Practical Approach of Audit by GST Authorities under Section 65 of the CGST Act, 2017

The intention of this article is to give all the readers a practical understanding of how the authorities go about with the GST Audit and to highlight the parameters which are mostly taken into consideration by the officers as a part of GST Audit. We shall also make you understand the documentation and procedures adopted by the authorities while conducting the GST Audit of any taxpayer.

Audit under GST, or departmental audit as we may call it, has always been an area of discussion even in the Pre-GST regime, namely Excise Audit, Service Tax Audit and even audit under VAT in few of the states. Undoubtedly the authorities would like to have a double check on the GST Annual Return and the Reconciliation Statement filed by the taxpayers and their professionals under Section 44 read with Section 35(5) of the CGST Act.

Under the CGST Act, there are two types of Audit namely:

1. Audit conducted by the tax authorities – Section 65

2. Audit of a taxpayer conducted by Chartered Accountant / Cost Accountant if directed by tax authorities (Special Audit) – Section 66

Audit Conducted by Tax Authorities – Section 65

Once the authorities decide to undertake the audit of any registered person, the officer as authorised by the Commissioner shall issue a Notice in Form ADT-01 to the taxpayer. This Notice has to be issued at least 15 days prior to the conduct of the audit.  The taxpayers for issuing Notices are selected on the basis of the Risk Scores assigned by the Risk Assessment Programme developed by the Directorate General of Audit, as per the Audit Plan issued by the Director General of Audit in the month of June 2019.

From past few months, authorities have been actively engaged in sending Notices in Form ADT-01 to selected taxpayers by shortlisting them in the category of:

  • Large Taxpayer: Turnover more than 30/40 Crores
  • Medium Taxpayer: Turnover between 30/40 to 7.5/10 Crores
  • Small Taxpayer: Turnover below 7.5/10 Crores

The Form ADT-01 issued by the officer specifies the documents to be submitted by the taxpayer, though the list is not exhaustive in nature and the officer may ask the taxpayer to submit any other document which may be necessary with the proceedings of the audit. Given below is the list of such preliminary documents, which as already stated, may vary from taxpayer to taxpayer:

1. Audited Financials including Balance Sheet, Profit & Loss, Audit Report, Notes to Accounts, etc

2. 26AS, especially in the case of service providers

3. Stock Register

4. Cost Audit Report

5. Report and Directors Report

6. Sample Copies of Purchase Orders/ Agreements

7. E-Way Bill vis-à-vis outward supply summary

8. Input Tax Credit Register with date of payment of invoices & GR copies

9. Sale Register with GR Copies

10. Bank Account Statements

11. Sale and Purchase invoice copies

The officer has the power to conduct the audit in his office or visit the taxpayers premises at the date which is pre-informed to him in the Notice. According to the Audit Plan of the Department as mentioned above, in the case of Medium and Large taxpayers, premises based audit has to be conducted, whereas in the case of small taxpayers, desk (office) based audit is preferred which may be shifted to premises based audit depending upon cooperation and submissions made by the taxpayer. The visit of the officer at the taxpayer premises makes it imperative to ensure the compliance of Section 35- accounts and proper records that are maintained in the registered premises of the taxpayer.

On the basis of above documents along with various information and explanation given by the taxpayer, the officer understands the entire business model of the taxpayer and checks the following most crucial aspects, among others, which are otherwise also very crucial in respect of GST Audit by professionals:

1. Compliance of eligibility and conditions of taking Input Tax Credit (Section 16):

i. Possession of Tax paying document such as tax invoice

ii. Proof of Receipt of Goods or services

iii. Compliances of Returns

iv. Payment of tax by the supplier to the government

v. Payment of supply by taxpayer within 180 days from date of invoice

2. Compliance of payment of interest in case of late filing of GSTR-3B (Section 50). Presently the authorities are levying interest on Gross Output of Tax rather than Net cash liabilities. The same has been taken care of in the 39th GST Council meeting where it was decided by the council to levy interest on the Net cash liability. However, till the time it is notified, authorities shall continue to levy interest on Gross Output Liability

3. Compliance of payment of Reverse Charge by the recipient in the case of inward supply of specified category of goods or services (Section 9(3)). The officer shall check all the RCM provisions that may be applicable in the taxpayer`s case, the most important ones being:

i. Services of Goods Transport Agency, who is not paying tax under forward charge

ii. Legal/ Advocacy services

iii. Services by Director to the Company, etc.

4. Compliance of payment of Reverse Charge by the recipient in the case of inward supply of goods or services from an unregistered person for the period July till 13 October 2017, in case the value of supply exceeded Rs. 5,000 in a day. Beyond the said period, the section 9(4) was initially exempted vide various notifications issued from time to time and then amended through CGST Amendment Act 2018

5. Verify proper reversal of ITC in case of Credit Notes received from suppliers against turnover discounts as per the agreement entered into with the supplier (Section 15(3))

6. Ensure no blocked credit which are detailed in Section 17(5) has been availed by the taxpayer by asking necessary explanation for the nature of expenses and Input Tax Credit availed along with cross verification with the copy of invoices of inward supplies provided.

7. Verify that the supply as declared in GSTR-3B and GSTR-1 is appropriately matching with the Sales figure appearing in the Profit & Loss along with the TDS details appearing in the Form 26AS of the Income Tax, and asking the reasons for the differences

8. If the financial year under Audit also includes issuance of E-Way Bill, the authorities shall ask for a reconciliation of the E-Way Bills issued during the year vis-à-vis the supply outward declared in the GST Returns and ask for reasons of differences

9. Ensure that the ITC has been availed only to the extent of Inputs being used for business purposes (Section 17(1)). Also the officer shall ensure appropriate reversal of ITC has been made in case the Inputs are used for effecting both taxable as well as exempt supplies (Section 17(2))

10. Levy of GST in case of supply of goods or services from one registered state of taxpayer to another registered state of taxpayer, even when made without consideration (Schedule I)

11. Levy of GST in case of permanent transfer or disposal of business assets such as stock, capital assets etc. even if made without consideration (Schedule I)

12. The most crucial comes the Stock Register. This document, which is also mandated under Section 35, is where most of the taxpayers fail to provide reasonable assurance to the authorities. The officer shall match the inward and outward movement of goods with invoice copies, tally their HSN codes, and match the closing stock with the submission made in the Income Tax Returns.

The officer may further extend his examination depending upon the submissions and cooperation of the taxpayer. Once the audit is completed by the officer, he shall communicate his findings with the taxpayer and enable him to file a reply considering which final Audit observations shall be passed by the officer in Form ADT-02, wherein the taxpayer shall be informed the amount to be paid on account of various heads under each category of tax, i.e. Tax, Interest, any other amount to be paid under IGST, CGST, SGST and Cess. The audit shall be completed within a period of 3 months from the date of commencement of audit, which may be extended further by a period of 6 months by the Commissioner if he is satisfied to do so.

Audit of a taxpayer conducted by Chartered Accountant / Cost Accountant if directed by tax authorities (Special Audit) – Section 66

This section provides the authorities the power to direct any taxpayer, even if he is already audited under the provisions of GST Act or any other Act, to get his records and books of accounts audited by a Chartered Accountant or a Cost Accountant as may be nominated by the Commissioner.

The process of Special Audit is as under

1. If at any stage during the proceedings before the officer, being atleast the rank of Assistant Commissioner, is of the view that value has not been correctly declared or the credit availed is not within normal limits, he may direct a taxpayer in the Form ADT-03 to get his accounts audited by a Chartered Accountant or a Cost Accountant as nominated by the Commissioner

2. The Chartered Accountant or Cost Accountant shall submit a report to the officer within the period of ninety days, which may be further extended by the officer for a period of ninety days

3. The taxpayer shall be given of opportunity of being heard on the basis of the above said report

4. The expenses of special audit shall be determined and paid by the Commissioner

5. The taxpayer shall be informed the findings of the special audit in Form ADT-04 and shall be used in any proceedings against him as per the requirement of the officer.

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