ILLUSTRATIVE LIST OF IMPORTANT DOCUMENTS FOR GST SCRUTINY AT
DESK REVIEW STAGE

PART-A (FOR GOODS)

I. Check of Documents during Desk Review –

Sr. No. Name of the Record/Document Relevance of the documents and checks to be done
1. Annual Report & Director’s Report
The Annual Report prepared prepared by a company inter alia contains the following:

i) Director’s Report (ii) Statutory Auditor’s Report (iii) Balance sheet and Profit & Loss Account (iv) Financial statements of subsidiary companies, if any.

Director’s Report: This gives information like overall financial results of the company, during the year and future plans of the company. Some of the 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.

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.

Nature of verification: (i) 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 have not been made during the year. Tax auditor may like to examine such opinion in detail.

ii) 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.

iii) 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.

iv) In the case of Public Sector unit, C & AG report and comment of the company available in the Annual Report should be examined.

2. Profit & Loss Account
Nature of the Account: The Profit and Loss Account shows major items of expenditure and income. This is one of the important documents used during desk review to find out the overall working of the unit. 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:

(i) 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.

(ii) 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

(iii) 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.

(iv) Notes given along with the said schedule should be studied carefully to find out cases of use of material for non-production activities.

(v) 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.

3. Balance Sheet
Nature of document :

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

(i) 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.

(ii) 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.

4. 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.

Nature of verification:

(i) Notes of Significant Accounting Policies may be studied to find out the accounting policy in the areas like revenue recognition or determination of obsolete stock.

(ii) Notes on quantitative information on inward and outward supplies may reveal number of interesting aspects. Cases of use of inputs for other purposes (not in the course of business or furtherance of business) may also be noticed from the study of such information. Adjustment for shortages, losses etc. may also be reported in the
said information.

(iii) Any important transaction/happening during the year like non-reconciliation of accounts of inputs lying with job worker, major expenditure on research and development, destruction of record and reconstruction of duplicate records may also be noticed from the study of such notes.

(iv) As per the Accounting Standard issued by the Institute of Chartered Accountant of India, the specified companies are required to disclose transactions with the related parties under the Companies Act as part of the Notes to the Accounts. The said information gives all types of transactions, payments made or payments received from various related parties. Such information is very useful to find out the details of the related parties and the type of transactions made by them. However, the related parties as per the Companies Act may not be considered as ‘related person’ under the GST Law.

5. Trial Balance
Nature of Document :-

Trial Balance is a statement showing balances of all accounts in the ledgers as on a particular date. In other words, it is a summary of the ledger account maintained by an Taxable person. 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 :-

i) 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.

ii) 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 during Desk review. There might be some of the ledger accounts whose exact nature may not be clear on reading of Trial Balance and these accounts may also be identified for further inquiry during the further course of audit.

iii) 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.iv) 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.

6. 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. The details of relevant paras useful for GST Audit are given in the table below:

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.

The auditor may examine the following aspects from the Cost Audit report.

S. No. In Annexure to the Cost Audit Report and subject What is to be seen
1, 2 & 3 – General Information Auditors may use this information at the time of Desk Review.
4 -Quantitative details It contains details of:

  • Total available quantity
  • Samples/ Quantity Captively consumed.
  • Outward supplies – with break-up of Export & domestic clearance

Auditors should reconcile this data with GST Return and major variation (if noticed) should be looked into.

5 – Cost Statements/ Cost of production statement Separate cost statements would be available in respect of each product/ activity group. Auditors may utilise the same for valuation aspects. It also helps to compute taxable value under cost Construction method under Rule 30 of CGST Rules, 2017.
6 – Operating ratio analysis. Auditors may use the same for comparison of operating costs of each group, over a period of time.
10 – Related party transactions. Auditors may use this information with regard to valuation of
related party transactions under Rule 28 of CGST Rules, 2017.

 

8. 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.

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.

PART-B (FOR SERVICES)

Sr. No. Name of the Record/Document Relevance of the documents and checks to be done
1. Annual Report & Director’s Report
The Annual Report prepared by a company inter alia contains the following:

Director’s Report (ii) Statutory Auditor’s Report (iii) Balance sheet and Profit & Loss Account (iv) Financial statements of subsidiary companies, if any.

Director’s Report: 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.

Auditor’s Report: It is the most important report contained in the Annual Accounts of a Company. The statutory auditor certifies as to whether the books of account of the company are properly maintained or not and also whether internal control mechanism is commensurate with the size and extent of business of the company. Any adverse noting of the Statutory Auditor has to be replied by the management of the Company Nature of verification: (i) 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.

ii) CARO Report may be studied to find out whether the fixed assets records have been maintained properly or whether physical verification of capital goods was undertaken and whether any discrepancies were noticed on such verification or whether

2. Profit & Loss Account
Nature of the Account: The Profit and Loss Account shows major items of expenditure and income. This is one of the important documents used during desk review to find out the overall working of the unit. 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. 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.

Nature of Verification: The auditor is required to examine income and expenditure accounts in the Profit and Loss Account:

Auditor should analyse both debit and credit side of the profit & loss a/c, trial balance, ledgers etc. because it is a myth that while ascertaining the tax liability, one has to look only at the credit side of P&L A/c. Debit side is equally important or rather more prone to frauds and errors. Therefore, the auditor needs to pay attention towards debit side also. Debit side is important because of–

i. Reverse charge mechanism- under this mechanism, the recipient of services is liable to pay GST (e.g. GTA Services, services received from abroad, Services notified under Section 9(3) & 9(4) of CGST Act.). Therefore, nothing appears on the credit side of the P&L a/c. However, GST has to be calculated on the amount paid towards taxable services received.

Reimbursement- unless the concept of ‘pure agent’ is applicable as stipulated under Rule 33 of CGST Rules, 2017, reimbursements are includible in the value of Taxable supplies. Reconciliation should cover all receivables including reimbursements, supply of goods etc

a) Income Accounts: Normally, the Profit and Loss Account would show a consolidated entry for business income from all sources. According to accounting standards, non-business income such as interest income or dividend income is required to be shown separately.

To begin with, auditors should call for the groupings of business income shown in the Profit and Loss Account. The said groupings would show the different heads under which the incomes have been accounted for. They should carefully study the nature of business income – some of which may have accrued from the supply of taxable services and the balance from the supply of non-taxable services. The exact nature of these services may be determined from the supporting documents such as vouchers, bills or contracts. In doing so, auditors need to be guided by the nomenclature (used for each service) in the Trial Balance or Annexures to the Profit and Loss Account. It is possible that the true nature of the service may be obscured or disguised by using a nomenclature that is either non-taxable or exempted.

Other incomes like insurance claims receipt, sale of capital goods, commission received, erection and commissioning income, freight and insurance recovered etc. may be examined in detail to find out the exact nature of such incomes and whether these are liable for GST and have any bearing on ITC utilisation.

b) Expense Accounts: Scrutiny of expense accounts would enable the Auditor to identify major expenditure heads. In specific terms, such scrutiny may be useful in the following manner:

> Useful for verification of out of pocket expenses where deductions for these have been claimed from the value of taxable supplies.

ii. Correlation between expenditure head and value of taxable supplies e.g. fuel expenses and the value of taxable service in the case of tour operators.

3 Balance Sheet
Nature of document :

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

(i) 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 transactions with the holding/subsidiary company, in that case, the valuation of such supplies needs to be examined in the light of Valuation Rules.

(ii) 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 was paid, if the ITC was availed in the past.

4. 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.

Nature of verification:

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.

5. Trial Balance
Nature of Document :-

Trial Balance is a statement showing balances of all accounts in the ledgers as on a particular date. In other words, it is a summary of the ledger account maintained by a Taxable person. 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.

The perusal of the Trial Balance could achieve the following:

i. Familiarization with chart of accounts/account code and understand as to what extent the information is detailed and integrated with other subsystems; few samples Journal Vouchers may also be seen to understand the information mentioned therein.

ii. Understand the grouping of sub accounts under main accounts for the purposes of summarization into Profit and Loss account and the Balance Sheet.

iii. Identification of accounts, which have a prima facie relevance for GST payment (may be direct or indirect). These accounts may have to be seen in detail at later stage of audit depending upon the result of subsequent audit processes;

iv. Understand the tax accounting system in so far as it pertains to Tax payment and treatment of credit of GST on input services;

During the study of the Trial Balance/ Profit and Loss Account all income accounts should be studied in detail.

The most important use of Gross Trial Balance is that it contains balances of individual accounts whereas in Balance Sheet and P&L A/c many accounts are grouped together,e.g.,

a. In the P&L A/c, all the incomes are clubbed together under the head ‘Gross Receipts’, ‘Sales’as the case may be. However, Trial Balance shows income earned under each category of revenue separately.

b. Not only the Trial Balance is important in relation to income side, but it is very important in relation to expenditure side also. For instance, Payment made towards Sponsorship services may be clubbed in the category of Advertisement and Sales Promotion Expenses which can be identified only from the Trial Balance.

c. Similarly, freight paid may be clubbed with Purchases or Fixed Assets.

6. Cost Audit Report
Cost Audit Report provides quantitative and financial details regarding related party transaction, valuation of services rendered as per GSTR 9/ Periodical return under GST.

The auditor may examine the following aspects from the Cost Audit report.

S. No. In Annexure to the Cost Audit Report and subject What is to be seen
1 & 3 -General Information Auditors may use this information at time of Desk Review.
5 – Royalty & Technical Knowhow Charges As the information contain is product wise, the auditor may find it useful in determining the tax liability of the Taxable person under reverse charge mechanism if any in case the same was paid to foreign entities. Moreover, auditor may go through the source documents about the scope of work and terms of payment to assess the tax-compliance on Royalty & Technical Know-how.
10 – Related party transactions.

 

Auditors may use this information with regard to valuation of related party transactions.

 

7. 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 by the service providers 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 is paid on these amounts in case they are subject to GST.

iv. Clause 39 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.

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.

Source- GST Audit Manual of CBIC

More Under Goods and Services Tax

2 Comments

  1. vswami says:

    ADD-on
    In this write-up important documents only for GST scrutiny are enumerated/covered. The earlier posted comment would be of equal relevance to ‘VAT Scrutiny’ as well; and, might entail similar practcal prblems, being irresolute, could be faced with. Albeit, the contents of the AUDIT REPORT Form prescribed by the state(s) is more detailed . For MAHA., a related (run-of-the mill type) article on the VAT Audit is found displayed @ https://taxguru.in/goods-and-service-tax/e-704-frequently-asked-questions.html

  2. vswami says:

    INSTANT

    4. Notes to the Accounts

    Refer the points set out under the above head. These are of relevance; and might have to be adverted to in the CA’s / CS’s Report /Certification separately provided for GST purposes, as is found/to the extent considered necessary. It is in this context that the point of doubt/ problem as posed in my comment (s) posted wrt the Article @
    https://taxguru.in/goods-and-service-tax/unlocking-gstr-9c.html?fbclid=IwAR2T-4YwB_pd5INeaXir3wVPgw_XDrgDtZUlVsOktZ60wbqGWGJjLZuzEeU (also shared on FB/Linkedin) is begging for clarity! Any thoughts, if were tned to the same wavelength, -especially, with a different stroke, in case eminently held , to share and enlighten ?

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