Due Diligence Under GST

INTRODUCTION:

‘Due Diligence’ is a term used to describe the process of investigating and evaluating a business opportunity. It entails a broad need to use caution in all transactions. Due diligence is an investor-led inquiry into the specifics of a possible investment, including an assessment of operations and management, as well as the verification of material facts. It includes making questions in order to get timely, adequate, and correct disclosure of all significant statements/information or documents that might affect the transaction’s result.

Due diligence is an examination conducted before to purchasing a controlling interest to ensure that the organization’s conditions match what has been provided about the target business. Due diligence may also refer to a recommendation for an investment or a loan/credit advance.

It entails a study of relevant and important financial and non-financial records. Simply defined, due diligence is exercising the level of caution that a normal person would exercise before engaging into a contract or transaction with another party. The due diligence process can be divided into various areas which are as follows:-

For the benefit of statutory auditors, investors, financial institutions, governmental bodies, and other consumers of financial statements, this article focuses on giving an overview of several methodologies for doing due diligence under indirect taxes. During the analysis, the buyer looks for any red areas, such as delayed tax obligations or ongoing government lawsuit. If the target company is found to be responsible under any of these, the acquirer will face significant future obligations in terms of both money and reputation.

The acquirer must search in all directions for current, pending, and even anticipated future lawsuits. The information gathered during legal due diligence can assist both the buyer and the target company in drafting proper merger and acquisition papers, as well as other ancillary paperwork. It also aids in the negotiation of a fair price for both parties, depending on the target company’s legal duties.

OBJECTIVES OF “DUE DILIGENCE”:

• Prior to takeover, liabilities for previous acquisitions, reorganisation, disposals, and restructuring must be declared at proper value.
• The goal of due diligence is to help a buyer or investor learn everything he can about the company he’s buying or investing in before closing the deal, including crucial success factors, strengths and the flaws.
• Furthermore, it may reveal issues or prospective issues that may be addressed during pricing negotiations or by including appropriate terms in contractual documents, such as warranty and indemnification provisions.

HOW TO CONDUCT “DUE DILIGENCE”:

Phase I: Pre Due Diligence

• Consultation with the customer to get a better knowledge of the transaction
• Evaluation of the most appropriate scope of work and technique
• Project team coordination from a central location
• Making a list of due diligence requests to focus on specific areas of concern

Phase II: Due Diligence Process & Negotiation Phase

• Off-site or on-site work
• Flexible approach even after project kick-off
• Management Q&A process
• Assisting with the formulation of financial aggregates and the phrasing of financial clauses in reports.
• Assistance in drafting negotiating terms
• Communication with the client on a regular basis

Phase III: Closing and Post-Closing Process

• Preparation of a study of the Target’s closing paperwork
• Assistance with PPAs and other post-closing transactions
• Participation in price adjustment processes based on due diligence results

PROCESS OF CONDUCTING “DUE DILIGENCE”:

• An open mind, in which you don’t assume something is wrong and instead seek for it. It is necessary to detect potential problems and seek explanations.
• Assemble the best group of individuals possible, there are due diligence specialists that you can employ if you don’t have a group of individuals within your company who can perform the job e.g. lack of personnel, lack of people who know the new business since you’re purchasing a business in a different industry, etc.
• Take a risk-management approach to your research; you must ensure that you do not anger the target company’s team of employees by bombarding them with a barrage of questions while conducting your study.
• Write a detailed report outlining all of the compliances as well as any significant risks or concerns.

KEY AREAS OF GST DUE DILIGENCE AND HEALTH CHECK SERVICES:

1. Understanding of Business:

It is critical to comprehend the company’s operations in order to classify them as more accurately using GST codes for goods and services. Also, look over the accounting records to see if they are up to snuff, keeping in mind the GST law’s obligations. It will give the acquirer  a clearer picture of how GST affects each goods and service, as well as how it affects the total GST liability.

2. GST Compliance by Business:

GST due diligence specialists assist our clients by reviewing their GSTR-3B filings and comparing them to the GSTR-1.

Experts ensure that input tax credits are treated correctly in cases of book-to-return reconciliation, exempted/non-GST supply, delivery under warranty, matching of the input tax credit in GSTR 3B against GSTR 2A, and free samples transactions.

3. Supply Related Details:

Experts handle and review the invoices to ensure that tax has been charged correctly. In respect to transactions “Place of Supply” & “Time of Supply” are measured adequately to avoid any interest or penalty payments.

4. Transactions related to Input Tax Credit:

Checks related to the delivery of goods/services, receipt of tax invoice, filing of GST return by the vendor, payment of GST by a vendor to the government, and payment paid to the vendor against the tax invoice within 180 days.

5. Any Other Reviews:

Other verification issues which include import of services, legal services, sponsorship services, goods and transport services (GTA), director’s services.

Where GST litigation began, a health check of the organisation is required; nowadays, with dwindling margins and millions of transaction tax rates, levy or credit mistakes may be devastating. In IDT, because the GST law is new and ambiguous, different interpretations might result in massive requests and billions of dollars spent on addressing them. It is very unusual for crores of requests to be made in the income that have not been considered into the expenditures. Many businesses suffer as a result of erring on the side of caution.

The scope, coordination, and planning of the examination, as well as the employment of a highly trained team, are critical to the effectiveness of a due diligence inquiry. When compared to the expense of a bad acquisition, the cost of preparing a quality due diligence exercise is low. In today’s competitive market, the expense of a dispute or credit loss might be the huge difference in profit and loss. As a result, so many large-scale manufacturers and service providers see indirect tax due diligence as a value-added endeavour. It’s also known as an IDT health check or a restricted evaluation of indirect tax compliance.

The GST due diligence is all about, whether the review of last three annual return, reconciliations of financials with returns furnished, current status of advance ruling, review of past due diligence report if any, further examine the completeness and accuracy of tax filing under GST. Due diligence, in our opinion, extends beyond the compliance check and current lawsuit. In addition to these checks, we must ensure that management is informed of legislative updates, that they are able to grasp the changes, and that management is aware of the repercussions of non-compliance.

The Government, in budget 2021, updated the provisions related to e-invoicing and linkage of GST registration with Aadhar have been introduced to restrain fake invoicing and fraudulent availment of input tax credit. The Government has also made record of GST collection in the last few months by tapping fraudulent sources through its advanced data analytics and artificial intelligence. The Government has also widened the scope of self-assessed and made certain amendments in assessment procedure as well.  The responsibility has been assigned to taxpayer by way of self-certified financial reconciliation statement that would leads even more critical. As the highlights in budget 2021, the measure to remove certification of annual accounts by professionals and introducing self-certification by the taxpayers would definitely a significant step by the Government, however, taxpayers need to be more diligent in complying GST provisions in order to avoid interest and penal consequences. Therefore, the taxpayer should comply all the legal provisions of GST with due diligence to avoid future penalties. Significant penalties is really alarming where the non-compliance can be more costly than cost for complying the same. Therefore, it is suggested that taxpayers should have proper internal checks and comply the provisions of GST mechanism to stay robust in the midst of this self-assessment regime.

On the other hand, whether the revenue officials are seriously following the due diligence under indirect tax?

CBIC had issued a letter to all principal chief commissioners and commissioners for not issue demand and notices just for the difference between ITR-TDS and service tax amount. The taxpayer must provide a reconciliation statement detailing the discrepancy and whether the service revenue received during the comparable period is related to any negative list services. After sufficient research and verification, all chief commissioners and commissioners may sensitise the field formations to issue demand notices. Therefore, the GST department can issue SCNs till December 31 for any service tax violation in FY 2015-16. The duty of officers to issue notices and demands after performing due diligence and if difference arises then verify and ascertain the same with the taxpayer and inquire for statement and the reason for difference. Now days, GST department has issued number of notices to taxpayers, without verification of information and data. Which leads to undue pressure on taxpayers for complying the provisions.

One of major area where due diligence plays an essential role is provisional attachment of property under GST Act, CBIC has come out with guidelines for provisional attachment of property with respect to GST provisions,  which assigns the Commissioner to exercise due diligence and carefully examine all the facts of the case. The tax officer has the power of provisional attachment of the property, which needs perform before making proper verification of all the information diligently to avoid any non-compliance under GST.

Financial statement users are becoming more demanding, and auditor’s accountability and duty are being called into question. In some circumstances, auditors assigned to undertake due diligence may not be able to examine areas pertaining to indirect tax compliances.

Despite the fact that the auditor doing due diligence should undertake a thorough assessment of GST compliances as per law and some of the checks under GST is discussed below

• Whether manager is able to prove the reconciliation between GST returns and audited financials.
• Whether GST returns have been filed with in the timelines.
• Whether all compliances under GST is fulfilling.
• If they have received any notice from GST department so what’s the status of the same.
• Whether any legal compliances/cases remain pending from earlier indirect tax regime ( service tax, VAT etc )
• Whether stock report is verified to ensure that there are no goods lost/damaged
• Whether credit is taken as per GST law

Similarly, a GST auditor performing due diligence should pay attention to all areas covered by the Customs Act so that the company does not face large tax demands from the department. However, there are several tests that should be performed, and few of them are as follows:

• Whether exporter has a current account for credit of any drawback in custom.
• Whether the goods imported/exported valued as per custom act.
• If there are any exemption then examine the same.
• Whether the documents like bill of entry is accurate and the same has submitted to the custom officer for clearance of goods.
• Whether there is any violation of any rules/restriction given in custom act.

Due Diligence allows you to make important judgments about to take proper decision. This procedure provides for the planning of future actions and conditions. With this in mind, it can be stated that it assists the reviewer in focusing on what is relevant in the transaction and digesting the plethora of information collected into something meaningful that will direct the transaction’s progress. Despite the importance of due diligence, it is often misunderstood, particularly by new partners who are typically given major responsibility.