1. Lot of confusion presently prevails as to whether registered persons under GST are required to undergo an GST audit by a Chartered Accountant or a Cost Accountant if the turnover of such persons exceed INR 2 crores. Let us look at the current legal provisions with regard to the said subject. Sec. 35(5) of the CGST Act, 2017 related to GST Audit reads as under:
“(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.”
2. A bare reading of the above provision entails that every registered person under GST whose turnover exceeds the specified limit (presently INR 2 crores) shall get his accounts “audited” and shall submit a copy of “audited annual accounts” along with a certified reconciliation statement as well as other documents which may be prescribed.
3. Definition of GST audit as contained u/s 2(13) of the said Act provides as under:
“(13) “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 thereunder”
4. Hence what is required to be ascertained is the true import of the word “audit” in the context of Sec. 35(5) ?
5. If the definition u/s 2(13) is applied to Sec. 35(5), the conclusion seems to be that a Chartered Accountant or a Cost Accountant is indeed required to “audit” the “accounts” maintained by a registered person, whose turnover exceeds INR 2 crores despite the fact that such person has already undergone audit under the provisions of other laws (e.g. Companies Act, 2013). Said conclusion seems to be misplaced.
6. Section 35(5) also provides that the registered person needs to submit the copy of “audited annual accounts”. An audit conducted in light of the definition u/s 2(13) will not lead to any “audited annual accounts”. It will lead to only submission of an audit report wherein the auditor shall comment on various claims made by the person in his annual return. This is because the definition of “audit” only asks to verify various claims made by the concerned person and not to verify his “accounts” which will entail a far broader exercise. Moreover, if such person has already obtained “audited annual accounts” under the Companies Act, 2013 or the Income Tax Act, 1961 (in case of non-corporates), which “audited annual accounts” should he furnish ?? Is he still required to obtain again “audited annual accounts” under the GST laws. Answer seems to be no given the language employed. Hence seen in this light the word “audit” u/s 35(5) seems to be referring to audit under other laws and only the said audited accounts are required to be furnished along with a reconciliation statement and other prescribed documents. It is in the reconciliation statement that the State-wise bifurcation will be done of the figures appearing in the audited financial statements to reach the figures reported in the State-wise annual return.
7. As compared to GST laws, the drafting under the Income Tax Audit, 1961 of the provisions concerning audit is more logical. Sec. 44AB provides that in the specified cases, person shall get his accounts audited and an audit report is required to be furnished. However third proviso provides that in cases where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions if such person gets the accounts of such business or profession audited under such law. Hence second audit is not sought under the Income Tax Act, 1961 accounts are already audited under other laws. Only a tax audit report is sought.
8. 44(2) is also relevant for appreciating the said view and hence is reproduced below:
“(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.”
9. Above provision also talks about furnishing copy of “audited annual accounts” along with a reconciliation statement. Hence it seems that audit under GST is not required to be carried out as per the present provisions of the law.
10. At this juncture it is also worthwhile to refer to the CGST Rules, 2017 concerning the issue. Rule 80(3) is reproduced below:
“(3) 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.”
11. Again the above rule provides for furnishing “audited annual accounts” along with a certified reconciliation statement.
12. Seen in the above light, it clearly appears that the audit under the GST laws Provisions is not required. Only “audited annual accounts” are required to be submitted along with a reconciliation statement. Hence accounts audited under other laws are sufficient. Said accounts are to be taken as a base for preparation and certification of the reconciliation statement.
13. It is also important to understand that what is sought to be asked from the registered person is furnishing of the “audited annual accounts”. How can someone furnish entire “audited accounts” ?? One can only furnished “audited annual financial statements” along with reconciliation statement.
14. Now coming to the reconciliation statement, Sec. 44(2) provides for furnishing the same by reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement. Said reconciliation statement needs to be certified by a Chartered Accountant or a Cost Accountant in cases where the turnover exceeds INR 2 crores (see Rule 80(3)). Here also the language provides for only carrying out “reconciliation of values”. Hence what appears is that a Chartered Accountant or a Cost Accountant is only required to certify the said reconciliation and not enter into the legality of various claims made in the annual return.
15. Readers will duly acknowledge that the above provisions related to GST audits are very badly drafted and will lead to different interpretations. Hence it is suggested that the Government comes out with appropriate clarification in this regard. The proposed amendments to GST laws does not seem to address this issue.
16. If the above interpretation is the actual intention of the Government then we must examine whether the same will serve the purpose for which such provisions are made ??
17. A Chartered Accountant or a Cost Accountant are professionals. They carry out their duties with utmost dedication. Hence Government time and again have reposed their faith in such professionals. If only “reconciliation statement” is required, then the purpose of maintaining a check as regards various claims made by the registered person will be defeated. It is a fact that Government will not be able to carry out their audits for all the tax payers. Hence only such checks can serve the purpose of the Government in ensuring that due taxes are paid.
18. Before we part we must also say that, whether or not such GST audit is legally required, trade and industry will be far more benefited if such checks are done on routine basis to ensure that any major lapses are corrected in a timely manner. It must be remembered that detection of lapses by the Department after a period of time will entail interest cost as well as possibly penalties based on the issues involved.
(views are strictly personal)