Radhe Krishna IRS
Acknowledgement to Sri Pawan Kumar Deputy Director (Cost) & Sri RR Tripathi Supdt and Mr Manish Kumar Jha Inspector CGST For all the help and Support in bringing out this book.
Disclaimer: – This manual is just an effort to synchronize the audit/scrutiny process and solely aimed to provide guidance in the process. It is not to be quoted in the court of law. This is a work of collation from different sources as mentioned in references for educational and training purposes only.
Foreword
Audit and scrutiny of financial documents and statements forms an integral part of the work conducted by the tax departments and many of the officers of the tax department whether it is state administration or central administration does not have specialization in finance or accounting. Hence, it becomes a very difficult task to conduct audit and scrutiny. However, the officers of the department learn things with training and experience, this handbook is an effort to equip the departmental officers with requisite skills in audit and scrutiny.
It provides the officers with detailed guidelines on the purpose and legal authority to conduct audit. It outlines the process of how to conduct an audit and scrutiny and what are the things to be looked for while reading the financial statements of the business firms. It covers the lessons learnt from the previous audits in the service tax and central excise era. It also brings about some sector specific studies in some most common sectors of the businesses.
This handbook, however, cannot anticipate every situation or answer every question about audit and scrutiny. The procedures and practices stated in this handbook are mere guidelines to help and support the departmental officers in the course of their duty. The procedures and practices are subject to change. This is a work of collation from different sources as mentioned in references for educational and training purposes only. This is not a source of legal authority for audit or scrutiny neither a limitation upon the application of personal ideas by any officer.
(Satyendra Kumar Singh)
Principal Commissioner
CGST, Ranchi.
Table of Contents
| Sl no | Chapter |
| 01 | Meaning and Purpose of Audit/Scrutiny |
| 02 | Legal Authority for GST Audit |
| 03 | Documents Collection for Audit/Scrutiny |
| 04 | Scope of Audit/Scrutiny in GST |
| 05 | Audit Procedure – Process Flow |
| 06 | Learning from Previous Audits |
| 07 | Checklist for Auditors/scrutiny |
| 08 | Appendix
Some Sector specific studies 1. Hotel/Lodge/Inn 2. Restaurants 3. Construction & Real Estate 4. Cement 5. Automobile dealers 6. Domestic Appliances/Electronic goods |
1. Meaning and Purpose of Audit
Meaning of Audit: – ‘Audit’ implies – Detailed examination of
i. Records,
ii. Returns and
iii. other documents – maintained / furnished by a registered person, under GST law/any other law or rules; and
iv. Reconciliation of Books of accounts of the taxpayer with the Returns filed by them.
Purpose: – The purpose of audit is to
(a) Verify the correctness of
(i) Turnover declared;
(ii) Taxes paid;
(iii) Refund claimed;
(iv) Input tax credit availed;
(b) Assessment of tax compliance by the taxpayer,
(c) Detection of revenue leakage, recovery and
(d) Facilitating the taxpayer in ease of doing business by making him aware of rules/regulations and its application.
(e) Maintenance of adequate standards of accounting for trade and industries.
The taxpayer’s anticipation of audit/ Scrutiny actions has both preventive and deterrent effects. The deterrent effect is the extent to which audit actions discover and stop taxpayers from continuing to under-declare or manipulate their tax liability. The preventive effect is the extent to which registered persons decide not to evade tax, because they are aware of audit activity and fear of detection by the tax auditors.
2. Legal Authority for GST Audit
> Sec 2(13) of CGST Act 2017 – Definition of Audit
“audit” means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made there under 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
> Section 65 read with rule 101– Power to audit and procedure of audit, obligation of taxpayer.
(1) The Commissioner or any officer authorized by him, by way of a general or a specific order, may undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed.
(2) The officers referred to in sub-section (1) may conduct audit at the place of business of the registered person or in their office.
(3) The registered person shall be informed by way of a notice not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.
(4) The audit under sub-section (1) shall be completed within a period of three months from the date of commencement of the audit:
Provided that where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within three months, he may, for the reasons to be recorded in writing, extend the period by a further period not exceeding six months.
Explanation.––For the purposes of this sub-section, the expression “commencement of audit” shall mean the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later.
(5) During the course of audit, the authorized officer may require the registered person,—
(i) To afford him the necessary facility to verify the books of account or other documents as he may require;
(ii) To furnish such information as he may require and render assistance for timely completion of the audit.
(6) On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings.
(7) Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, the proper officer may initiate action under section 73 or section 74.
> Section 66 read with rule 102- Special audit
(1) If at any stage of scrutiny, inquiry, investigation or any other proceedings before him, any officer not below the rank of Assistant Commissioner, having regard to the nature and complexity of the case and the interest of revenue, is of the opinion that the value has not been correctly declared or the credit availed is not within the normal limits, he may, with the prior approval of the Commissioner, direct such registered person by a communication in writing to get his records including books of account examined and audited by a chartered accountant or a cost accountant as may be nominated by the Commissioner.
(2) The chartered accountant or cost accountant so nominated shall, within the period of ninety days, submit a report of such audit duly signed and certified by him to the said Assistant Commissioner mentioning therein such other particulars as may be specified:
Provided that the Assistant Commissioner may, on an application made to him in this behalf by the registered person or the chartered accountant or cost accountant or for any material and sufficient reason, extend the said period by a further period of ninety days.
(3) The provisions of sub-section (1) shall have effect notwithstanding that the accounts of the registered person have been audited under any other provisions of this Act or any other law for the time being in force.
(4) The registered person shall be given an opportunity of being heard in respect of any material gathered on the basis of special audit under sub-section (1) which is proposed to be used in any proceedings against him under this Act or the rules made there under.
(5) The expenses of the examination and audit of records under sub-section (1), including the remuneration of such chartered accountant or cost accountant, shall be determined and paid by the Commissioner and such determination shall be final.
(6) Where the special audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, the proper officer may initiate action under section 73 or section 74.
> Sec 70- Power to summon
(1) The proper officer under this Act shall have power to summon any person whose attendance he considers necessary either to give evidence or to produce a document or any other thing in any inquiry in the same manner, as provided in the case of a civil court under the provisions of the Code of Civil Procedure, 1908.
(2) Every such inquiry referred to in sub-section (1) shall be deemed to be a “judicial proceedings” within the meaning of section 193 and section 228 of the Indian Penal Code.
> Sec 71- Power to access of premises for audit
(1) Any officer under this Act, authorised by the proper officer not below the rank of Joint Commissioner, shall have access to any place of business of a registered person to inspect books of account, documents, computers, computer programs, computer software whether installed in a computer or otherwise and such other things as he may require and which may be available at such place, for the purposes of carrying out any audit, scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.
(2) Every person in charge of place referred to in sub-section (1) shall, on demand, make available to the officer authorised under sub-section (1) or the audit party deputed by the proper officer or a cost accountant or chartered accountant nominated under section 66—
(i) Such records as prepared or maintained by the registered person and declared to the proper officer in such manner as may be prescribed;
(ii) Trial balance or its equivalent;
(iii) Statements of annual financial accounts, duly audited, wherever required;
(iv) cost audit report, if any, under section 148 of the Companies Act, 2013;
(v) The income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961; and
(vi) any other relevant record, for the scrutiny by the officer or audit party or the chartered accountant or cost accountant within a period not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by the said officer or the audit party or the chartered accountant or cost accountant.
3. Documents for GST audit/Scrutiny
(I) Financial statements
1. Balance Sheet
2. Profit and Loss Account
3. Trading Account
4. Directors/Auditors Report
5. Trial Balance
6. Ledger entry and Journal Entry
7. Income tax audit report and Income tax returns
8. Cost audit report
9. Purchase book
10. Purchase return book
11. Debit Notes
12. Credit Notes
13. Monthly Stock statement
14. Fixed Asset Register
(II) Other Documents
1. Purchase Orders
2. Price Circulars
3. Delivery Challans
4. Material transfer note
5. Sales Book
6. Outward supply book
7. Any agreement/MOU
8. Stores Ledger
9. Goods Receipt Note (GRN)/Material Receipt Note/Inspection cum Receipt Report (ICRR)
10. Material Return Note
11. Rejected Goods Register
12. Waste Register
13. Physical Stock Verification Statement
14. Job work/Sub-contract Register
(III) Returns under GST:-
1. GSTR3B filed monthly details of liability, ITC and Payment.
2. GSTR 1M details of outward supplies
3. GSTR 4 details of supplies by composition tax payer filed quarterly.
4. GSTR 9/9A/9C and reconciliation statement or gst audit report for 2 cr and above tax payers.
5. GSTR 7 Tax deducted at source
6. E way bills (Generated and accepted both)
4. Scope of Audit/Scrutiny in GST:-
1. Evaluation of Correct Application of Tax Rate.
2. Evaluation of Admissibility of input tax credit.
2.1 Evaluation of correct utilization of ITC in terms of IGST /CGST/ SGST
3. Evaluation of Correct Classification of supply.
3.1 HSN code/SAC code
3.2 Composite Supply
3.3 Mixed Supply
4. Evaluation of Correct value of Supply.
5. Evaluation of Correct time of supply.
6. Evaluation of Correct Place of Supply.
7. Evaluation of transitional credit if any availed by the unit.
5. Audit Procedure – a brief review
Stages in conduct of audit- Process flow
The processes involved in conducting GST audit are enumerated below for the ease of the officers involved in the auditing.
i. Creation of Audit teams.
ii. Preparation of schedule on the basis of the risk assessment list provided by DG (Audit). The same is divided into annual and quarterly audit schedules.
iii. Allotment of taxpayers to the audit groups.
iv. Intimation to the Registered Person (GST ADT-01).
v. Reviewing the taxpayer data – Tax Payer at a Glance (TAG), Registration, Returns, Payments, Dispute Resolution, Audit Report Utility, E-way bills & Third Party data if available.
vi. Conducting desk review in offline / online mode (wherever available) and uploading the result of desk review.
vii. Preparing the audit plan in offline / online mode (wherever available) and uploading the audit plan.
viii. Carrying out verification and uploading the verification report, within twenty four hours of completion of audit.
ix. Uploading the draft audit report (DAR) for the MCM, within 10 15 days
x. Examining the audit paras in MCM.
xi. Uploading the minutes of the monthly monitoring committee meetings (MCM), within twenty four hours of the meeting.
xii. Uploading final audit report, within thirty days of the Meeting.
xiii. Communicating the audit report to taxpayer (ADT-02).
xiv. Communicating to the Registered Person the future course of action in case of contested paras.
6. Learning from the erstwhile audits:-
Sector
1 Manpower Supply/Security
| Sl No | Issue |
| 1 | Non Inclusion of amount of PF/Medical/Safety in gross amount for calculating service tax |
| 2 | Irregular availment of Input Service Credit on personal Health Insurance of employees |
| 3 | Non-inclusion of amount received for uniform, weapon etc. in gross value |
| 4 | Amount collected on security contract, rent a cab, sales bill and renting of immovable property, on which service tax is payable. |
| 5 | Delay payment of service tax |
| 6 | Non-payment of service tax in spite of collecting amount from customers |
| 7 | Non-payment of tax on manpower supplied to college/educational institutes/hospitals etc. claiming it as exempted |
Sector
2 Manufacture/cement
| 1 | Non-payment of Service Tax on Selling Agency Commission in foreign currency to foreign agent. |
| 2 | Non-payment of amount equal to five/ six percent of the value of exempted goods/ service of traded goods. |
| 3 | Non – payment of Service Tax in respect of supply of tangible goods services. |
| 4 | Wrong availment of CENVAT Credit on Input Service on account of Service Tax charged towards construction of a building or civil work. |
| 5 | Wrong availment of input credit on invoices issued more than one before availment |
| 6 | Non-payment of differential duty on transfer of goods for captive consumption under CAS 4 |
| 7 | Non-payment of amount @ 6% on exempted goods |
| 8 | Short payment of Central Excise Duty by way of non-inclusion of outward freight in the assessable value on goods sold on FOR basis |
| 9 | Non-payment of C. EX. Duty on amount received under the Jharkhand Industrial Policy, 2001 and this amount is equal to 75% of CST/ VAT paid by them |
| 10 | Non-payment of C.Ex. Duty on freight in r/o consignment sale |
| 11 | Non-payment of C. Ex. Duty on Packing and Forwarding charge |
| 12 | Short payment of Service Tax on renting of immovable property |
| 13 | Non-payment of Service Tax on the receipt of commission |
| 14 | Non-payment of service tax on LD charges collected |
| 15 | Non-payment of service tax on GTA under RCM |
| 16 | Non-payment of service tax on Security service under RCM |
| 17 | Non-payment of service tax on fee paid to advocate under RCM |
| 18 | Non-inclusion of value of free supplied items in assessable value of final products |
| 19 | Non/Short payment of tax on sale of scrap on which credit as CH was availed |
| 20 | Irregular availment of credit on repair and insurance of Motorcycle |
| 21 | Short payment of duty to calculation on low ad-valorem duty |
| 22 | Non-payment of interest on short payment due to short balance in PLA |
| 23 | Short payment of duty on less rate of specific duty on Cement |
| 24 | Short payment of duty on sale of cement at Industrial rate whereas it was retail sale. |
| 25 | Short payment of duty at bulk rate instead of retail rate |
| 26 | Non-payment of tax under RCM on Directors Remuneration |
| 27 | Wrong availment of credit on Structural items as input |
| 28 | Wrong valuation showing clearance for job worker premises but actually goods were sold from their depot |
| 29 | Wrong distribution of ISD Credit |
| 30 | Wrong utilisation of ISD credit as service was not at all used by the unit |
Sector
3 Coal/Coal washery
| 1 | Non-payment of differential Central Excise Duty on coal supplied to sister concern |
| 2 | 100% Credit availed on Capital Goods in receiving years instead of 50% by the assessee |
| 3 | Wrong availment of Cenvat Credit on Basic Custom Duty |
| 4 | Wrong availment of CENVAT Credit on inadmissible input service Outward GTA |
| 5 | Short payment of Service Tax on account of undervaluation of Rejected / ungraded coal due to non-inclusion of transportation, loading charges and Railway Siding charges in taxable value |
| 6 | Non-payment of duty and interest on performance incentive received |
| 7 | Non-payment of duty and interest on supplementary invoices issued |
| 8 | Non-payment of proper Coal Energy Cess on difference in ER 1 and Cess statement |
| 9 | Wrong availment of credit on Rent-a-Cab service |
| 10 | Irregular availment of Cenvat credit on Capital Goods as Inputs |
| 11 | Non-payment of C. Ex. Duty on domestic consumption of coal |
| 12 | Short payment of C. Ex. Duty on account of captive consumption of Coal |
| 13 | Non-payment of Service tax on LD charges collected from various vendors |
| 14 | Short payment of Duty on clearances made to (related person) at rates which is lower than rates charged from independent buyers. |
| 15 | Non Payment of Service tax on commission received |
Sector
4 Iron & Steel
| 1 | Non reversal / payment of input service credit on GTA in case of trading of coal |
| 2 | Wrong availment of credit on 2% Coal CVD on imported coal |
| 3 | wrong availment of credit on 2% duty on coke under SSI Scheme |
| 4 | Non-payment of appropriate duty on depot sale |
| 5 | Wrong availment of Service Tax Credit on Catering Services |
| 6 | Wrong availment of Service Tax Credit on Commercial Training & Coaching imparted for Development |
| 7 | Wrong availment of Cenvat Credit on account of Structural Fabrication, Structural Erection, Painting of Structure, Fixing of Ridge and Sheeting |
| 8 | Wrong availment of Cenvat Credit as input Service on account of providing entertainment programme |
| 9 | Irregular availment of Cenvat Credit on account of translation charges |
| 10 | Irregular availment of Cenvat Credit as input service on account of GPS Web Tracking |
| 11 | Irregular availment of Cenvat Credit on donation made towards Durga Puja and Kali Puja |
| 12 | Undervaluation of goods ( Wire Rod i.e. WRM chapter heading 72132090 ) sold to related person resulting into short payment of Central Excise Duty |
| 13 | Short payment of Service Tax on taxable income on account of Renting of Immovable Property services |
| 14 | Non-payment of Central Excise Duty on char coal cleared by the assessee |
| 15 | Non-payment of interest on wrongly taken and utilized of Cenvat Credit on the input invoice |
| 16 | Non reversal of input service credit taken on inputs removed as such |
| 17 | Wrong availment of Cenvat credit as capital goods TMT bars (Ch.72), H. R. Coil cutting sheet/ chequered coil (Ch.72), structural components (Ch.73), M. S. Angle/ shapes/ beam/ joist/ channel/ flat/ bars/ rods/ end cut scraps (Ch.72), MS-TOR steel (TMT)/ Round (Ch.72), P M Plate (Ch.72), G. P. Coil (Ch.72), painted electro forged gratings set (Ch-73) |
| 18 | Wrong availment of Input Credit on Customs Education Cess & Secondary and Higher Education Cess |
| 19 | Availment of credit on Amount paid under Rule 6(3) |
| 20 | Excess credit on material short received |
| 21 | Non-payment of duty on amount collected through Debit Note for escalation of price |
| 22 | Excess availment of credit by availing twice on same invoice |
Sector
5 Mining Service
| 1 | Non-payment of Service Tax on taxable income on account of loading charges received from service recipient |
| 2 | payment Service Tax on taxable income on account of loading and handling charges received from service recipient |
| 3 | Non-payment of service tax on Diesel escalation charge |
| 4 | Non-payment of service tax on account of misclassification of services under GTA instead of Mining service |
| 5 | Irregular availment of credit on Dumper/Tipper as Capital goods before addition of the same under CG |
| 6 | Irregular availment of credit on maintenance and insurance of vehicle which are not in nature of CG |
| 7 | Non-inclusion of value of free supplied items by the customer |
| 8 | Availment of excess abatement under GTA |
| 9 | Non-payment of interest as per valuation under POT Rules |
| 10 | Short payment of interest in case of late payment |
| 11 | Non-payment of Service tax on Machine Hire Charges |
Sector
6 Automobile Dealer
| 1 | Non-payment of S. Tax as per POT Rules 2011, on accrued income shown in B/S |
| 2 | Non-payment of S. Tax on Renting of Immovable Property |
| 3 | Irregular utilisation of Cenvat credit on goods which do not fall under definition of Capital Goods |
| 4 | Non-payment of service tax on Bank pay-outs |
| 5 | Wrong availment of Cenvat Credit for work contract service |
| 6 | Wrong availment of input service credit like security services, telephone services, service tax paid against the event management for product promotional programmes etc |
| 7 | Wrong availment of Cenvat Credit for work contract Service (Civil Work). |
| 8 | Cenvat Credit taken & utilized wrongly on Demo Car |
| 9 | Non-payment of Service Tax on account of Business Auxiliary service Pay out Commission received, FMSC & warranty Labour |
| 10 | Non reversal of credit under Rule 6(3) in spite of non-maintaining separate register for exempted and dutiable service |
| Irregular availment of credit on inward GTA | |
| 11 | Non-payment of tax on ORC Over Riding Commission |
Sector
7 Hotel/Restaurant
| 1 | Non-payment of Service tax on Licence fee under RCM |
| 2 | Non-payment of tax on food supplied in room |
| 3 | Excess abatement availed in different service |
| 4 | Non-payment of tax on outdoor catering |
| 5 | Non-payment of tax on Mandap keeper service |
| 6 | Suppression of sale in comparison to value calculated on amount paid to franchise under clause of agreement |
| 7 | Short payment of tax on difference of amount in B/S and ST 3 |
| 8 | Non-payment of tax on amount collected from seminars/meetings |
| 9 | Non-payment of tax on Service Charge collected from customers without abatement on full value. |
| 10 | Reversal of amount under Rule 6(3) |
| 11 | Non-payment of tax on room rent collected below Rs. 1000/- but declared tariff was more than 1000 |
| Non-payment of tax under RCM on Sponsorship service |
Sector
8 Construction Service/Erection, Commissioning
| 1 | Non-payment of Service Tax on Sponsorship Service |
| 2 | Wrong availment of Cenvat Credit on Security/Detective agency Service used in other project |
| 3 | Non-payment of Service Tax construction service provided to land owner (flat given to land owner). |
| 4 | Non-payment of service tax on installation charge received |
| 5 | Non-payment of tax on forfeited advance payment |
| 6 | Non-payment of interest while returning money to buyer after a delay while adjusting tax in that very month |
| 7 | Applicability of Rule 6(3) in ratio of duty not paid after getting completion certificate |
| 8 | Excess abatement availed, short payment of duty |
| 9 | Non-payment of tax on supervision charges on Consulting Engineer Service |
| 10 | Non-payment of tax on amount received as commission on Real Agent Service |
| 11 | Non-payment of tax on Tower Rent received |
| 12 | Non-payment of interest on Late payment of tax on Project Commission bills |
7. Checklist for Auditors
What to check in GST Audit/Scrutiny:-
Auditor’s Responsibility:- the auditors are required to keep in view, the prevalent trade practices, the economic realities as also the industry and business environment in which the Registered person operates. Therefore, the auditor should take a balanced and rational approach while conducting the audit.
Confidentiality should be maintained in respect of sensitive and confidential information furnished to an auditor during the course of audit
(I) Scrutiny of Financial Statements
(1) Director’s Report:
This gives information like overall financial results of the company, important happenings during the year and future plans of the company. Some of the important happenings like fire and loss of material in the company, details of new products launched, change in the marketing pattern etc. reported in the report may be useful to the auditor.
Director’s report may, inter alia, contain information about-
a) Foreign Exchange earned during the year.
b) Foreign Exchange paid during the year, e.g. may be on account of taxable services provided by the registered person/Taxpayer where he is liable to pay GST under reverse charge mechanism.
c) Information on the operations carried out by the registered person/Tax payer during the year under report. This may help in finding the exact nature of services provided by the registered person/Tax payer.
d) The facts stated in Director’s Report should be reconciled with the GST Returns.
(2) Auditor’s Report:
These may be reports of statutory auditor or internal auditor or C & AG Audit. In the case of statutory audit, a separate report under CARO (Companies Auditor’s Report Order, 2003/2015) is required to be given.
(a) The Auditor’s Report should be studied to find out any qualified/adverse opinion given by the auditors which may have impact on GST liability. For example, Auditor may report that goods meant for outward supply, available in stock were not reconciled or provision for obsolete items has not been made during the year. Tax auditor may like to examine such opinion in detail.
(b) Company Auditor’s Report Order (CARO) may be studied to find out whether the fixed assets records have been maintained properly or whether physical verification of inward supplies and goods meant for outward supply was undertaken and whether any discrepancies were noticed on such verification or whether the company has maintained proper records for unserviceable or damaged goods.
(c) CARO also shows disputed tax liabilities separately for Customs, Income Tax, GST etc. Cases booked under Income Tax may be examined to find out any implication on GST.
(d) In the case of Public Sector unit, C & AG report and comment of the company available in the Annual Report should be examined.
(3) Trial Balance
Trial Balance is a statement showing balances of all accounts in the ledgers as on a particular date.
The final accounts, namely, Profit & Loss account and Balance Sheet are prepared from the Trial Balance only. From the Trial Balance, similar accounts are grouped together and these are transferred to the Profit & Loss Account and Balance Sheet.
Types of verification :-
(a) Familiarization with account coding system and understanding the grouping of sub account under main accounts for the purpose of summarization into Profit & Loss Accounts and Balance Sheet.
(b) Main purpose is to select the accounts for further scrutiny as a part of audit plan. Accounts which have a prima facie relevance for GST payment or availment of ITC need to be identified.
(c) Unusual ledger accounts like Loss of inputs or unusual income accounts may also be noticed in the Trial Balance. However, such accounts will not be reflected in the Profit & Loss Accounts as these accounts are adjusted against other accounts. Such account may be selected for finding of exact nature and detailed scrutiny.
(d) Various income accounts (credit balances) available in the Trial Balance like Job Work Income Account, Erection and Commissioning Income Account, Commission Account, Recovery of Freight/Advertisement Charges Account Technical Consultation Income Account etc. should be selected to verify whether these income can be added to the assessable value for payment of GST or whether these are liable for payment of GST.
(4) Cost Audit Report
Cost Audit Report provides quantitative and financial details regarding production, clearance, capacity utilization, input-output ratio, related party transaction, valuation of production along with reconciliation of annual turnover with taxable value of Goods produced as per the GST returns.
The Cost Auditor in his report gives the information/details on the cost data for the company as a whole as well as in the respect of each plant/unit of the company located at different locations, thus study of the report helps the audit officer in comparison of various information/details across the plants and units.
In case Registered person is not covered under the cost audit, the Audit Officer may examine the Cost Accounting records maintained by them on the lines of Cost Audit Report.
(5) Profit and Loss Account
The Profit and Loss Account shows major items of expenditure and income. In the main body of the Profit & Loss Account, only major heads of expenditure and income are given and the constituents of these headings are given in a separate annexure. The said annexure should be studied in detail.
Types of verification:
(a) Scrutiny of supplies: Supplies may include inter-state supplies, intra-state supplies, Zero rated supplies including supplies to SEZ. Study of the pattern of supplies will give an idea about the volume of indigenous/ internal market for the registered person’s supplies.
(b) Other incomes like scrap, insurance claims receipt, profit on sale of fixed assets, commission received, erection and commissioning, freight and insurance recovered etc. may be examined in detail to find out the exact nature of such incomes and whether these have any bearing on the valuation or whether these are liable for GST
(c) On the expenditure side, value of inward supplies on which GST is payable under Reverse Charge – Section 9(3) should be examined in detail. For this purpose, the relevant ledger account may be scrutinized as discussed under the head General Ledger. Ratios like
i) Inputs consumed to inputs purchased,
ii) ITC availed on inputs to outward supplies, raw material purchased and ITC taken on inputs etc. may be worked out.
(d) Notes given along with the said schedule should be studied carefully to find out cases of use of material for non-production activities.
(e) The expenditure or income of the major heads should be compared with the previous year’s amount in order to find out cases of major variations.
(6) Balance Sheet
Balance sheet is a statement of assets and liabilities of a unit on a particular day. The overall financial health of a company can be determined from the study of a Balance sheet.
Types of verification
(a) Study of schedule of Share Capital may reveal if the company is subsidiary company and in case the company is holding company, in that case, the name of subsidiary company will be disclosed in the Schedule of Investment.
If there are supplies between holding company and subsidiary & vice versa, valuation aspects needs to be examined in the light of CGST Rules.
(b) Study of fixed assets schedule may show additions and deductions to the fixed assets during the year. For the deductions made during the year, verification may be made as to whether appropriate GST has been paid.
(7) Notes to the Accounts
These notes are part of the Profit & Loss Account and Balance Sheet.
These notes may be inserted by the company as per the requirement of the Companies Act or may be added at the instance of Statutory auditor. These notes are very important to a Tax auditor as these reveal important transactions or the important accounting policies followed by the unit.
In case of debtors, notes indicate debtors which are outstanding for a period exceeding 6 months.
Foreign Exchange related transactions are also given in the notes on accounts. Management can use these figures to show book profit to suit their requirements.
Netting of amounts of revenue or expenditure can also be resorted to by the management although as per accounting standards it is mandatory to specify the figures separately.
Scrutiny of Notes will also reveal as to whether there was any change in the system of accounting. For example- a Taxable person changes from cash system of accounting to mercantile system.
The notes also indicate the impact of accounting policies on various liabilities including the tax liability of the Taxable person. Therefore, the auditor must read the notes carefully.
(8) Scrutiny of Tax Deducted at Source (Income Tax TDS) Certificates
The total receipts can be verified from TDS certificates in the following manner:-
i. By deducting the amount of GST from the value on which tax has been deducted at source, the receipts appearing in the books of accounts can be reconciled.
ii. The nature of supplies can also be confirmed from these certificates and in case of any discrepancy in the categorization of services under proper head, elaborate checks need to be carried out by the Auditor.
iii. Details of TDS credit claimed in the Income Tax Return may also be examined.
(9) Tax Audit Report
The Tax Audit Report is given by Chartered Accountant. The said report is given in the form 3 CD and it is required to be enclosed along with the Income tax return filed by the assessee.
Scrutiny of the Tax Audit Report
i. Clause 18 of the Tax Audit Report provides information about amount of depreciation under Section 32 of the Income Tax Act, 1961 and that of ITC availed on capital goods.
Depreciation statement as per the provisions of Income Tax Act enclosed with Tax Audit Report may be verified to confirm the correctness of availlment of ITC on capital goods.
ii. Clause 27(a) of the Tax Audit report gives the details of ITC claimed. It also provides the details of credit available and carried forward to the next year. Hence, the Auditor can authenticate the amount of credit carried forward in the GST returns with the information provided in terms of this clause.
iii. Clause 21(b) of the Tax Audit Report also gives information regarding prior period incomes and expenses booked in the year under Tax audit. The Auditor shall ensure that GST on such supplies is paid on these amounts as per the provisions of Time of supply under CGST Act.
iv. Clause 38 of the Tax Audit Report provides the information relating to Cost Audit. If such an audit has been carried out, the Auditor should examine the Cost Audit Report.
v. Clause 40 of the Tax Audit Report provides the important accounting ratios.
vi. As per clause 35(a) to 35(c), details like opening stock, purchases, sales and closing stock of trading activities and in the case of manufacturing unit quantitative details or principal items of raw materials, finished goods and by products showing opening stock, purchases, consumption, sales, closing stock, yield of finished goods, percentage of yield and shortages/excesses is required to be given.
This information may be used by Tax Auditor to verify the input-output ratio. The reasons for excessive shortage/ excesses and whether duty has been paid on the sale of raw material as reported in the tax audit report may be inquired into.
(10) Income Tax Returns
This return is filed by the assessee with the Income Tax department showing the calculation of income tax on the profit / loss earned by them.
In the computation of income statement, a depreciation statement is also enclosed. The said depreciation statement shows depreciation claimed on various assets as per the provisions of Income Tax Act. The auditors should verify whether the value considered for claiming depreciation is inclusive of ITC availed by the tax payer or not.
(11) Ledger
Ledger is a book where transactions of same nature are grouped together in the form of an account. For example, all transactions relating to GST payment may be entered in GST Payment Account.
Ledgers are of three types:
(a). Debtor’s Ledger: This contains accounts of all debtors (customers). All transactions made with a customer are entered in the individual account of each customer. Details of sales invoices and debit note issued to a customer and payment received from a customer are entered in the customer’s individual account.
(i) Ledger account of the major customers should be scrutinized. In the Customer’s account it should be verified as to what are the documents used for recording the sales of the goods/services. These documents may be sales invoices or debit notes or Journal Vouchers (JV). If debit note and JVs are also found entered in the customer’s account, such documents should be verified to find out the reasons for such recoveries from the customers and whether GST has been paid or not.
(ii) If substantial amount of advances are recovered regularly, this may also be verified from customer’s account. In such cases, there may be credit balance showing receipt of advance payment.
(b). Creditor’s Ledger: This Ledger contains accounts of all creditors like suppliers and service providers. Like in the case of Debtor’s Ledger, in the case of supplier’s account, the details like purchase invoice, debit note or JV may be available in a supplier’s account. The debit note or JV might have been prepared for rejection of purchase material or for short receipt of purchase material or for short receipt of services.
If the customer’s account shows details of debit note or JV, the reasons thereof may be inquired into and whether ITC has been reversed or not may be verified.
(c) General Ledger: This Ledger contains all accounts of assets, liabilities, incomes and expenses. Scrutiny of this ledger is very important to a Tax Auditor as the income and expenditure accounts have direct impact on availment of credit, valuation of finished goods and payment of GST. The General Ledger may contain 100-500 accounts depending upon the size of the company.
Therefore, selection of account for scrutiny is an important task for an auditor. For this purpose, accounts should be selected from the Trial Balance which gives names of all the accounts maintained by a unit. Some of the general rules which may be kept in mind while selecting the accounts for scrutiny are given below :
(i) Credit entries in expenses account.
(ii) Income accounts.
(iii) Unusual account.
Types of verification:
(i) All the important input purchase/inward supply accounts may be verified in order to find out whether any rejection of raw material or short receipt of input have taken place and whether ITC has been reversed or not.
(ii) Expenditure accounts where recovery of expenses is possible like Packing and Forwarding Expenses Account, Advertisement Expenses Account, Transportation/Freight Charges Account, Sales Expenses Account etc. may be scrutinized in order to find out any recoveries being made from the customer.
(iii) From the Trial Balance, the income accounts (these accounts will have credit balances) should be selected for scrutiny and the exact nature of such income’s accounts should be found out from the study of the documents mentioned in the relevant ledger accounts. Some of these accounts might have direct impact on the valuation of finished goods or it may also affect the GST liability.
(iv) Unusual accounts as noticed during the study of Trial Balance may also be scrutinized so as to find out the exact nature of such accounts.
(v) The auditor may verify the Plant and Machinery Account to find out the additions made during the year and the disposal of plant and machinery made during the year. In the case of disposal, whether the appropriate amount of tax has been paid or not may be inquired into.
(vi) As far as verification of claiming of depreciation on capital goods is concerned, the verification should be made from the Income tax return filed by the assessee or from the Income Tax Audit Report.
(12) Debit Notes
Debit Note is a statement informing the other party that his account has been debited for the reasons given in the Debit Note.
The financial impact of a Debit Note is that the addressee is liable to pay the amount mentioned in the said statement to the person who has issued the Debit Note. In other words, the person issuing the Debit Note is eligible to receive the amount from the addressee.
Debit Note may be issued for various reasons like return/short receipt of goods purchased, increase in the rate/quantity of the outward supply of goods made /services rendered, recovery of packing charges, warranty charges, after-sales service charges etc. from a customer. The job worker may raise a Debit Note for value of own material used by him. The principal may issue a Debit Note to a job worker for the value of scrap generated during job work process and retained by a job worker
(i) Since the numbers of Debit Notes issued by a unit are generally not very large, therefore all the Debit Notes must be studied by a Tax Auditor.
(ii) The Debit Note itself shows the reason for its issue and most of the time the supporting documents are enclosed with the Debit Note. Therefore, such documents should be studied in detail.
(iii) Cases of additional recoveries from the customer or rejection and short receipt of inputs are generally noticed in the Debit Note.
(13) Credit Note
it is a statement informing the other person that his account has been credited for the reasons mentioned in the Credit Note. The financial impact of issue of a Credit Note is that the addressee is eligible to receive the amount of credit note. Credit Note may be issued for the reason like return of goods by the customer (sales return) etc.
14. Journal Voucher (JV)
JVs are prepared for all adjustments which may not involve direct financial dealings. For example, accounting of raw materials consumed in a particular month, providing of depreciation or making provision for payment of royalty
(i) As most of the adjustments are made at the end of the half year and at the end of the year, therefore, all the JVs for the half yearly period or yearly period (month of September or March in the case of units following April to March as accounting year) must be verified.
(ii) The narration given in the JVs should be studied in order to find out the exact nature of transaction being entered in the books of accounts.
(iii) Study of JVs may reveal accounting system followed by a unit. For example, a company following the system of cost centres may account for consumption of raw material for each centre on a monthly basis. In such cases, the raw material consumption by non-production department like construction department or maintenance department may be found out from the study of JVs which is passed at the end of each month. The said JVs may also be useful in quantifying the amount of wrong availment of ITC for entire year as only one JV is required to be examined for each month.
(iv) Adjustment entries passed for transferring the balance of one account to another related account may also be found out from the study of JVs. For example, Recovery of Packing and Forwarding Charges Account may be transferred to Packing and Forwarding Expenses account and for this purpose a JV is passed.
(v) Sometimes additional consideration may be collected from customer by issuing a simple letter to the customer (without issuing any debit note or sales invoice). In such cases these transactions are accounted for through JVs.
(vi) Similarly, for quantities short received or rejected quantity also the supplier may be compensated by way of intimation and the transaction is recorded through a JV.
15. Internal Audit Report
This is the report submitted by internal auditors appointed by the company which looks into day-to-day activities and the systems followed by the unit. In the bigger company, it is mandatory also.
i) Call for sample audit reports and examine with respect to observations on loss of any input, excess availment of ITC, collection of additional consideration
ii) Verify whether any system changes have been advised and followed by the assessee. In that case for the past period any implication on Excise payment due to a week internal control needs to be examined.
iii) Internal Auditor also reports about stock verification and in case of shortages the ITC availment needs to be examined.
(II) Scrutiny of other documents:-
1. INVOICING PATTERN:
i. Whether the invoice issued contains all the information prescribed in Rule 46 of CGST Rules and is being numbered accordingly
ii. Whether revised invoice or credit note or debit note issued contains all the information prescribed in Rule 53 of CGST Rules
iii. Whether the export invoice is being endorsed with the words “supply meant for export on payment of integrated tax” or “supply meant for export under bond or letter of undertaking without payment of integrated tax”
iv. Whether the payment voucher issued for advance payment has been made as per Rule 52 of the CGST Rules.
v. Whether the receipt voucher issued for advance receipt has been made as per Rule 50 of the CGST Rules.
vi. In case of a composition dealer U/s 10 of the SGST/CGST Act, whether bill of supply has been issued U/r 49 of CGST Rules.
vii. Whether invoice has been prepared in triplicate in the case of supply of goods as per Rule 48(1) of CGST Rules. N.B. – Significant omission/commission in the invoice should only be taken into consideration for taking action U/s 73 or 74 of the CGST Act.
2. STOCK VERIFICATION
i. Check the physical stock of taxable and risk-prone commodities which can be quantified.
ii. Check whether the stock-in-trade found at the time of Audit Visit tallies with the books of accounts maintained.
iii. Value of Closing Stock vis-à-vis ITC balance.
iv. Monthly stock statement to bank.
v. Stock verification statement should be examined to find out the cases of shortages or excesses. In case discrepancies are not explained, action may be taken either for demanding reversal of ITC or demanding GST. This statement may also be available in the Cost Audit Report.
vi. On the basis of such statement, stock adjustments are made in the financial records by passing a Journal Voucher. The said JV may also be examined for the adjustments carried out by the unit.
(3) Purchase order/Agreements/MOUs
This document denotes the price and other conditions laid for purchase and sale of goods and services.
Purchase order placed by Customers, Agreement/MOU with the Customers:
(a) To verify the terms and conditions especially with respect to price revision, supply of any material/component by the customer, erection and commissioning charges. The total price charged in the Purchase Order may be compared with the GST invoice to ensure that no extra flow back is received outside the invoice through commercial invoice/debit note.
(b) To verify whether the invoice is raised for full amount as per the Purchase Order/Agreement/MOU
(c) Tax structure agreed upon in the purchase order should be checked with invoices raised for provision of services. In case the unit raises a separate commercial invoice, such invoices should be checked for the basic price, taxes, etc. actually collected.
(4) Sales / outward supply Book
This is used for recording all services provided.
(a) Invoice Numbers mentioned should be sequential and if any number is missing the same has to be examined.
(b) Verify how many series of sales invoices are used for provision of services. Whether GST invoice series and commercial invoice no. series are different.
(c) Whether Debit Notes/Journal Vouchers are also entered in the sales register. If yes, whether GST is payable on additional considerations received through such Debit Notes/JVs.
(d) Sales register normally show GST separately. Verify the cases where GST has not been paid and find out the reasons thereof.
(5) Stores Ledger
It contains the details about receipt of various input or consumable, its issue for production and closing balance. It also contains details like results of physical verification, obsolete items, slow moving items and its write off etc. Now-a-days most of the companies maintain stock records on computer.
i) Verify coding system for receipt, issue, stock verification, valuation, input cleared as such, obsolete item and other found in store records. ii) Compare the purchase as per ITC documents with a receipt in the store records.
iii) Verify whether any item written off due to obsolesce.
(6) Sub contract Register / Job Work Register
This register indicates activity sub-contracted outside.
(a) To study whether all materials sent outside for job work have been received back within the time stipulated.
(b) In case the job worker discharges GST, then valuation of such goods should be examined as to inclusion of any freely supplied material in the value.
(c) Receipt of scrap generated at job workers premises should be verified.
(7) Purchase/Inward supply Book
This shows credit purchase of raw materials and other inputs.
(a) To find out major suppliers
(b) It may also show GST separately. In that case GST recorded in the purchase register may be reconciled with credit availed as per Electronic credit Register GSTPMT-01
(8) Purchase Return Book
This book gives details of goods returned to suppliers.
Verify whether ITC has been expunged / such goods cleared on payment of duty.
(9) Fixed Assets Register
This register contains the details of purchase invoice, date of installation, place of installation, addition/deletion to the asset and depreciation charged
(a) Deletion of Assets – Payment of GST on clearance needs to be verified.
(b) For physical verification, the location may be found out from this register
(10) Waste Register
Where the raw material or components are not in useful condition, they are transferred to Bad Bins. The Auditor should verify the concerned records seeking reversal of credit on such unusable inputs. These goods are also known as obsolete items.
(11) Price Circular
Most companies issues price circular periodically explaining various conditions of sales/ outward supplies like various types of discounts, conditions for providing the discount, recovery of freight, packing charges, interest and other charges.
i) Study the various elements to be recovered from the customers and whether these are required to be added to the transaction value or not like packing charges, freight charges, handling charges.
ii) If any discount is given to a class of buyer, the exact nature of such discount may be studied in detail to find out whether the discount is admissible or not.
iii) Verify whether any item or benefit if supplied free of cost by the buyer.
iv) In case of cum duty prices, the various component forming part of value needs to be studied from price circular.
(12) Delivery Challan
Delivery Challan indicates the description of goods, quantity cleared and receiver of goods. D.Cs may be of two varieties viz. returnable D.C. & Non-Returnable D.C.
(a) Check how many series of DCs are issued and which sections are preparing these.
Returnable D.Cs is used for movement of job-work materials. D.C. Register should be verified to ascertain whether materials sent for job work has been received back within the stipulated time, if not, whether appropriate duty has been paid or not.
Non-Returnable D.Cs are used for clearance of goods, which are not to be received back. Normally it is the practice in the industry to raise D.Cs for outward supplies made and it accompanies the Outward supply Invoices. Inter unit movement of goods are sometime done through non-returnable D.Cs without any invoices resulting in clearance without payment of duty.
Verify whether GST has been paid on scrap cleared under N.R.D.C.
Replacements/Samples may also be cleared under the cover of NRDC’s without invoices.
(13) Material Transfer Note
This document is used for inter unit transfer of materials & for inter branches transfers within a unit.
Valuation adopted for such inter unit transfers need to be checked and whether duty has been paid on such transfers be ascertained.
(14) Materials Receipt Note/Goods Receipt Note (GRN)/Inspection cum Receipt Report (ICRR)
The MRN/GRN is prepared for all goods received in the factory. It shows the details like actual quantity received, quantity as per challan/invoice, quantity short received. It is prepared by the Stores Department. The ICRR is prepared by the quality control department and it shows the quantity accepted, quantity rejected and the reasons for rejection. A number of times these reports may not be physically available as these are maintained in computer systems. But statements may be generated on the request of Auditors for cases where goods have been short received or rejected.
(i) Check the cases of short receipt and rejected goods and verify whether ITC has been reversed.
(ii) Verify in random cases, whether for ITC availed invoices, corresponding GRNs are available or not.
(15) Material Return Note
This document is raised by various departments to return the material to stores or to suppliers.
(i) In case ITC availed materials are returned to supplier whether appropriate GST has been discharged.
(ii) In case MRN is raised by shop floor for rejection of raw material, the ITC treatment may be examined.
(iii) In case MRN is raised by shop floor for rejection of partially processed material, such material should be cleared on payment of GST.
(16) Material Requisition Note (MRN) and Material Issue Note (MIN)
MRN is used by various sections in the factory for requisition of material from stores department. In turn, stores department issue the material on MIN. The MRN & MIN contain code no. of receiving sections, description of material and code no. of material issued, and quantity of material.
(i) MIN may also be used for adjustment of shortages, stock verification discrepancies, stock issued as scrap, obsolete items etc. There may be separate code no. for such adjustments. ITC treatment on such goods may be verified.
(ii) For inputs cleared as such for outward supply, inter unit transfer, warranty period supply, MIN may be prepared showing different codes. All such clearances may be examined to verify payment of taxable value GST.
(II) Admissibility of Input tax credit-
After verification/scrutiny of all the Financial and other documents, the most important issue which needs to be verified is Admissibility of input tax credit.
> Pre-Requisites to claim Input Tax Credit (ITC)
The following conditions have to be met to be entitled to Input Tax Credit under the GST scheme:
1. One must be a registered taxable person.
2. One can claim Input Tax Credit only if the goods and services received is used for business purposes.
3. Input Tax Credit can be claimed on exports/zero rated supplies and are taxable.
4. For a registered taxable person, if the constitution changes due to merger, sale or transfer of business, then the Input Tax Credit which is unused shall be transferred to the merged, sold or transferred business.
5. One can credit the Input Tax Credit in his Electronic Credit Ledger in a provisional manner on the common portal as prescribed in model GST law.
6. Supporting documents – debit note, tax invoice, supplementary invoice, are needed to claim the Input Tax Credit.
7. If there is an actual receipt of goods and services, an Input Tax Credit can be claimed.
8. The Input Tax should be paid through Electronic Credit/Cash ledger.
9. Person claiming the ITC has to furnish the returns.
10. Full Credit on capital goods will be allowed in the year of purchase itself.
> Documents and forms required to claim Input Tax Credit
Each applicant will require the following documents to claim Input Tax Credit under GST:
1. Supplier issued invoice for supplying the services and goods or both according to Section 31 of GST law.
2. A debit note issued by the supplier to the recipient in case of tax payable or taxable value as specified in the invoice is less than the tax payable or taxable value on such supplies according to section 34.
3. Bill of entry as per customs act 1962.
4. A credit note or invoice which is to be issued by the ISD (Input Service Distributor) according to the GST invoice rules according to section 34.
5. An invoice issued like the bill of supply under certain situations instead of the tax invoice. If the amount is lesser than INR 200 or in conditions where the reverse charges are applicable according to the GST law.
6. A supplier issued a bill of supply for goods and services or both as per the GST invoice rules.
> Certain special conditions under which Input tax credit will be available as mentioned in Sec 18 of the CGST Act:-
a) Eligibility of credit upon available stock/finished goods/semi-finished goods at the time of new registration or at the time of opting out of composition scheme.
b) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable: In the like manner if a taxable supply becomes exempt, the ITC availed needs to be reversed.
c) Transfer of credit, where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities.
d) In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined, whichever is higher:
> Claiming Input Tax Credit Against Inputs Sent for Job Work
As a registered taxable person you can also claim ITC on inputs sent to gob-workers if the following conditions are satisfied:
1. You should receive such input back within 1 year.
2. If the inputs involved are capital goods, then you should get such inputs back within 3 years.
3. If you fail to receive inputs within the above mentioned time period, then you will have to pay an amount equal to ITC claimed along with interest.
4. However, you are still allowed to reclaim ITC if inputs or capital goods are received back from the place of business.
> Input Tax Credit on Supply of Capital Goods
1. A registered taxable person is liable to pay tax on such a supply of capital goods on which ITC has already been claimed.
2. This amount should be equal to ITC claimed after reducing it by prescribed percentage points or the tax applicable on the transaction value of such capital goods, whichever is higher.
> ITC Provided by Input Service Distributor (ISD)
An input service distributor (ISD) can be the head office (mostly) or a branch office or registered office of the registered person under GST. ISD collects the input tax credit on all the purchases made and distribute it to all the recipients (branches) under different heads like CGST, SGST/UTGST, IGST or cess.
> ITC in case of imports
In the GST era, Input tax credit of IGST and GST compensation cess is available to the importer. The input tax credit of the BCD is not available. In order to claim the input tax credit, the importer must mention the GST number on the bill of Entry.
> ITC is Not Available to be claimed in the Following Cases, u/s17 (5):
1. Motor Vehicles and other conveyances are not eligible for ITC except in some cases;
2. You cannot claim ITC for goods & service for beauty treatment, health mainly used for personal purposes.
3. If you have acquired goods & services under a contract which results in construction of immovable property other than plant & machinery.
4. If you have paid tax on goods & services under GST composition scheme.
5. if goods & services have been used to build immovable property other than plant & machinery & such property is not transferred.
6. Works Contract Services when supplied for construction of an immovable property,( other than plant & machinery) is not eligible ,except where it is an input service for further supply of works contract service
7. If depreciation has been claimed on the cost of capital goods, then they are not eligible for Input Tax credit.
8. Goods or services or both received by a non-resident taxable person are not eligible for input tax credit, except on goods imported by him;
9. Goods or services or both used for personal consumption are not eligible for ITC;
10. Goods Lost, stolen, destroyed, written off or disposed off by way of gift or free samples are not eligible for ITC;
11. No ITC will be allowed if depreciation have been claimed on Tax component of capital goods.
> Reversal of Input Tax Credit
1. Proportionate amount of ITC will be reversed if goods or services are used for business or non-business purposes.
2. Where the recipient fails to pay the amount of value of supply along with the tax payable thereon within a period of 180 days from the date of invoice by the supplier, an amount equal to ITC availed by the recipient ;
3. Reversal of ITC if goods or services become wholly exempt or GST registration cancelled;
4. Reversal of ITC if taxable person switches to composition Scheme.
> ITC verification in the light of fake invoicing
1. Assessment of GSTR2A of the unit for credit receipt from unknown/unheard entities (special attention on large and frequent credits from proprietorship firms).
2. Random check of vehicle numbers given in inward E way bills from VAHAN portal for kind of vehicles used in transportation of goods.
3. Tallying of E-way bills with GSTR 2A/GSTR3B eligible ITC figures.
> Transitional verification
a) To cross-check the veracity of information furnished under TRAN-1 vis-a-vis the books of account and last returns filed under the repealed Acts.
b) To check whether ITC has been properly claimed on Capital Goods as per the existing provisions of the State VAT Act.
c) Whether Inputs/Semi-finished goods/Capital Goods have been returned back to the Principal Place of business which was sent to Job Worker within the prescribed time as per Section 143.
d) To check proper availment of credit on transactions where unit has not submitted statutory forms under the CGST Act within the prescribed time.
e) Check whether the ITC taken after filing GST Tran-1 / Tran-2 is proper
(III) Applicability of correct rate of tax-
i. In light of many frequent changes in rates of various goods and services, the correct application of rate of tax needs to be verified.
ii. This has also become important in the light of anti-profiteering measures.
(IV) Applicability of correct classification of supplies.
(a) Check Whether HSN of the supply and minor code mentioned in GSTPMT-06 Challan is appropriate?
(b) Check Important contracts, invoices, purchase orders issued by the clients
(c) Exempted supplies – Check eligibility to Notifications and other Relevant notifications, Relevant contracts, invoices, purchase orders issued by the clients
(d) Non Taxable Supplies – Relevant notifications, Relevant contracts, invoices, purchase orders issued by the clients
(e) Any receipts claimed as not a “supply” at all?
Relevant invoices, purchase orders placed by the client, JVs
(f) Nature of supply is to be ascertained as mixed supply/composite supplies if any.
(v) Application of correct valuation, place of Supply rules and Point of taxation rules.
(a) VALUATION
i. Whether “Time of supply of goods” was properly determined in terms of Section 12 (2) of CGST Act while discharging the tax payable.
ii. Whether time of supply of goods was properly determined in terms of Section 12(3) of CGST Act in case of payment under reverse charge and tax liability was discharged properly.
iii. Check whether the discounts allowed are in accordance with regular practice of the dealer and the purchaser has paid the sum originally charged less the discount.
iv. Check whether any amount, that the supplier is liable to pay but incurred by the purchaser has been included in the value of supply
v. Check whether interest or late fee or penalty for delayed payment of any consideration for any supply collected from the purchaser is included in the value of supply
vi. Check whether there are supporting documents for the credit notes issued for the sales made
vii. Check whether there are supporting documents for the debit notes issued for the sales made
viii. To check the time of supply of goods in cases where there is change in rate of tax U/s 14 of CGST Act.
ix. Whether the time of supply in case of Composite and Mixed Supply has been correctly made as per Section 8 of the CGST Act.
x. Check whether transactions have been made between related persons. If so, check whether there is significant variation in the value in comparison to similar transactions with unrelated buyers. If there is significant variation in the value of goods or services, market value of the goods/services should be taken by rejecting the value disclosed between the related persons.
xi. Whether the value has been made in accordance with the Valuation Rules from Rule 27 to 35 of the CGST Rules 2017.
N.B. – Debit Note and Credit Note should have direct link to a transaction having implication on tax liability. Debit Note and Credit Note if not linked to implication of tax liability should be ignored.
(b) PLACE OF SUPPLY
i. In respect of interstate supplies & Imports, check whether place of supply of goods has been properly determined in terms of Section 10 & 11 of IGST Act and IGST has been paid accordingly.
ii. and IGST has been paid accordingly.
(VI) Anti-Profiteering rules –
Anti-profiteering means there should not be unjust enrichment and the rate of reduction of duty on any goods/services/supplies must reach the common man and the ultimate consumer.
Application of correct value of supply in the cases where The Taxpayer has supplied goods on which there has been reduction in rate of duty, in order to examine the possibility of profiteering under Section 171 of the CGST Act, 2017.
(VII) Scrutiny of returns-
(a) Time of filling and payment
Check whether the taxpayer is filing returns within the time prescribed in Section 39 of CGST Act.
It is to be verified for interest payment under section 50 of the CGST act 2017 and due penalty under other provisions of the act. However, while doing the same the waiver of penalty notifications for specific periods to be kept in mind.
(b) Reconciliation of returns with E way bills and Financial statements
i. Check the outward supplies made from GSTR-1 and compare it with the outward supply/sales account maintained. It is also to be compared with E-Way bills data. However there may be differences for genuine reasons between GSTR1/GSTR3B and E-way bills data. Those genuine reasons need to be analysed as per the facts and circumstances of each specific case.
ii. Check whether claim under nil rated, exempted and non GST outward supplies shown in GSTR-1 & GSTR 3B is proper.
iii. Check whether proper rate of tax was applied to outward supplies shown in GSTR-1& GSTR 3B
iv. Identify Zero rated supplies from the GSTR -1 & GSTR-3B and compare it with the records maintained by the trader.
v. Check the total taxable supplies from GSTR-1 & GSTR-3B and compare it with the sales account maintained to identify any suppression of sales.
vi. Cross-check the GSTR-1 with GSTR-3B of the corresponding month Vis-a-vis E-way bills.
vii. Total taxable turnover as per GST Return vis-à-vis turnover as per financial accounts.
viii. Random check of vehicle numbers given in E way bills from Vahan portal for kind of vehicles used in transportation of goods.
(VIII) OTHER CHECKS
i. Ratio of net purchases to Net Sales (Net Purchase = O.B. + Purchases – C.B.)
ii. Value addition percentage vis-à-vis cash payment of GST to total liability
iii. Any other registrant in the name of family member just on paper.
iv. Turnover before GST introduction to check suppression in value.
v. Reverse charge liability is to be verified in the light of changes and relevant notifications in this respect.
Appendix
Some Common Sector Specific GST Brief Study:-
1. Hotel/ Lodge/ Inn:-
Hotels/Lodge/Inn is the set of taxpayers who fall under the ambit of service providers in the GST regime. VAT, luxury tax and service tax applicable in earlier regime have been replaced with GST.
Services provided by Hotel Industry:-
1. Room accommodation services.
2. Serving of foods and liquor in restaurant and in room.
3. Rent a cab.
4. Mandap keeper.
5. Banking and financial services like foreign currency exchange.
6. Supply of packed food items as mini bar.
7. Renting out the premises for events, conferences etc.
8. Laundry services.
9. Business support services.
10. Telecommunication services like telephone, fax, wi-fi.
11. Beauty parlour
12. Gymnasium services.
13. Club Facility.
Now it is important to know the tax rates:-
| ROOM ACCOMMODATION SERVICES | ||
| S. No. | Services | Rate of Tax under GST |
| 1. | Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation less than one thousand rupees per day or equivalent | Exempted Services. |
| 2. | Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes having room tariff Rs.1000 and above but less than Rs.2500 per room per day. | 12% with ITC Credit. |
| 3. | Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes where room tariff of Rs 2500/ and above but less than Rs 7500/- per room per day. | 18% with ITC Credit. |
| 4. | Accommodation in hotels including 5 star and above rated hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes, where room rent is Rs 7500/- and above per night per room. | 28% with ITC Credit. |
RATE OF GST ON FOOD & BEVERAGES (F&B) SALE in restaurants or in room dining.
1. All stand-alone restaurants irrespective of air conditioned or otherwise, will attract 5% without ITC. Food parcels (or takeaways) will also attract 5% GST without ITC.
2. Restaurants in hotel premises having room tariff of less than Rs 7500 per unit per day will attract GST of 5% without ITC.
3. Restaurants in hotel premises having room tariff of Rs 7500 and above per unit per day (even for a single room) will attract GST of 18% with full ITC.
Point to be Noted:-
1. Serving of Alcoholic drinks will be outside the preview of GST and local sales tax or VAT shall be applied on the same.
2. It is advisable for the hotel to issue the separate bills for alcoholic drinks and foods.
| RENT A CAB | ||
| 1. | Rent a cab (If fuel cost is borne by the service provider) | 5% with No ITC.
ITC shall be available if cab is booked from other cab operator. |
| 2. | Rent a cab (If fuel cost is borne by the service recipient) | 18% with ITC Credit. |
| MANDAP KEEPER | ||
| 1. | Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises (including hotel, convention center, club, pandal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises. | 18% with ITC Credit. |
| FORIEGN CURRENCY EXCHANGE SERVICES | ||
| 1. | In case of currency exchange to its guest | 18% with ITC Credit, but valuation shall be done as per valuation rules |
| Value of Currency Involved (in INR) | Value | |
| 0 to 1,00,000/- | 1% or Rs. 250/- whichever is higher. | |
| 1,00,001/- to 10,00,000/- | 1,000/-+ 0.5% | |
| 10,00,00/- and above | 5,000/-+0.10% or Rs. 60,000/- whichever is lower. | |
| SUPPLY OF PACKED FOOD IN MINI BAR | ||
| 1. | Supply of packed food in mini bar | Rate shall be as per product rate. |
| Renting out the premises for events, conferences | ||
| 1. | Renting out the premises for events, conferences | 18% with ITC Credit. |
| Other Services | ||
| 1. | Catering | 18% with ITC Credit. |
| 2. | Laundry services | 18% with ITC Credit. |
| 3. | Business support services | 18% with ITC Credit. |
| 4. | Telecommunication services like telephone, fax, wi-fi. | 18% with ITC Credit. |
| 5. | Beauty parlour | 18% with ITC Credit. |
| 6. | Gymnasium services | 18% with ITC Credit. |
| 7. | Club Facility. | 18% with ITC Credit. |
Thus, The GIST is
A) GST to be collected on Room Charges:- Applicable tax rates
Room tariff less than 1000 is exempt
Room tariff between 1001 to 7500 is taxed @ 12 percent.
Room tariff above 7500 is taxed @ 18 Percent.
a) In July 2018, a decision was taken by the GST council regarding applicability of GST at Transaction Value and not the tariff value marked. That is if a discount has been offered by the hotel on the applicable tariff then GST will be charged at the transaction value i.e tariff value minus discount.
For example:- if for a hotel room applicable tariff is say 8000, and the hotel offers discount of Rs 1000 on the tariff. So after July 2018, the GST applicable will be 18 Percent and not 28 percent as transaction value is less than 7500.
b) GST to be collected on room services like food in the room, laundry services, complimentary breakfast etc offered by the hotels.
c) Applicability of ITC to be checked.
Notes:-
If Service Charge has been collected separately on the bill and not booked on the expense side. It will be treated as separate consideration entirely for the service portion and GST @18 percent to be levied on such amount.
2. Restaurants: – Vat/Sales tax and service tax is replaced with GST.
| Type of Restaurants | GST Rate |
| All restaurants | 5% no ITC |
| Restaurants within hotels (room tariff <7,500- 5% without ITC | 5% no ITC |
| Restaurants within hotels (room tariff >7,500 ) still 18% with ITC | 18% with ITC |
| Outdoor catering | 18% with ITC |
Note:- These changes have come into force from Nov 2017. Earlier, the rates were different for Non AC restaurant @12% and AC restaurants @18 % respectively.
3. Construction Sector: –
Works contract and Construction- How they are different:
– As per the definition of works contract, the works contract inter-alia include construction of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
– Construction has been defined under explanation to sec 17(5) (c) and (d) as reconstruction, repairs, renovation, additions etc. to an immovable property the cost of such work is capitalized.
– Construction activity will not qualify as works contract if there is no transfer of property in goods involved i.e. the contractor is supplying service only without any supply of goods.
– Works contract may or may not be a construction. Like there may be activities like installation, fabrication, construction which may qualify as works contract but cannot be covered in the definition of construction.
Crux of determination of ITC on works contract and construction activity:
Step 1: Check if the activity is to be performed on or in relation to immovable property?
Step 2: If answer to Step-1 is “Yes”, then check whether the activity is a type of works contract or construction (other than works contract) activity. If answer to Step-1 is “No” then test of ITC eligibility concludes here only and ITC is eligible as property is movable
Step 3: If answer to Step-2 is “Yes”, then if the expenditure incurred if capitalised in the books – ITC is not eligible. If the expenditure is charged to revenue then ITC is available. If answer to Step -2 is “No”, ITC would be available as the activity is not even in nature of works contract or construction.
INPUT TAX CREDIT ON WORKS CONTRACT UNDER GST
- Input Tax Credit of GST paid on Works contract will be allowed if
- the output supply is also Works Contract, and;
- When the Contract is for construction of Plant and Machinery.
Apart from the above two, no Input Tax Credit will be available for works contracts for construction of immovable property. For Eg- Hotel.
ABATEMENT AND COMPOSITION SCHEME
- No abatement is till now available for works contracts under GST.
- Works Contractor cannot opt for composition scheme as a works contract is treated as a supply of services if their turnover is more than 50 lacs.
- Earlier For supply of services, only restaurant businesses are allowed to be registered under Composition Scheme. This has been changed subsequently and service sectors with turnover upto 50 lacs can apply for composition scheme.
Sale of Completed flats – Reversal of ITC
- Section 17(2) provides that where goods or services are used partly for effecting taxable supplies and partly for exempt supplies, ITC credit attributable to taxable supplies can only be taken
- Exempt Supply is defined u/s 2(47)] to include non-taxable supply
- Non-taxable supply is defined u/s 2(78) of the Act to mean:
- Supply of goods or services or both
- Which is not liable to tax under CGST or IGST Act
- Section 17(3) specifically includes sale of building and sale of land as exempt supply
- Sale of completed flat will be exempt supply for the purpose of reversal of ITC u/s 17(2) of the Act from start of the project.
- Also builder may liable to pay interest on such reversal of credit for the period starting from the date of completion certificate till date of actual reversal.
> GST on Real Estate:- A special study
With effect from 01-04-2019, effective rate of GST applicable on construction of residential apartments by promoters in a real estate project are as under:
| Type of Property | Effective rate of GST (after deduction of value of land on total consideration) | |
| Construction of affordable residential | 1% | without ITC |
| Construction of residential apartments other than affordable residential apartments | 5% | without ITC |
The above rates are effective from 01-04-2019 and are applicable to construction of residential apartments in a project which commences on or after 01-04-2019 as well as in ongoing projects.
However, in case of on-going project, the promoter has an option to pay GST at the old rates, i.e. at the effective rate of 8% on affordable residential apartments and effective rate of 12% on other than affordable residential apartments and, consequently, to avail permissible credit of inputs taxes; in such cases the promoter is also expected to pass the benefit of the credit availed by him to the buyers.
> Residential Real Estate Project
A “Residential Real Estate Project” means a Real Estate Project” in which the carpet area
of the commercial apartments is not more than 15 per cent of the total carpet area of all the apartments in the project.
Affordable residential apartment-
Affordable residential apartment –
(i) carpet area upto 60 square meter in metropolitan cities and 90 square meter in cities or towns other than metropolitan cities and
the gross amount charged is not more than forty five lakhs rupees.
(ii) The term also includes apartments being constructed under the specified housing schemes of Central or State Governments.
[Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, and Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR) with their geographical limits prescribed by Government.]
> An on-going project–
A project which meets the following conditions shall be considered as an ongoing project.
(a) Commencement certificate for the project, where required, has been issued by the competent authority on or before 31st March, 2019, and it is certified by a registered architect, chartered engineer or a licensed surveyor that construction of the project has started (i.e. earthwork for site preparation for the project has been completed and excavation for foundation has started) on or before 31st March, 2019.
(b) Where commencement certificate in respect of the project, is not required to be issued by the competent authority, it is to be certified by any of the authorities specified in (a) above that construction of the project has started on or before the 31st March, 2019.
(c) Completion certificate has not been issued or first occupation of the project has not taken place on or before the 31st March, 2019.
(d) Apartments of the project have been, partly or wholly, booked on or before 31st March, 2019
In the case of an ongoing project, to continue with the old rates, the promoter/ builder has to exercise one time option in the prescribed form and submit the same manually to the jurisdictional Commissioner by the 10th of May, 2019. However, in case where a promoter or builder does not exercise option in the prescribed form, it shall be deemed that he has opted for new rates in respect of ongoing projects and accordingly new rate of GST i.e. 5% / 1% shall be applicable and all the provisions of new scheme including transitional provisions shall be applied.
There is no such option available in case of projects which commence on or after 01.04.2019. Construction of residential apartments in projects commencing on or after 01.04.2019 shall compulsorily attract new rate of GST @ 1% or 5% without ITC.
> the criteria to be used by an architect, a chartered engineer or a licensed surveyor for certifying that construction of the project has started by 31st March, 2019 Construction of a project shall be considered to have been started on or before 31stMarch, 2019, if the earthwork for site preparation for the project has been completed, and excavation for foundation has started on or before the 31st March, 2019.
> A promoter shall purchase at least eighty percent of the value of input and input services, from registered suppliers. For calculating this threshold, the value of services by way of grant of development rights, long term lease of land, floor space index, or the value of electricity, high speed diesel, motor spirit and natural gas used in construction of residential apartments in a project shall be excluded.
> Promoter has to pay GST @ 18% on reverse charge basis on all such inward supplies (to the extent short of 80% of inward supplies from registered supplier) except cement on which tax has to be paid (by the promoter on reverse charge basis) at the applicable rate, which at present is 28% (CGST 14% + SGST 14%) 10. In case of new rate of 5% / 1%, whether the conditions of payment of tax through Cash Ledger, payment of tax under RCM subject to 80% limit, non availing of Input Tax Credit, reversal of credit, maintenance of project wise account, reporting of ITC not availed in corresponding GSTR-3B etc. are required to be complied mandatorily by the Developer.
> Supply of TDR (transfer of development rights) or FSI (Floor space index- It is the ratio of total floor area to the total area of the plot) or long term lease of land used for the construction of residential apartments in a project that are booked before issue of completion certificate or first occupation is exempt.
> Supply of TDR or FSI or long term lease of land, on such value which is proportionate to construction of residential apartments that remain un-booked on the date of issue of completion certificate or first occupation, would attract GST at the rate of 18%, but the amount of tax shall be limited to1% or 5%of value of apartment depending upon whether the residential apartments for which such TDR or FSI is used, in the affordable residential apartment category or in other than affordable residential apartment. TDR or FSI or long term lease of land used for construction of commercial apartments shall attract GST of 18%. The above shall be applicable to supply of TDR or FSI or long term lease of land used in the new projects where new rate of 1% or 5% is applicable.
> The promoter is liable to pay GST on TDR or floor space index supplied on or after 01-04-2019 on reverse charge basis.
> The liability to pay GST on development rights shall arise on the date of completion or first occupation of the project, whichever is earlier. Therefore, promoter shall be liable to pay tax on reverse charge basis, on supply of TDR on or after 01-04-2019, which is attributable to the residential apartments that remain un-booked on the date of issuance of completion certificate, or first occupation of the project.
> On FSI received on or after 1.4.2019, the promoter should discharge his tax liability on FSI as under: (i) In case of supply of FSI wherein consideration is in form of construction of commercial or residential apartments, liability to pay tax shall arise on date of issuance of Completion Certificate. (ii) In case of supply of FSI wherein monetary consideration is paid by promoter, liability to pay tax shall arise on date of issuance of Completion Certificate only if such FSI is relatable to construction of residential apartments. However, liability to pay tax shall arise immediately if such FSI is relatable to construction of commercial apartments.
> On long term lease received on or after 1.4.2019, the promoter should discharge his tax liability on long term lease as under: In case of supply of long term lease of land for construction of commercial apartments, tax shall be paid by the promoter immediately. However, for construction of residential apartment, liability to pay tax on the upfront amount payable for long term lease shall arise on the date of issuance of Completion Certificate.
> The rate of tax applicable on the work contract service provided by a contractor to a promoter for construction of a real estate project shall be 12% or 18% depending upon whether such work contract service is provided for construction of affordable residential apartments or residential apartments other than affordable residential apartments. Rate of tax applicable on such work contract service provided by a contractor to a promoter on construction of commercial apartments shall be 18%(irrespective of option exercised by developer/promoter
4. Dealers:- for cement dealers
Points to check- Admissibility of
The tax rate for cement is extremely complex. For example, there are various rates and specific duties of excise applicable on different types of cement depending on whether they are supplied in bulk form or in packaged form or whether for industrial or trade purposes. The effective rates including excise & VAT totals up to around 24-25%.
Refractory cement, mortars, concretes (mainly used for building industry furnaces, huge ovens etc.) will attract 18% tax.
Cement Bonded Particle Board will attract 12%.
The main raw materials for cement are limestone, coal and electricity. The tax rates on these are as follows:
- Limestone is taxed at 5%
- Coal is capped at 5%,which is a reduction from the earlier rate of 11.69%
- Electricity is outside the purview of GST
Nothing is mentioned regarding the royalty that the cement companies pay to the state governments for quarrying limestone. Clean energy cess is levied on coal, which is not available as an input credit because it is not subsumed by GST as decided in Mohit Minerals versus UOI by the honourable Supreme Court..
So, these two factors will continue to be outside the purview of GST and will be included in the cost of the cement production even after GST is implemented, as was done previously.
Positive Impact of GST on Cement Industry
Warehousing
Cement manufacturers can heave a sigh of relief as the supply chain management of cement will get a boost under GST. Most companies maintain multiple warehouses across states to avoid CST and state entry taxes. These warehouses generally operate below their capacity which leads to operational inefficiencies. Like other sectors, the cement companies will also consolidate their warehouses and maintain warehouses in areas where it is most beneficial (such as Nagpur-0-mile city) thus leading to operational economies.
Savings on Transport Costs
Most of the cement manufacturers are located near limestone quarries. But demand for cement is pan-India which means that the cost of transporting cement from the manufacturer to the buyer is pretty high. Now, with GST the logistics industry is also going to be overhauled. The transit time will decline as vehicles will spend lesser time at checkpoints. This will lead to lower transportation costs and in turn, the cement industry will save transport costs.
Less Complex Taxes
Currently, there are multiple excise duties applicable to cement manufacturers. There are separate rates and specific duties applicable on different types of cements depending on whether they are supplied in bulk form or in packaged form, or whether they are for industrial or trade purposes etc.
C &F Agents (Automobile Dealers)-
Pre GST, Automobile dealers were not able to avail CENVAT credit on the following indirect taxes paid by them:
- CST Paid on purchase of vehicle, spares, consumables, accessories and assets;
- Excise Duty paid on purchase of vehicles, spares, consumables and accessories;
- NCCD, Auto Cess and Infrastructure Cess paid on purchase of vehicles;
- CVD paid on any imported Spares, accessories and consumables;
- SBC paid on input services;
- Reversal of proportionate CENVAT credit of service tax due to trading activity – Showroom Rent, Advertisement expenses etc.
In GST, all the above duties/ taxes will get subsumed, therefore dealers should be able to avail the input tax credit of all its procurements of goods/ services except for few restrictions laid in the GST law.
Tax rate slabs in GST:-
| Segment | Excise | *Nccd + auto cess | VAT | *Road tax |
*Motor vehicle tax | Total | CGST | SGST | TOTAL | Differ-ence |
| Small Cars < 1200cc | 12.50% | 1.1% | 14% | State based |
State based | 28%(ap prox) | 9% | 9% | 18% | 10% |
| Mid- SizeCars from 1200cc to 1500cc | 24% | 1.1% | 14% | State based |
State based | 39% | 9% | 9% | 18% | 21% |
| Luxury Cars> 1500cc | 27% | 1.1% | 14% | State based |
State based | 42% | 14% | 14% | 28% | 14% |
| SUV’s >1500cc, >170mm ground clearance | 30% | 1.1% | 14% | State based |
State based | 45% | 14% | 14% | 28% | 17% |
Small family cars like Alto, Santro, Nano, Datsun Go as a minimum cess of 1% has been charged over and above the GST rate of 28%. Bikes which have an engine of greater than 350CC like Enfield 500CC or Harley Davidson etc would be charged GST at the rate of 28% and an additional 3% cess would be levied. It is difficult to understand the placement of yachts, aircraft, personal jets under the 3% cess bracket along with the small cars having engine >1200CC and <1500CC instead of the 15% cess.
Presently, sales of used cars attract VAT, and in some states, a composite rate and Excise/VAT are not applicable on advance received for supply of goods. Many states provide the Original Equipment Manufacturers (OEMs)/component makers with different investment-linked incentive schemes. The two main components of this scheme are subsidies and interest-free loans allied with VAT/CST payable on sale.
Sale of goods/service without any form of consideration is currently exempted from being taxed under VAT and Service tax. Importers and dealers currently are ineligible for the CVD and excise duty paid by OEMs (Original Equipment Manufacturer).When goods are transferred from the factory, excise duty has to be paid but no VAT/CST is applicable under current tax laws. These vehicles are exempted from the Nccd/auto cess: electrically operated vehicles, three-wheeled vehicles, hydrogen vehicles based on fuel cell technology, vehicles used solely as taxis, the ones used by physically handicapped persons, hospital ambulances.
There is good news for the importers/dealers as they would be able to claim the GST paid on goods imported/sold whereas currently, they are ineligible to claim the excise duty and VAT paid. Excise paid on stock transfer will be covered by IGST under the GST law. Advance received for supply of goods will also be taxed under GST. GST would help the manufacturers in procuring auto parts at a cheaper cost due to an improved supply chain mechanism under GST.
Issues of disputes
(i). Demo Cars / Vehicles
Demo cars are used for marketing and training as a usual business practice which are presently not considered as capital goods. There are two divergent views on the same in view of specific denial of credit to motor vehicles in input tax credit provisions.3.
(ii). Discounts on Vehicles
Giving discounts to buyers of vehicles by dealers in different forms is very common. It could be via invoice or otherwise. Dealers also get discounts from the manufacturers of vehicles in the nature of quantity or trade discount / incentive. Their tax treatment and documentation would be crucial to avoid interpretational disputes with the Department.
(iii). Dealing in pre-owned Vehicles
Today, there is not tax or a lower tax on pre-owned or second hand vehicles. In GST, tax would be payable on all such deals at full value or at differential value where input credit has not been taken. The problem is two-fold, valuation issue as well as rate of tax which is likely to be same as in case of new car. Cess may also be applicable which is not yet clear. The tax rate on used car transactions has been reduced to 18 percent for large cars and SUVs, and 12 percent for small vehicles, from 28 percent (for both categories) earlier. The new rates will come into effect from January 25, 2018.
After the implementation of GST sale of used and old vehicles were taxed at the same rate as applicable on new vehicles which was 28% + Applicable cess which was up to 15%, and due to this effective tax on sale of old vehicles was upto 43%. This higher rate of tax was causing the burden on trade and industry and due to this there was slow down in the used vehicle market.
> Big Relief on Sale of Old and Used Vehicles:
Government by issuing the Notification No. 8/2018 Central Tax Rate read with state Tax Notification, reduced the Rate of GST on old and used vehicle as follows:
(i) GST-18% on Old and used, petrol Liquefied petroleum gases (LPG) or compressed natural gas (CNG) driven motor vehicles of engine capacity of 1200 cc or more and of length of 4000 mm or more.
(ii) GST-18% on Old and used, diesel driven motor vehicles of engine capacity of 1500 cc or more and of length of 4000 mm
(iii) GST-18% on Old and used motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles.
(iv) GST-12% on All Old and used Vehicles other than those mentioned from S. No. 1 to S.No.3
Note: Government also Exempted the Cess applicable on sale of Used vehicle through Notification No. 1/2018 Compensation Cess Rate.
> Valuation of Old or Used car for GST Calculation
Value on which GST at above rates to be calculated shall be Margin of Supply which is to be calculated in the manner as mentioned in Notification which is given below:
(i). In Case Depreciation under Income Tax Act Availed: Margin of supply shall be difference between Sale consideration and Written down Value and tax to be calculated on such Margin, and where the margin of such supply is negative, it shall be ignored.
(ii). In other cases: Margin of Supply shall be difference between sale price and purchase price Tax to be calculated on such Margin, and where the margin of such supply is negative, it shall be ignored;
(iv). Composite Contracts of Sale and Service
Vehicles are generally subject to repair and maintenance which will involve supply of consumables as well as spare parts. Rates of both goods as well as services would be different, i.e., 28 or 18%. The problem of treating a transaction as a mixed or composite supply is a technical issue wherein interpretation may be divergent and would lead to disputes. Before the introduction of GST, if a part that was sold by a company for Rs. 1,000 to a service centre that added a margin of Rs. 155, the customer would have paid Rs. 1,917. The same will now cost Rs. 1,836 – a saving of Rs 81. In this case, for the purpose of calculations, the MRP is assumed to be Rs. 2,000, excise duty @ 12.5%, abatement @ 30%, VAT @ 14.5% and GST @ 28%.
(v). Heavy Taxes on pre-owned Vehicles
Dealing in second hand goods (pre-owned vehicles) is a substantial part of dealer’s business. There is no concessional rate of tax prescribed looking to the fact that such goods would have suffered tax already at the time of first purchase. The tax rate on used
car transactions has been reduced to 18 percent for large cars and SUVs, and 12 percent for small vehicles, from 28 percent (for both categories) earlier. The new rates will come into effect from January 25, 2018.
(vi). Advance Booking of Vehicles
Vehicles booking by paying advance money has have been taxed in past but in GST regime, advance bookings will be taxed when such advance is paid, adversely impacting working capital. This could result in acceptance of lower advances which will adversely affect the working capital of manufacturers.
(vii). Free Services / Warranties
Free services on behalf of other dealers or manufacturers, extended warranties, reimbursement of expenses as pure agents are contentious issues which may lead to non -compliance, disputes and litigation.
(viii). Marketing Strategies and Freebies
At present auto dealers offer incentives to potential buyers in the form of free insurance, free accessories, fuel coupon, extended warranty etc which may by taxable in GST regime. Valuation rules do not permit such practices unless properly documented and as such, tax would be attracted. If not, dealers may not get input tax credit on these activities as these would imply exempt supplies.
6. Household Electronic Appliances
Currently, the average VAT rate on most of the household appliances is charged around 1112.5% in most of the states. Excise duty is charged at the rate of 12.5% on the household electronic appliances. An average total tax at the rate of around 25-26% on such goods(including CST and other local taxes)
Impact of GST rate on Domestic Appliances and Electrical machinery
Handlooms used in the handicraft industry are the only machinery charged at NIL rate of tax under GST. Most of the electrical machinery are charged tax at a similar rate to the rate declared under GST. It is expected that the prices are going to stay neutral for the end consumer of the above electrical machinery. Although the manufacturers using electrical machinery will benefit from the availability of input tax credit on the services used which was not available under VAT.
The rate for each household electronic appliance like the fridge, washing machine, vacuum cleaner etc is fixed at the rate of 28% under GST. It is likely that the increase in the tax burden by 2-3% under GST would be passed on to the final consumer.Placement of the basic appliances such as fridge and washing machine under 28% slab shows that electronic appliances are still considered as a luxury by our government.
Manufacturers of such household electronic appliances like Samsung, Godrej, Voltas etc may not be able to provide any benefit of GST to the end consumer due to the tax rate of 28%. Clarifications are also required for the treatment of the current tax exemptions or deductions provided by the different states. Manufacturers in Mumbai would be the only one’s getting relief under GST as they are charged octroi at the rate of 5% after the other taxes( average 2526%) on household electronic appliances.
References/Bibliography
1. GSTAM 2019 by CBIC
2. www.Cleartax.com
3. www.ultratechcements.com
4. Overview of ITC by CMA Arindam goswami
Download Handbook for Departmental Officers Audit/Scrutiny in GST Era
Sir, You have almost created an manual on Audit. Very labourious work. Extreamly thankful for yo efforts.