GST Audit Basics

Introduction to GST Audit

The introduction of the Goods and Services Tax regime is a revolutionary step in the domain of commodity and services tax, which has brought about a paradigm shift in the methodology of levy and collection of taxes. It is an internationally recognized multipoint tax system, providing for levy of tax on goods as well as services on the value addition occurring at every stage of business activity. Today, it can be said that the GST, being a self-assessment tax, requires the introduction of audit procedures for ensuring its proper compliance.

Goods and Services Tax was introduced to consolidate most of the indirect taxes and also to increase the tax base with emphasis on compliance. At the same time, thrust was given to self-assessment processes whereby the tax payers are required to assess their tax liability and pay taxes. While doing so and also considering the challenges which the government may face in handling the volume of tax payers and transactions, technology support has been taken right from the time of its introduction.

Objective of Audit under GST Law

The objective of the GST audit can be ascertained from the definition of Audit given in Section

2(13) of Central Goods and Services Tax Act, 2017 (CGST Act). The said definition reads as follows:

“audit means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made thereunder 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.” 

From the above, it can be deduced that:

(a) Audit is examination of records, returns and other documents;

(b) Those records. returns and documents might have been maintained or furnished under GST Law or any other law;

(c) The examination is to verify the correctness of

i. Turnover declared

ii. Taxes paid;

iii. Refund claimed; and

iv. Input tax credit availed;

(d) The examination is also to assess auditee’s compliance with the provisions of GST Act and rules.

All this makes it clear that the objective of GST is to ensure the correctness of Turnover declared, Taxes paid, Refund claimed, and Input Tax Credit availed in addition to compliance of the GST Act and Rules. The intent is that the compliance of the GST law has to be confirmed by the GST audit.

The objective of Audit under GST as per the definition under Section 2(13) can be explained as follows:  

Legal provisions of GST Audit

In order to understand the gamut of the GST Audit and its requirement, it is relevant for us to understand the legal provisions related to the GST audit. Two important provisions which are relevant and important in this context are Section 35(5) and Section 44(2) of the  GST Act.  In terms of Section 35(5) “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”.

In terms of section 44(2) “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”.

In terms of Rule 80(3) of the CGST Rules “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 the audited annual accounts and a reconciliation statement, duly certified, in GSTR 9C, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner”. 

Applicability of GST Audit

Section 35 of the CGST Act, deals with the maintenance of books of accounts, documents and records. Section 35(5) read with Section 44(2) of the CGST Act and the corresponding Rule 80(3) of the CGST Rules relates to audit. In terms of the said section / rule, every registered person whose turnover in a financial year exceeds two crore rupees has to get his accounts audited by either a Chartered Accountant or a Cost Accountant.

Though the definition of Audit under Section 2(13) mandates certain aspects, there is no specific mention of methodology of audit or the manner of reporting either in the Act or the Rules, except for a certificate format which is notified as part of reconciliation  statement in Form GSTR 9C.

Preparation for the GST Audit 

the GST Audit would be undertaken for the first time, it demands significant preparation from both the auditor and the auditee. While the statutory audit (under the Companies Act) and tax audit (under the Income-tax Act) primarily rely on the financial records, the GST audit would require coverage of a larger cluster of records. The GST audit requires deep understanding of the GST laws, IT infrastructure of the auditee, the method in which the GST portal operates, applicability of the various notifications, circulars, clarifications, classification of goods and / or services, the nature of supplies, the manner of availment of credits together with its allowability or otherwise, maintenance of various records and documents specified therein, requirements of reporting and source of information, understanding of the business of the auditee etc. Apart from these issues, it is imperative that an auditor understands the basic functioning of the e-governance model. The audit coverage of all these records and documents would need substantial amount of preparation and time.

To start with, the following (among others) are the various steps an auditor can take in connection with the forthcoming GST audit:

(a) Inform the concerned assessee  about the applicability of the GST audit; (b) Confirm the eligibility to be the GST auditor under the related legislation and the guidelines issued by the ICAI;

(c) Understand the nature of business, the products or services, requirements of records to be maintained, and advise the auditee to maintain accounts and records so required, beforehand;

(d) Prepare a questionnaire to understand the operations / activities of the auditee, and specifically develop questions on those issues on which the GST law would have a bearing

(e) Preparation of the detailed audit program and list of records to be verified;

(f) Host of relevant reconciliations.