GST Checklist Before Finalisation of Books of Accounts W.R.T Profit and Loss Items (PART-II)

INTRODUCTION: A lot of legal considerations have to be kept in kind before finalizing books of accounts for the auditor to give a reasonable assurance that the financial statements of the client give a true and fair view. One of such legal considerations involve compliance with GST Act. In previous article on GST CHECKLIST BEFORE FINALISATION OF BOOKS OF ACCOUNTS we had discussed the GST considerations in balance sheet items. In this article we shall learn the GST considerations with respect to profit and loss items w.r.t what all needs to be ensured and verified by the auditor.

REVENUE:

1) Reconciliation of Turnover as per Returns and Books:

Auditor needs to reconcile the differences between turnover in returns and books on a periodic basis and particularly at the end of financial year and watch out for the reasons in differences. There are bound to be certain differences between the turnover in books and returns. Some of the cases where there would be invariable differences are as follows:

A) Stock transfers as per GST are included in turnover. However, in case of financial statements the stock transfer transaction gets nullified. The auditor needs to check that the same has been accounted for in turnover and GST liability has been discharged in respect of the same.

B) Revenue Recognition might be affected due to Accounting standards because of risk and control being transferred later on but GST liability may arise earlier.

C) Differences arising due to exchange rates. For e.g. In books of accounts the sales will be recorded at average transaction rate. However, for GST sales, the exchange rate is to be adopted is the rate notified under section 14 of the Customs Act. This will lead to difference between books and GST returns.

2) Discount allowed: Year-end supply discounts might affect turnover and reduce GST liability. The auditor needs to confirm and verify the existence of such an agreement before or at the time of supply and linkage of discount to specific invoices keeping in mind the implications of Section-15(3) of CGST Act, 2017.

3)Correct Classification of goods: The auditor should verify that HSN classification and GST rates are correct and if not, then the GST differential liability has been paid.

4) Samples towards sales promotion: Business promotion may involve distribution of free samples and gifts to customers. These free samples or gifts, which are supplied free of cost are not treated as supply under GST. However, the ITC availed on the inward supply of these items must be reversed. The auditor needs to review the nature of such transactions and check that the necessary action in terms of reversal of ITC has been properly reflected in books.

5) Valuation rules as relevant are considered if transaction is between related parties or through an agent.

6) The auditor needs to ensure that the additional places of business have been added to registration for which turnover has been considered.

7) Adjustments in relation to credit notes which are accounted for in the audited financial statement but not permissible under GST.

OTHER INCOME:

  • Interest although not chargeable to GST still has to be included in Aggregate turnover as per section-2(6) of CGST act 2017. Held in Authority for Advance Ruling (AAR), Gujarat in Re: Shree Sawai Manoharlal Rathi (2020) 6 TMI 449; (2020) 117 taxmann.com 497 (AAR, Gujarat). The auditor needs to check the same.
  • If there has been sale of fixed assets the auditor needs to check the GST liability. If ITC has not been availed, GST liability is on transaction value or sales consideration. In case where ITC has been availed and the asset has been sold within a period of 5 years GST payable shall be higher of a) sale consideration*Rate applicable or b) reversal of proportionate ITC claimed as per Section-18(6) of CGST Act,2017.
  • It is advisable for the auditor to go through every transaction reflected in ‘Other Income’ ledger to confirm as to whether GST is applicable on any such transaction for which tax invoice is not prepared. For example, penalty / damages recovered etc.

EXPENSES:

  • The auditor needs to verify whether expenses attract any RCM liability, if yes, the liability has been discharged of. Section-9(3) of CGST Act,2017 needs to be referred for the same.
  • ITC has not been availed on employee benefit expenses e.g., travel benefits, food and beverages supplied to employees, life and health insurance which are restricted as per Section-17(5) of CGST Act,2017 provided such ITC is in respect of goods or services where it is obligatory for the employer to provide the same to employees
  • The auditor needs to ensure that ITC has not be claimed in case of the prepaid expenses booked at the end of financial year since one of the preconditions of availing of ITC as per Section-16 is the receipt of goods or services.
  • The auditor should verify, if any transaction falls under reimbursement category and should review the GST implication on the same. Generally, all reimbursement will attract GST unless the reimbursement is on account of pure agents as defined in Rule 33 of CGST Rules.
  • The auditor should ensure that ITC on Repairs and maintenance expenses which do not result in immovable property have been availed as per Section-17(5) of CGST Act,2017.
  • Auditor should ensure that the ITC on expenses such as telephone, mobile and internet provided the bills are in the name of the company and place of business is mentioned on such bill.
  • The auditor has to verify the nature of expenditure. ITC is available subject to section-16 and section-17(5) of CGST Act,2017 only when used for business purpose. If availed both for personal and business use, then auditor should ensure that ITC has been claimed proportionately.
  • The auditor should ensure proper compliance in regards to the payment of Director’s remuneration. The company must discharge the GST liability as applicable above under reverse charge mechanism. Where a director is treated as an employee of the company, there must exist an employer-employee relation between the two, TDS must be deducted under section 192 of the Income Tax Act,1961 and the expense must be shown under the head salaries in the books of accounts. In other cases, TDS must be deducted under section 194J of the Income Tax Act,1961.

NOTE: This is not an exhaustive list of checking. The auditor needs to apply his judgement and professional skepticism and remain alert to all the statutory compliances including GST.

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