Analysing the audited financial statements from perspective of a GST Audit/ Review (GSTR 9 & 9C)
GST audit ensures compliance with Goods and Services Tax regulations, verifying the accuracy of returns and ϐinancial records. It helps identify discrepancies, prevents tax evasion, and enhances transparency. Applicable to businesses with turnover exceeding ₹2 crore, it ensures correct tax payment, claiming eligible input tax credits, and overall regulatory adherence.
Few steps follow before starting GST audit/Review
1) Understand client business (Nature of goods/Services)
2) Matched Turnover as per ϐinancials vs Books of accounts is matched or not?
3) Complete the Reconciliation part.
i.e 1) GL dump with TB
2) GSTR 1 vs GSTR 3B vs Output GL
3) Revenue reconciliation.
4) Input Reco (GL vs GSTR 2B vs GSTR 3B)
Balance Sheet
| Balance sheet& Notes | GST Impact |
| Share holding | 1) GST liability & ITC impact w.r.t merger/demerger/transfer (Refer Circular No.133 03/2020)
2) Registration in portal – Amend & Signing (change in signatory) |
| Gratuity | ITC eligible on gratuity insurance as it is not life/health insurance |
| Govt. Grants | Other than CG/SG, consideration received in form of grants /subsidy would be liable under GST. (Ex: NGOs/ NPOs) |
| Trade payables (Creditors) | Rule 37 – 180 days ITC reversal provision can be veriϐied. ITC to be reversed and re-claimed upon payment. |
| Current liabilities | GST applicable on advance against services only (not goods) |
| Property, Plant& Equipment | 1. Land & Buildings: Additions – GST eligible on ancillary; Deletions – ITC reversal (common credits)
2. Plant & Machinery (others): Additions – ITC eligibility incl. civil structures / construction; Deletions – Section 18(6) 3. Motor Vehicles: Additions – ITC eligibility check; Deletions –Margin method/full rate liability. Note: Rule 43 – ITC reversal w.r.t Capital Goods used for taxable +exempt supply. |
| Intangible assets | Cross charge implications if multiple GSTINs.
(Refer Circular No. 199/11/2023) Absence of asset/expense may indicate related party transaction. |
| Trade Receivables (Debtors) | Decision to raise credit note before October month GSTR3B due date following the financial year (only due to deficiencies) |
| Inventories | 1. Imports: Possible Customs/FTP benefits to be explored
2. Related party purchase: Valuation check 3. Write-off/disposals: Raw material – ITC reversal, semi/FG – ITC eligible (as used in business – disputable) 4. Scrap/Further supply: Classification & Rate applicability 5. Loss: ITC reversal may be required for abnormal loss only |
| GST dues & Balance with govt. authorities | 1. Indicates – Interest & possible SCN/demand on past dues
2. Identify – Status, accumulation reason & reclaim to bank 3. Credit & cash balance – Books vs GST portal |
| Other current assets | 1. Type of incentives (Ex: MEIS, CER, etc.), possible GST on scrip/security sale
2.Time of supply implication (Accounting standards vs GST) |
Profit & Loss Account
| Profit and Loss & Notes | GST Impact |
| Revenue from operations(goods/services) | 1. Levy, valuation, classification, Time & Place of Supply verification and HSN.
2. Exempt supplies/certain Sch III items – ITC reversal impact Other indicators: E-invoice compliance/E-way bill compliances/ Scheme/State incentives |
| Other Income (identify goods/services only) | Levy, valuation, classification, Time & Place of Supply verification Indicates – Non-GST supplies/Sch III items for GSTR 9 disclosure. |
| Segment reporting | 1. SEIS, MEIS/RODTEP benefits realized against exports.
2. Imports – FTA between countries, CEPA and can also be explored. |
| Employee benefit expenses | 1. Sch III no GST. (ER-EE relationship)
2. ITC eligibility to be verified (ex: insurances, necessity goods like water, medicine, gifts, recreational/business trip, etc.) |
| Conveyance | 1. 13-seater + vehicles – ITC eligible
2. Goods vehicle – ITC eligible 3. Reimbursements GTA/rent-a-cab – RCM liability |
| Power & fuel | Table 5 GSTR 3B – inward – exempt & non-GST supply disclosure |
| Freight | 1. GTA (agency) vs
2. GTO (operator – exempt and not under RCM 3. FCM vs RCM (5% vendor beneficial if credit ineligible) |
| Repairs &Maintenance/Building expenses | 1. Motor Vehicle: Depends on vehicle eligibility
2. Premises: Eligible when it is an expenses 3. Plant & Machinery: Eligible |
| Communication costs & Bank charges | ITC eligible but GSTIN missed in Tax Invoices – Internet, Telephone, bank charges (tax invoice not just statements.) |
| Food & Beverages(F&B) | Canteen – mandatory – ITC eligible as per Factories Act/Rules. Water – ITC eligible (it is not ‘beverage’) Others F&B – ITC ineligible |
| Professional fee | 1. ITC eligibility
2. Possible RCM on import of services |
| Legal fee | 1. RCM & ITC
2. Non-advocates/non-legal activity considered under this head for RCM incorrectly. |
| Rates & Taxes; Subscriptions | 1. RCM on CG/SG/LA services not being exempt (ex: Leased line license from Ministry of Telecom). Verification of supplier’ not being governmental authority/entity and transaction if liable/ exempt as per rate notifications.
2. Subscriptions – RCM impact |
| CSR | Possibility to claim ITC subject to general ineligibility. (disputable) Helps increase social expenses, positive for India. |
| Other common costs (Ex: IT Costs) | Requirement of ISD to transfer credit to GSTINs utilizing such services. (multiple GSTINs) |
| Profit/Loss of sale of Fixed assets | 1. Motor Vehicle: Margin/full value liability
2. Section 18(6) – 5% per quarter reduction requirement. 3. WDV block concept can be adopted instead of date of sale. Generally, a reconciliation item for GSTR 9C (Table 5) Vs Annual financial statements. |
| Related Party disclosures | 1. Classification of goods/services
2. Valuation supply-wise 3. ITC eligibility |
| RPT – Directors | RCM liable on directors sitting fees/any other services rendered in the capacity of director. |
| Advertisement, Sales promotion expenses | 1. RCM on sponsorship
2. ITC eligibility on sales promotion |
Few important areas being part of the Notes to Accounts but not part of BS / PL is:
1) Globally accepted HSN code for business conducted
2) Key concerns from management’s report
3) CARO Report – to identify consideration in kind.
4) Requirement of registration under Acts – possible RCM liability
5) Foreign currency transactions – Indicates: Possible RCM liability on Import of services
6) ITC eligibility against Import of Goods & RCM payments
7) Refund issues due to non-receipt of forex.
8) FTP & Customs beneϐits on outward forex. (Exemptions, SEIS, RoDTEP, MOOWR)
9) Contingent Liability – Indicates Possible liability which may have GST impact when transaction is with related party (ex: corporate guarantee)
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