How to handle the suppression of inward supply in books of account by taxpayer cases by the departmental officers?
Generally GST officials tried to find suppressed outward supply in time of scrutiny or any other proceeding of GST law or look after the ITC related issues but practically in some cases, the taxpayers suppress “Inward Supply” also. Therefore, in through this write-up I am trying to describe the way to handle those kinds of cases by departmental officers.
Generally, Inward supply procured from Registered Persons by any Taxpayer did not suppressed in his books by the taxpayers because the transaction becomes authenticate in initial stage as the supply is supplied by registered person and the supplier of that supply disclose that in his GST compliance u/s 37. I mean the supplier disclose that supply in his GSTR 1. So that inward supply in the hands of recipient becomes authenticate and Input Tax Credit facility can be taken by recipient according to GST law though credit cannot be availed for block credit cases u/s 17(5) or others applicable cases. The main fact is that the “Inward Supply” becomes recorded. So from my point of view, suppression of recorded transactions cases are very rear because most taxpayers know the bad effects of suppression of recorded transactions. Initially from GSTR 2A of any taxpayer, we can find inward supplies which were procured from a registered person.
In most of the suppressed inward supply cases, we can see that the inward supply which was suppressed is procured from any un-registered person because initially before investigation GST officials cannot trace those inward supply and also taxpayers gives consideration to the supplier by hand cash for abolish the proof. If the Consideration was made through Bank or through book adjustment then also the suppression of inward supply become tough for taxpayer as in time of checking of books of account, he cannot explain the debit effect of those transactions.
Now I am going to explain what the consequence of those kinds of suppression are and how to handle those cases by the departmental officers?
There are two ways by which suppression can be possible. One is direct suppression Tax and another one is indirect suppression on Tax.
Direct Suppression of Tax:
When any Inward supply is subject matter of section 9(3) of CGST/SGST act or section 5(3) of IGST act and taxpayer did not give reflection of those inward supplies in books as well as did not pay the tax, it becomes a direct avoidance of tax which is levied in that inward supply in RCM basis and levied penalty for non-booking of entry in prescribed register.
When any inward supply is procured from any un-registered person where Sec 9(3) of CGST act or Sec 5(3) IGST act is not subject matter for that inward supply but the taxpayer suppressed the entry in books, directly it is not a avoid case as the provision of Sec 9(4) is changed at present. That case may fall under indirect avoidance of Tax which is described below.
Indirect Suppression of Tax:
In normal point of view, if any inward supply is not subject matter of levy u/s 9(3) of CGST/SGST act, u/s 9(4) of CGST/SGST act, u/s 5(3) of IGST act or u/s 5(4) of IGST act and those inward supplies are suppressed from the books, no levy of tax can be subject matter but if we think very closely and very sensuously, we can say indirectly levy of GST attracted u/s 9(1) for the regular taxpayer on the same amount of taxable value which is equal to the amount of suppressed Inward supply or the value of his declared outward supply may increase through apply of valuation rule for covering the amount of undeclared inward supply. I want to say indirectly the value of suppressed inward supply becomes the value of suppressed outward supply.
Handling of Indirect Suppression of Tax by way of non recording of inward supply in books of accounts relates with the concept of general principal of accounting. We all know that, Section 35(1) of CGST/SGST act read with Rule 56 of CGST/SGST rule prescribes some accounts which have to be maintained by every registered dealer. Rule 56(18) says, if any person falling for mandatory maintain books in any other law then that act’s prescribed books also the subject matter of GST issues. Just like If the person falling mandatory maintenance of books u/s 44AA of the IT act,1961 then those books prescribed in IT act are also be treated as a factor of GST issues and Section 2(12A) of income tax act prescribed those books also. If the cases is subject of Sec 44AA(1) of IT act, 1961 then some others prescribed registers also be maintained as per Rule 6F of IT Rule 1962. If we watch Section 2(12A) of IT act, we can see the ledgers and cash book also must be maintained and those books are directly related with GAAP. In time of Inspection, Search, Seizure, and Arrest through Access of Business premises u/s 71 of CGST/SGST Act the Trial Balance, Statements of Annual Financial Accounts may play a vital role as per sec 71(2) of CGST/SGST act. So we can say that the elements of GAAP shall take a vital role in GST investigation.
Very briefly, I want to say that the Balance Sheet is nothing but the equation of source of fund and application of fund. Liability side is source of fund and by using that source of fund the application of fund is done and that application of fund means the Assets side.
As per comparing the accounting concept with Inward Supply as per Sec 2(67), we can say credit purchase of inputs, cash purchase of inputs, Services Received in form of revenue expenses (consideration paid or payable), acquire of capital goods in cash or on credit all are examples of Inward Supplies (though some cases like No supply factors are not a case of inward supply as per GST law). If consideration as per section 2(31) already paid to supplier as per evidences in hand of Officer but the Inward Supply is not recorded in books (Also No advance payment shown in Balance Sheet for that payment) it directly triggered that consideration which was already paid is done through non accounted source of fund. Double Entry System is a scientific system and have Debit and Credit legs of every transactions so reduction of fund through consideration towards supplier either established the Revenue Expenses/Capital Expenses made or established the advance payment of consideration for that case factor. So suppression of expenses means suppression of Consideration (if actually consideration already adjusted or disbursed without giving effect in financial books) so when books do not have that kind of entries but officer have sufficient evidence to prove that the consideration was practically paid, it becomes a case where that source by which consideration was already made is nothing but a unaccounted source of fund. The taxpayer suppresses the inward supply because he suppresses the entry of accruing of source. So he make unaccounted application by using the unaccounted sources. So if the proof of consideration for inward supply in the hand of officer (consideration is undisclosed from the end of taxpayer) is genuine, then as per double entry system of GAAP the creation of source is also genuine because double entry system is a systematic scientific system.
Now the officers must trigger the point, in which way the actual source (which is undisclosed in books as well as application in form of expenses/inward supply also undisclosed) was generated. As per GAAP, generation of source means generation of revenue or increase of liability or decrease of assets (Sale of goods/Rendering of Services/Loan Taken, Sale of Capital Assets etc). So if the taxpayer cannot prove that the source is generated from a factor by which Supply cannot be tracked (Like Loan received, Creditors increase etc), The case is falling either suppression of Sale/Rendering of Services or the case is falling into that situation where, the taxpayer booked his accounting Sale/Service render by a value which is less than the amount actually Received from customers without discount exercise and that un- accounted received raised the unaccounted fund.
In those situations officers may use the increase of value of supply for his existing outward supply to cover the suppress inward supply value through valuation rule.
If the source is proved by the taxpayer as generation from the source which is not a taxable parameter in GST, Only penalty u/s 127 or other applicable sections may impose because it is a case of wrong data given in Financials accounts and manipulation/omission of entry in prescribe register u/s 35(1)(b).
If the taxpayer cannot prove that the source is gathered from the factors where no GST is levied, tax may be determined by officer through increase is existing value of supply of his already declared outward supply of sales/Rendering of services or officer may make the case where the same amount equal to suppressed inward supply is tracking as suppressed outward supply of the taxpayer through his generally used goods or services for his business and make computation of tax amount accordingly. The officer may process the case u/s 74 because the wordings used in u/s 74 is fit for that case because it is a case for suppression of fact to avoid tax.
** It is my personal opinion. Each case depends on the situation of that case, so it is not a solution of every case. It is just a brief write-up on types of cases. So consider each cases as per the actual factor and parameters of that case.