It is necessary for every taxpayer to have a standard operating procedure to be followed regarding processes which have repercussions in terms of GST law. Some of the examples that readily come to mind are classification, valuation, determination of eligibility of ITC on inwards supplies of input goods, input services, and capital goods, Identification of common ITC and process for calculation of admissible common credit, requirement of cross charge, treatment of gifts, samples, supplies subject to reverse charge mechanism, imports, and exports. If the process and the procedure laid down are good and are followed meticulously, the possibilities of getting caught on the wrong foot in availing the benefits such as ITC and exemptions would be considerably reduced and the taxpayer will have the confidence to answer queries from the department and auditors.
An effective internal control mechanism would ensure that the standard operating procedure laid down is followed in each area and reduce clerical mistakes which can turn out to be costly. There must be a verification process of each aspect on established sampling bases (if it is not possible to verify all aspects) so that the legal provisions are followed to the letter and spirit. A properly implemented verification process can bring out the omissions/commissions in the standard operating procedure and both will complement each other.
Every taxpayer has to identify the required processes and procedures in respect of each type of supply of goods or services or both made by him or received by him and ensure that such processes and procedures are followed meticulously and fully to ensure 100% compliance with the provisions of GST law, Customs law and Foreign policy (where applicable). Internal control is meant to achieve this.
Some important areas where proper internal control systems are necessary to fulfil GST legal requirements are listed below (The list is not exhaustive):
1. Authorised person
2. Correspondence with the department
3. Tax accounting
4. Vendor management – review of contracts
6. Determination and application of rate of tax
7. Determination and application of Place of supply
9. Determination and application of Time of supply
10. Input tax credit management
11. GST credit and cash ledgers
12. Job work management
13. Determination and application of Foreign Trade Policy and Customs provisions on Exports and deemed exports
14. Determination and application of Foreign Trade Policy and Customs provisions on imports
15. Demands and refunds
16. Treasury management
18. Other aspects of customs such as warehousing, customs broker etc. if relevant.
After laying down a standard operating procedure and proper internal controls, the tax payer has to ensure that for each item of work requirements to be fulfilled are laid down and proper accounts, records and documentation are maintained so that the obligations cast on the taxpayers under the GST law are fulfilled.
If the taxpayer’s turnover is more than the stipulated limit, GST audit would be compulsory, and the professional auditor would have to conduct audit of the accounts, records and documents required under GST law and other statutes. A proper GST audit by a professional should help a taxpayer to be compliant with the GST law and give the confidence to the taxpayer that he is fully compliant and enable him to take corrective/remedial action wherever necessary.
The departmental officers when they undertake the audit, will have the benefit of GST audits done by the auditors, reconciliation reports reconciling the tax paid/payable as per books of accounts and tax paid as per the returns, the standard operating procedures and the internal controls established by the taxpayer, external sources of information and the information available in GSTN portal. Good standard operating procedures, proper internal controls, and quality GST audit by a professional would reduce disputes and ensure that the taxpayer does not lose any of the legal benefits available under various statutes.