pri GST Audit – An Analysis GST Audit – An Analysis

Why Audit ?

Whenever I start thinking of undertaking any kind of audit, a sense of exasperation and a little bit of despondency creep into me. Despondency because I will have to displease people again and again, exasperation because there will be unnecessary but obvious arguments not based on facts and logic but backed by a desire to shield mistakes and even to justify such mistakes, when exposed. Over the years, as a finance professional, it was one of my unpleasant experiences that in the workplace, audit is resisted by most of the auditees. Reluctantly they agree to get audited because either it is mandated by statute or the management have forced them to go through it. The saying also goes like this that if the auditors and the auditee both are happy after an audit is over and there was no bad blood between them then presumably no meaningful audit was conducted at all.

Because of its inherent nature, audit sometimes unfortunately creeps into one’s privacy. The management may try to shield some of its so called secrets and any effort to dig into it is sometimes resisted tooth and nail. They treat it as some sort of intrusion into one’s bedroom. Insisting on MOC in Bank Audits is one of such glaring examples. While the Auditors vigorously try to bring out the NPAs or other irregularities swept under the carpet, the Management tries all the tricks up their sleeves to keep those under wraps. However, the opposite is also true, when the auditor sometimes gets obsessively vindictive and steps beyond his jurisdiction and makes the exercise of audit some sort of a mockery and settlement of personal issues.

All said and done, on a lighter note, is it not amusing that one is paying money to an outsider to find out his own fault and report against him?

However, the concept of audit has nothing to do with such a brazenly ridiculous insinuation of the author of this write up. History of auditing dates long back and it seems to have a prolonged life. It has developed itself over the years from being a fault finding exercise to lending credibility to financial and non-financial information and thus has become indispensible now. It has imprinted its footprints for a variety of reasons – prominent among them being separation of ownership from management, protecting financial interests of the stakeholders, as a ‘check and balance’ tool for self-assessment procedure and as an instrument to ensure compliance.

GST being the ultimate as of now in respect of indirect taxation depends heavily on the fundamental concept of self-assessment. Like VAT and Income Tax, GST also relies comprehensively on the self-assessment principle where the dealer/assessee/registered person himself ascertains the tax payable by him and pays accordingly. Due to inherent limitations of the resources available to the Government, returns of all the assessees/registered persons cannot be taken up for scrutiny/assessments. Therefore, to protect the interest of the revenue, the onerous task of ascertaining whether taxpayers falling under a certain bracket are paying the taxes honestly and correctly and are complying with the provisions of the laws is somewhat delegated to the qualified finance professionals through an audit mechanism.

The general definition of audit is known to all the stakeholders of a set of financial statement of accounts and accordingly repetition of the same is redundant. However, the scope and objective of audit and coverage of prospective auditees are different under different laws. While the Companies Act requires all the companies incorporated under it to be audited irrespective of quantum of revenue or profitability or business operations, the erstwhile Vat Act was selective in coverage and a particular threshold turnover was fixed for audit. Similarly Sec 44AB of the Income Tax Act read with Sec 44AD, 44ADA and Sec 44AE has brought some of the assessees under the ambit of audit based on certain turnover and profitability criteria, which is generally termed as Tax Audit. However, interestingly none of these statutes has defined the term ‘audit’ specifically. A statutory definition of audit might tend to stifle the scope and dimension of an audit. Audit is not just a verification or post mortem of some blunt financial figures; it might even cover diversified spectrums such as company philosophy, employee satisfaction, eco system compatibility and so on.

As we are concentrating on audit under GST Laws, let us straightway jump into the territory and find out whether there is any definition of audit under GST Laws or the same is to be understood as per normal business parlance.

Unlike other Acts, the lawmakers of GST have provided a specific definition of audit. As per Sec 2(13) of the CGST Act, 2017 “audit means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made there under or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of this Act or the rules made there under”.

An analysis of the above definition leads to an inference that :

1. Audit under GST Law is an examination of records, returns and other documents;

2. These records, returns and documents are maintained or furnished under GST Law or any other law for the time being in force;

3. This examination is carried out to verify

4. the correctness of turnover declared in the returns

5. taxes paid

6. input tax credit availed

7. refund claimed

8. compliance with the provisions of GST laws.

We would have an elaborate discussion on the definition of audit in subsequent paragraphs.

Why GST Audit? Does it have statutory support? Who are covered under it?

 Although the GST laws have defined the term ‘audit’ but it does not inevitably mean that audit is compulsory under GST laws or even if it is compulsory, all the business would necessarily come under its coverage. Let us now examine whether audit under GST laws is compulsory or not and whether all business units are covered.

Based on a certain criteria, audits are basically of two types – statutory and voluntary. Statutory audit is obligatory in nature and is mandated by a statute. Voluntary audits are however; undertaken by the owners or management of a business unit for different purposes covering different aspects of business operations, financial statements, management and control. While statutory audits have some sort of legal validity, voluntary audits are more for a managerial purpose than for a legal compliance. Example of Statutory Audit would be the audit of annual financial statements of a company which is mandated by the Companies Act, 2013 or the statutory audit of banks which is compulsory under the Banking Regulation Act.

In respect of coverage, there are certain statutory audits which cover all the business units irrespective of turnover whereas there are some audits which cover only selected units based on certain criteria.

Now to have a firsthand knowledge whether GST Audit is mandatory and if so whether it covers all the business units, we will have to delve deeper into GST laws. Let us cover the issues one by one.

GST Audit is mandated by GST laws, particularly by sub section 5 of Sec 35 of CGST Act, 2017 (the Act) and clause 3 of Rule 80 of CGST Rules, 2017 (the Rules).

Sec 35(5) reads as under :

‘Every registered person whose turnover during a financial year exceeds the prescribed limit shall get his accounts audited by a chartered accountant or a cost accountant and shall submit a copy of the audited annual accounts, the reconciliation statement under sub-section (2) of section 44 and such other documents in such form and manner as may be prescribed.’

The following proviso to Sec 35(5) has been inserted by the Central Goods and Services Tax (Amendment) Act, 2018 which came into force from 1st February 2019.

“Provided that nothing contained in this sub-section shall apply to any department of the Central Government or a State Government or a local authority, whose books of account are subject to audit by the Comptroller and Auditor-General of India or an auditor appointed for auditing the accounts of local authorities under any law for the time being in force.”

Rule 80(3) reads as under :

‘Every registered person whose aggregate turnover during a financial year exceeds two crore rupees shall get his accounts audited as specified under sub-section (5) of section 35 and he shall furnish a copy of audited annual accounts and a reconciliation statement, duly certified, in FORM GSTR-9C, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner.’

SGST/UTGST Acts and SGST/UTGST Rules are identical so far as these above legal provisions are concerned.

Let us now analyse Sec 35(5) and Rule 80(3) to understand the implications.

A plain reading of the above implies that audit of accounts under GST laws is required for a registered person whose turnover during a financial year exceeds two crore rupees.

Before we go further, let us first understand the meaning of the term ‘turnover’. The CGST Act has not defined the term ‘turnover’ in a standalone or detached manner. It has been defined either as ‘aggregate turnover’ or ‘turnover in state’ or ‘turnover in union territory’. As per Sec 2(6) of the Act, ‘aggregate turnover’ has been defined as the ‘aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes Central tax, State tax, Union territory tax, Integrated tax and cess’. The definition of ‘turnover in state’ or ‘turnover in union territory’ is almost also on the same lines except for the fact that the turnover is not on a pan India basis but for supplies made within and from the state. As per Sec 2(112), ‘turnover in state’ or ‘turnover in union territory’ means the ‘aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess’. While ‘aggregate turnover’ is PAN based and is computed on an all India basis, ‘turnover’ if interpreted as ‘turnover in state’ is the value of supplies made from a particular state.

In common parlance, when we use the word ‘turnover’, we generally mean the gross revenue of a business unit net of taxes or discounts which consists of the gross sales proceeds or the proceeds from provision of services or both. The use of the term ‘turnover’ in Sec 35(5) of the Act vis-à-vis the use of the term ‘aggregate turnover’ in Rule 80(3) appears to be contradictory and confusing. If by the term ‘turnover’ in Sec 35(5), we mean ‘aggregate turnover’, then the entire turnover of a business unit having the same PAN on an all India basis would have to be considered. This might result in such situations where a company which has its branches in almost all the states and has a combined turnover of say 100 crore, would come under audit in all the states where it has branches despite the fact that in any of the branches, it might have a turnover of just Rs. 10,000 also. Similarly, hypothetically we can have a situation where a company has 20 branches and it has not made any supplies to the market but has stock transfers among different branches amounting to more than 2 crore rupees in a financial year. In such a case all the 20 branches would be covered under audit.

Act has precedence over Rule. If we go by this settled principle, then the term ‘turnover’ gets precedence over ‘aggregate turnover’ which is not defined in a standalone manner. However, the prevalent opinion among the experts is that turnover implies ‘aggregate turnover’.

The next issue is about the term ‘financial year’. The term ‘financial year’ has not been defined under the GST laws. Accordingly one may go by the meaning of ‘financial year’ as defined in General Clauses Act. Sec 3(21) of the General Clause Act, 1897 defines the same as – ‘financial year’ shall mean the year commencing on the 1st day of April. Accordingly, a financial year starts from 1st April and ends on 31st March of the subsequent year. Going by this, financial year 2017-18 would cover the period from 1st April 2017 to 31st March 2018. Does it suggest that to determine the aggregate turnover for the purpose of coverage under GST audit, we would have to include the turnover for the period from 1st April 2017 to 30th June 2017 under the existing laws i.e. Vat laws, Service Tax laws, Excise laws and other laws which have been subsumed under GST? If that is so, does it also suggest that in determining the turnover under erstwhile Vat Laws, the turnover under GST laws would be included to determine the threshold limit of turnover for audit? In fact, unlike GST Laws, Vat laws specifically define the term ‘year’ which clearly states ‘year’ means financial year beginning from 1st April and ending 31st March. For arguments sake, we can say that since the Vat laws were repealed w.e.f. 1st July 2017, the question of including the turnover from 1st July 2017 does not arise. But then, it can be countered by saying that GST laws too did not come to existence before 1st July 2017.

Let us again critically analyse Sec 35(5) and Rule 80(3) in terms of turnover/aggregate turnover vis-à-vis the financial year. The laws clearly say that if the turnover/aggregate turnover exceeds two crore rupees, the accounts will have to be audited.

Turnover/aggregate turnover comprises of the aggregate values of the following :

1. all taxable supplies (except value of inward supplies under RCM)

2. exempt supplies

3. value of exports

4. interstate supplies

‘Exempt Supply’ has been defined in the Act under Sec 2(47) as supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply. The definition is straightforward enough to include ‘non-taxable supply’ into ‘exempt supply’. ‘Non-taxable supply’ has been defined under Sec 2(78) as a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act.

It is clear from the above that ‘aggregate turnover’ includes ‘exempt supply’, ‘exempt supply’ includes ‘non-taxable supply’, ‘non-taxable supply’ stands for a supply which is not taxable under the GST Laws. Accordingly, it seems that the turnover under the existing laws i.e. Vat/Service Tax/Excise laws for the period from 1st April 2017 to 30th June 2017 would be included while calculating aggregate turnover for inclusion under GST Audit. This gives rise to a very peculiar situation where a registered person had a turnover of say Rs. 1.98 crore during the period April – June 2017 and just a meagre amount of supply of say 3 lakh during the period July 2017 – March 2018 and he would required to get his accounts audited under GST laws as well as under Vat laws in most of the states. Similarly, a restaurant which serves alcoholic liquor for human consumption might have to get its accounts audited under GST laws if the turnover from sales of liquor is say 5 crore but the realisations form supply of snacks etc. served with liquor is just say Rs. 20 lakh.

As every registered person whose aggregate turnover during the financial year 2017-18 exceeds two crore rupees would have to get his accounts audited, the moot questions comes here is whether the accounts will have to be again audited under the GST laws? It is obvious that all the companies and LLPs are covered under mandatory audit courtesy Companies Act, 2013 and LLP Act, 2008 and all the company form of businesses or LLPs whose aggregate turnover exceeds Rs. 2 crore would already be covered under audit and by the time GST audit is undertaken, the audit under Companies Act, 2013 and LLP Act, 2008 would already be over. Similarly, almost all other non-corporate form of businesses whose turnover in a financial year exceeds 2 crore rupees as well as professionals whose turnover exceeds 50 lakh rupees would have to get the accounts audited under Sec 44AB of the Income Tax Act, 1961. In fact, under Sec 44AB, when the accounts are already audited under any other laws, the reporting format is different and accordingly only Form 3CA-3CD are to be furnished. Form 3CA clearly states that this is an “Audit report under section 44AB of the Income -tax Act, 1961, in a case where the accounts of the business or profession of a person have been audited under any other law”. Form 3CA does have provision to mention the name of the other auditors if auditors are different for conducting the audit under Companies Act vis-à-vis Sec 44AB of the Income Tax Act. Form 3CD, which is common to both corporate as well as non-corporate assesses was titled “Statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961”. Thus it is a specific reporting under Sec 44AB. This issue is inevitable as the auditor appointed by a company for conducting the audit under Sec 44AB of the Income Tax Act could be different from the auditor appointed under Companies Act. Similarly, Cost Accountants could be appointed as auditors under the Vat laws but since they did not possess the requisite qualification under the Income Tax Act, they could not undertake audit under Sec 44AB and thus the position was almost similar.

In this respect, what is the provision under GST Laws as Cost Accountants can also undertake the GST audit of a registered person whose accounts have not been audited by them under any other law? We would have a discussion on this in subsequent paragraphs.

Now we would find, apart from registered persons crossing threshold limit of aggregate turnover, who else are covered under this GST Audit?

As per Sec 35(5) and Rule 80(3), every registered person subject to certain prescribed turnover would be subject to GST audit, which implies that to come under the coverage of GST audit, one would have to be a registered person first.

As per Sec 2(94), “registered person” means a person who is registered under section 25 but does not include a person having a Unique Identity Number. As per Sec 25, read with Sec 22 and Sec 24, the following persons liable/required to be registered would be registered persons if they apply for registration under GST Rules and the same is granted by the GST authorities or registered by the proper office on their failure to get registered.

a. Persons making taxable supplies if the aggregate turnover exceeds prescribed limits;

b. Registered business units under the existing laws;

c. Transferee of a business unit registered under GST laws as a going concern ;

d. Transferee of a business unit registered under GST laws pursuant to a scheme of amalgamation or demerger;

e. Persons making interstate taxable supply;

f. Casual taxable person making taxable supply;

g. Persons required to pay tax under RCM;

h. Persons supplying through e-commerce operators;

i. Non-resident taxable persons making taxable supply;

j. Government departments or agencies and local bodies who are required to collect tax at source under Sec 51;

k. Persons making taxable supplies on behalf of others;

l. Input Service Distributors;

m. E-commerce operators;

n. Supplier of OIDAR from outside India to a person who is not registered;

o. Persons opting for voluntary registration.

The following persons however, shall not be liable for registration:

1. Persons exclusively engaged in the supply of goods or services or both which are not taxable under this Act (alcoholic liquor for human consumption) or wholly exempt from tax under the Act (Books, Newspapers, Journals, Periodicals);

2. An agriculturist, to the extent of supply of produce out of cultivation of land.

The important consequence of the above is that if those persons effect supplies worth Rs. 5000 crore also, they are not liable to take any registration and accordingly do not come under purview of GST Audit. However, if they make even Re 1 of taxable supply, they become liable for registration and eventually would come under the coverage of GST Audit.

Areas to be covered under GST Audit :

 Now let us see, which areas of business operations and financial transactions of a registered person and what kind of books, records and documents are to be examined as mentioned in the definition of audit.

According to the definition of audit under GST laws, Audit under GST Law is an

1. Examination of records, returns and other documents;

2. These records, returns and documents are maintained or furnished under GST Law or any other law for the time being in force;

3. This examination is carried out to verify

  • the correctness of turnover declared in the returns
  • taxes paid
  • input tax credit availed
  • refund claimed
  • compliance with the provisions of GST laws.

Like any other audit, audit under GST laws also requires an examination of records, returns and documents. Use of the word ‘records’ has a larger connotation. Similarly, ‘other documents’ can include any documents and whether ‘returns’ means returns under GST laws only, is also not clear. However, as subsequent line clarifies these records, returns and documents could be under GST laws or any other laws and therefore, the coverage are pervasive. There is however, no mention of the words ‘books and accounts’ which can be presumed to be included in the meaning of the word ‘records’. By the word ‘returns’, one can relate to the returns that have been filed or furnished with the appropriate government authorities, the word ‘documents’ can represent  a piece of written, printed, or electronic matter that provides information or evidence or that serves as an official record. However, this definition suggests that audit is an examination of these kinds of records etc. which could be maintained under any other law for the time being in force. It could suggest that any records maintained even under Vat laws, which is not being in force as of now, need to be verified to make an informed opinion about the credit availed under transitional provisions.

Methodology of GST audit

 However, whatever be the language of the definition of audit under GST laws, it does not advocate any methodology how the audit is to be carried out. In any case, audit for whatsoever reason undertaken, would definitely involve an examination of the relevant records, information, data, documents etc. which would help in achieving the objectives of the audit. Here the objective is to verify the correctness of turnover declared, taxes paid, ITC availed, refund claimed and compliance with the law.

Let us study the above one by one –

Turnover declared for GST Audit

When we say ‘turnover’ here, it logically seems to cover ‘turnover in a state’ or to be more precise ‘turnover’ achieved by a registered person covered by a single GSTIN. The ‘aggregate turnover’ which is PAN based and covers the turnover on a PAN India basis, is relevant when the threshold limit for audit is determined for a particular PAN. However, since audit is conducted on a ‘registered person’ who has a GSTIN which is issued on a state wise basis, it is logical to conclude that the turnover achieved by the said GSTIN is to be examined.

When it is said that audit is undertaken to verify the correctness of the ‘turnover’ declared, the word ‘turnover’ assumes great importance. However, since the term ‘turnover’ is not defined in a separate manner in the Act, we would have to go by the definition of the term as understood in normal business parlance. Here by turnover, we generally mean the gross revenue of a business unit net of taxes or discounts which might consist of the gross sales proceeds or the proceeds from provision of services or both. In GST laws, the word ‘supply’ has literally encompassed almost everything under the sun and accordingly the main avenues of generating the revenue i.e. both sales and provision of services are covered under it. Accordingly, when we talk about turnover, it invariably represents ‘supply’ as is understood under GST laws.

When one talks of certifying or verifying the correctness of the ‘turnover declared’ by a registered unit, one needs to understand that he would have to check the correctness of the value of supplies. To do that, he needs to first understand the meaning of the term ‘supply’, in and out, which is arguably the backbone of GST laws.

A discussion on the term ‘supply’ would unnecessary lengthen the write up and is also redundant here because a thorough understanding of the term ‘supply’ along with understanding of Time, Value and Place of supply are sine qua non for undertaking an audit under GST laws and an auditor under GST laws is expected to have a reasonably good understanding of the term ‘supply’ and its time, value and place.

After having a fair idea what constitutes turnover, next issue is verification of the basic records, returns and documents where from the correctness of turnover could be ascertained.

Among others, the following could be the primary records, returns and documents that the auditor can fall back upon to verify the correctness of turnover :

1. Audited Annual Accounts

2. Invoice, Debit Note and Credit Note Register

3. Invoice, Debit Note and Credit Note copies with emphasis on cancelled documents

4. Branch Transfers, transfers between Principal and Agent

5. Lease rentals

6. GSTR – 1, GSTR – 2A and GSTR – 3B

7. Sundry Debtors account (Control Ledger) and Debtors Ledger (Subsidiary Ledger)

8. Stock records

9. E way bill

10. Expense vouchers in respect of tax paid under RCM

11. LUT/Bonds

ITC availed

Input Tax Credit is arguably the most fundamental prerequisite of a value added tax system like GST. The main intention to have a tax system which is free of cascading effects and double taxation is to incorporate a seamless flow of Input Tax Credit. ITC is one’s own money which is kept in Government custody with a conditional right to use it or claim refund of it. A thorough knowledge of where ITC is available and where ITC is blocked or not available or partially available is a prerequisite to determine whether the auditee has availed the right credit or not. Knowledge of Sec. 16 to 21 and particularly Sec. 17(5) is necessary to determine what is available and what is not.

There is a difference between the words ‘available’ and ‘availed’. ITC can be ‘availed’ when it is ‘available’. However, it is not necessary that whatever is ‘available’ needed to be ‘availed’. While some ITC may be too small to be availed, viz. ITC on bank charges, some may be even forgotten to be availed. Till such time, ITC is available but not availed; consequences of incorrect claim do not come into play. However, as soon as ITC is availed, it needs to be availed as per law and any mistake in claiming it has legal consequences. Theoretically, the entire quantum of ITC which is available needs to reflected in GSTR 2A, but that is hardly the case. Non-filing of GSTR-1 by some of the vendors distorts the picture and leads to unnecessary reconciliation exercises. Quantum of ITC which has been availed is reflected in GSTR 3B and the Electronic Credit Ledger of the auditee.

Apart from normal ITC in the normal course of business, for the first year of the introduction of GST, there is this transitional ITC. Unutilised credit on inputs, stock and capital goods as on 30.06.2017 reflected in the last return filed under the existing laws or deemed credit on the stock held on 30.06.2017 as well as on stock in transit is available under GST regime, subject to conditions laid down in Sec 140 of CGST Act and Chapter 14 of CGST Rules.

In addition to the above, under Sec 18 there are ITC which are available on certain circumstances. It allows ITC on the goods held in stock immediately preceding the date of registration. It also allows ITC on goods or inputs held in stock immediately preceding the date when exemption was withdrawn. Composition dealers opting out from composition scheme can also claim credit on the stock held prior to withdrawal. The transferee in case of change in the constitution can also claim the unutilised ITC.

Last but not the least; one should not forget to claim the amount of tax paid on inward supplies under reverse charge mechanism as ITC.

The following books, documents and records, inter alia, need to be verified to arrive at the acceptability of ITC available and availed :

1. Audited Annual Accounts

2. Purchase Register

3. Fixed Assets Register

4. Vat / Excise / Service Tax returns, Transitional credit details, Tran 1 and Tran 2

5. Tax Invoice, Debit Note and Credit Note copies issued by vendors

6. Bill of Entry

7. Details of ITC received from ISD

8. GSTR – 2A and GSTR – 3B

9. Sundry Creditors account (Control Ledger) and Creditors Ledger (Subsidiary Ledger) and details of advance received

10. Electronic Credit Ledger

11. Stock records

12. Expense vouchers in respect of tax paid under RCM

13. Details of gifts, free supplies for ITC reversal

Taxes paid

Amount of tax paid would be the difference between the Output Tax reported in GSTR 3B and the ITC availed in the same return which would be reduced by any ITC carried forward from previous periods subject to the provisions of Sec. 49 as well as TDS and increased by any interest or late fees payable. The payment is acknowledged through a challan, a copy of which is available at the portal.

The following books, records and documents need to be checked to ascertain the correctness of the taxes paid:

1. Audited Annual Accounts

2. Duties and Taxes ledger

3. GSTR 1, GSTR 3B and GSTR 2A

4. Electronic Cash Ledger and Electronic Credit Ledger

5. Copy of payment challan

Refund claimed

Generally, the question of refund arises in the following cases :

1. Zero rated supplies i.e. export and supplies to SEZ

2. Inverted duty structure where the output tax payable is less that the ITC

In certain circumstances, a registered person can claim refund against any excess tax paid by mistake.

It is to be kept in mind that all refunds are subject to the doctrine of unjust enrichment.

Compliance with laws

Compliance with GST laws is an all pervasive aspect of GST audit. It has literally covered everything under the sky and had left very little. In fact, when we say compliance with laws needs to be ensured, does it require mention of any specific area to be audited since compliance with laws is an all encompassing subject.

Audit of ISD, Govt. Organisation, E-Commerce operators, Non-filers, Casual Taxable persons and Non Resident Taxable person

Sec 35(5) is very clear that only registered persons with a turnover of more than 2 crore rupees in a financial year are required to get the accounts audited. A non-filer is a registered person who has failed to file his return although required to do so. Audit of non-filers would give rise to two problems – firstly, it would be difficult to prima facie ascertain his turnover as he has not filed any returns. Even if the turnover is ascertained from the books of accounts maintained by him and/or financial statement of accounts audited under any other law and found to be in excess of 2 crore rupees, for all practical reasons, it would be impossible to file the Annual return in Form 9 and a reconciliation statement in Form 9C as the comparison between the audited annual accounts and the returns filed under GST laws would not at all be possible.

As per Rule 80(1) read with Sec 44(1), following persons are not required to file Annual Return in Form GSTR-9

  • Input Service Distributor (ISD)
  • Persons paying tax u/s 51 or 52 (TDS by a Govt. organization and an e-commerce operator)
  • Casual taxable person
  • Non-resident taxable persons

However, Sec 44(2) says that ‘Every registered person who is required to get his accounts audited in accordance with the provisions of sub-section (5) of section 35 shall furnish, electronically, the annual return under sub-section (1) along with a copy of the audited annual accounts and a reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement, and such other particulars as may be prescribed’.

Sec. 44(1) clearly says that ISD, Government Organizations paying TDS, Casual taxable persons and non-resident taxable persons are not required to file Annual Return whereas Sec. 44(2) says that every registered person who is required to get his accounts audited i.e. whose aggregate turnover during a year exceeds 2 crore rupees needs to file an Annual Return. An Input Service Distributor, whose main job is to receive tax invoices issued under section 31 towards the receipt of input services and to issue a prescribed document for the purposes of distributing the credit of Central tax, State tax, Integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office, technically might not have a turnover. Similarly, organisations which deduct tax at source also do not have a turnover. But a casual taxable person who infrequently, irregularly or sporadically engages himself into activities or transactions involving supply of goods or services or both in the course or furtherance of business in a State or Union Territory where he does not have a fixed place of business could definitely achieve a turnover of 2 crore rupees but is not required to file an annual return. Moreover, the term is state specific i.e. a person who is a taxable person in a State could be a casual taxable person in respect of other states. The turnover of such a person may not reach 2 crore rupees in a particular state or UT but the aggregate turnover of the PAN may cross 2 crore rupees which requires the person in a particular state where he is a casual taxable person to even get his accounts audited although the turnover of that casual taxable person may not exceed 2 crore in that state where he is casual taxable person. Similarly, a non-resident taxable person who occasionally undertakes transactions involving supply of goods or services or both, whether as principal or agent or in any other capacity, but who has no fixed place of business or residence in India may also achieve a turnover of more than 2 crore rupees in a year but is not required to file an annual return.

Now the moot question is, are they required to get their accounts audited? If so, how would the Form GSTR-9C, required to be filed under Rule 80(3), be submitted which requires a reconciliation of the value of supplies reflected in the Audited Annual Accounts vis-à-vis the annual return?

Reports, certificates and returns to be furnished

Submission of reports, certificates and furnishing of returns is guided by basically Sec 35(5) and 44(2) of the Act and Rule 80(3). All of these have been discussed in the foregoing paragraphs.

Based on that, the following reports, returns and certificates need to be filed :

1. Audited annual accounts

2. Annual Return

3. Reconciliation statement in form GSTR 9C, duly certified.

Duplicity of audit ?

Sec 35(5), 44(2) and Rule 80(3), all of them pronounce that a registered person, whose accounts are audited under GST laws, needs to submit a copy of the audited annual accounts. All the corporate entities and LLPs as well as some other entities need to get their accounts audited according to the laws that govern them. In addition, all the non-corporate, non LLP entities whose turnover is more than 2 crore rupees are also required to get the accounts audited u/s 44AB of the Income Tax Act. So, literally all the entities whose accounts are required to be audited under GST laws would have already undergone a statutory audit.

Does it mean that the registered person would have to get his accounts audited more than once? The answer seems to be NO.

Part B of Reconciliation Statement GSTR 9C which deals with certification is divided into two parts. Part I is applicable for the auditors who have conducted both the audits – audit of financial statement of accounts under any other relevant Laws and the GST Audit under GST laws. Part II is applicable for the auditors who have conducted the audit under GST Laws. Plain reading of the certificates leads one to conclude that there is no duplicity of audit.

However, a deep thought into the same gives rise to obvious questions. An audit under GST requires examination of books, records and documents to verify the correctness of turnover declared, taxes paid, input tax credit availed, refund claimed and compliance with the provisions of GST laws. Wouldn’t a company auditor check the turnover, ITC, output tax, refund etc. while auditing the accounts under the Companies Act? Will he or somebody else apply different modalities, techniques, concepts, systems and procedures while verifying the turnover again during the audit of the same accounts under GST laws.

Penalty

Unlike Income Tax and erstwhile Vat Acts, no specific penalty has been prescribed under GST laws for not getting the accounts audited and non-submission of a copy of the audit report electronically with the prescribed authority. However, as per Sec 125 which deals with general penalty, for contravention of any of the provisions of the Act or any rules made there under for which no penalty has been separately provided, the person who is at fault, shall be liable to a maximum penalty of Rs. 25,000. The use of the word ‘shall’ here seems to be severe because the section does not mention about providing any opportunity of being heard.

Provisions of other types of audit under the GST laws

Apart from the audit conducted by a Cost Accountant or a Chartered Accountant, the GST laws have made provisions for audit by the Government also. As per 65 (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. In addition to that, as per Sec. 66(1), if at any stage of scrutiny, inquiry, investigation or any other proceedings before him, any officer not below the rank of Assistant Commissioner, having regard to the nature and complexity of the case and the interest of revenue, is of the opinion that the value has not been correctly declared or the credit availed is not within the normal limits, he may, with the prior approval of the Commissioner, direct such registered person by a communication in writing to get his records including books of account examined and audited by a Chartered Accountant or a Cost Accountant as may be nominated by the Commissioner.

Having understood a little bit about GST audits and the incidental issues surrounding it or rather getting confused about everything, let us now jump into the turbulent waters. Happy swimming.

Author Bio

More Under Goods and Services Tax

6 Comments

  1. R Mahalingam says:

    Very good article. Most part of it appears to be have been verbatim taken from ICAI Technical Guide on GST, which the author could have given a passing credit, at the least.

  2. vswami says:

    @vswami
    WRT – “On ITC, ‘nil’ availability / scope to avail of in a case of input supplier liable for GST but there being no supply by recipient to anyone , in turn .”
    Rider:
    For an attempt made to provide clarity on the stated point, suggest to refer the Post @
    https://www.facebook.com/swaminathanv3/posts/2326391530770453
    Question of availability or availing of ITC cannot conceivably arise in the case of a ‘housing – association’. For, in the nature of things , according to the proposition / view canvassed , housing association and its owner-members, by and for whom the association is formed, are one and the same ‘person’. For a detailed discussion of the said proposition/ view, suggest to go through the Articles in the above referred Post , as well as all the other related Posts shared and/or available in public domain on the topic of ‘Doctrine of Mutuality’.
    courtesy

  3. vswami says:

    “Having understood a little bit about GST audits and the incidental issues surrounding it or rather getting confused about everything, let us now jump into the turbulent waters. Happy swimming”

    If so duly equipped , with all AIDS ! – a forthright admission/ confession of an honest concerned .

    Auditors’ Envy ; Stakeholders’ WORRY >>>>>?!

    Read Pr. .POSTS .on the inherently inbuilt and inevitable ‘MISMATCH’ ?

    On ITC, nil availablity / scope to avail of in a case of input supplier liable for GST but there being no supply by recipient to anyone , in turn .

    Strange but true ! the comment posted @https://taxguru.in/goo…/treatment-write-amount-gst-era.html

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

July 2021
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031