Effective Practices for GST Department Audit: Tips for Smooth Compliance

Introduction:

Department audit is a process where the departmental officer would audit the books of accounts for ensuring that applicable taxes have been paid, ITC has been rightly availed, refund has not been claimed in excess, etc. Considering the fact that we are approaching the last date for issuance of show cause notice for the period July 2017 to March 2018 as per the normal period of limitation, the department has become extremely active in terms of finishing audits, issuing audit points and thereafter issuing show cause notices. Hence, it is extremely important for a registered person to be aware of the good practices which he has to follow to ensure a smooth department audit. It may sound like a myth but it is possible to have a smooth departmental audit. The author has tried to list down few good practices to handle department audits.

Relevant legal Provision under the CGST Act:

• Section 65 of the CGST Act provide that the commissioner or any officer authorized by him, could conduct audit of any registered person.
• The audit could either be conducted at the place of business of the registered person or the officer of the departmental officer.
• The audit should ideally be completed within a period of three months from the date of commencement of the audit. The period could be extended for a period of 6 more months.
• Audit findings should be informed to the registered person in FORM GST ADT-02.

[Section 65 of the CGST Act read with Rule 101 of the CGST Rules]

Preparations for GST department audit

• Prepare a brief note on the nature of business and its revenue streams. This may be sought by the department.
• Prepare a GSTIN wise financial statements to avoid unnecessary disputes as the company level financials may not be of any use to the officer.
• Reconcile your financials turnover with turnover as per GST. An explanation for the difference should be kept ready. The various reasons for the differences could be unbilled revenue, financial discounts, cross charge invoices, etc.
• Various other reconciliations could be kept handy. The reconciliations could be GSTR-3B and GSTR-1, GST returns and books, GSTR-2B and GSTR-3B, e-way bill and GSTR-1, etc.

Good practices to be followed during the department audit:

The following are few good practices for handling departmental audits:

• Ensure that the department has issued FORM GST ADT-01 i.e., notice for conducting audit before the audit is actually conducted.
• Check the place at which the audit is proposed to be conducted. It could be a desk audit or a field audit. The registered person may have to respond and act accordingly.
• In case the audit is proposed to be conducted at business premise of the registered person, then the visit by audit party should be recorded in a Log book.
• The list of documents which are required to be submitted should be mentioned in FORM GST ADT-01. Normally a standard huge list is included in the ADT-01 and hence the registered person should submit only those documents which are applicable to him.
• Double check all the submissions made before sending it to the department.
• Co-operate with the departmental officers and provide the information which is sought. Do not provide any extra/short information.
• Where additional time is required for submitting certain documents, the same could be sought with a written request citing reasons.
• Ensure that all communications with the department are in writing. Avoid oral conversations with the departmental officers. Insist for written communications as well. The various communications with the department could be:

1. Sending the documents

2. Asking for additional time

3. Replying to audit objections

• If there is any genuine liability which has been missed to be paid due to inadvertent error, discharge the same along with interest before issuance of show cause notice. Where tax and interest are paid before issuance of show cause notice, then penalty would not be payable in terms of section 73(5) and 73(6) of the CGST Act. So payment of tax and interest before SCN would result in savings of penalty and interest as well.
• The above payment must be made in DRC-03 provided the time limit for making adjustments in returns has passed.
• Any voluntary payment should be made by selecting “Section 73(5)” as the section under which payment is made. Once payment is made, the same has to be intimated to the officer in writing.
• Draft a reply to the audit points raised by quoting relevant provisions, circulars, case laws, etc. so that the chances that the matter does not reach the stage of show cause notice increases. Good replies with legal backing could get the points dropped at the audit stage itself which would avoid huge litigation cost. It is suggested to take professional advice and support for replying to departmental letters.
• Where the departmental audit has been concluded without any demand, then a confirmation from the department should be obtained in this regard. A letter from the department should be received stating that the audit has been concluded and there is no liability.
• If no communication is received from the department, then it is suggested to write a letter to the department mentioning the fact that the audit has been closed and there are no further liability and seek confirmation from the department.

In the view of the author, if the above practices are adopted, then the departmental audit could be handled in a more systematic, practical, and professional manner.

Do feel free to get in touch with the author at mayankgadiya@gmail.com in case of any clarifications.