• Mobile expenses
• Canteen expenses
• Transport expenses
• Any damages

♠ Anti-profiteering impact on selling price

♠ Any value of goods written off in the books

♠ Reversal of Input Tax Credit in case of

• Reconciliation of Books vs GST Returns
• Matching of ITC: GSTR 3B vs GSTR 2A
• exempted / non-GST supply
• Free samples / FOC
• Supply under warranty

♠ Time of Supply

• Taxpayers should ensure that tax liability under GST regime has been discharged as per the Time of Supply provision laid down in Sec. 12 & 13 of CGST Act 2017
• Payment of interest on account of delay in payment of taxes should be computed in the manner prescribed in Sec. 50 of CGST Act 2017 and the rate notified in notification no. 13/2017-CT dated 06.2017

We hope that you now understand the importance of getting GST Health Check of your business done. Conducting this activity regularly can help you stay compliant and avoid penalties, prosecution and other hassles while enjoying all the benefits offered by GST regime.