Government of Punjab,
2020- Punjab GST Audit Manual
Punjab Goods and Services Tax Act, 2017
Department of Excise and Taxation, Punjab

PREFACE

The perspective of modern-day tax administration has transformed substantially with the advent of self-assessment. The role of tax authorities is now more focused on post-event audit and less on primary assessment functions. This role will further deepen in the GST regime, making Audit the keystone of Indirect tax compliance monitoring mechanism, with assessment and inspection as its key pillars. GST law seeks to make a paradigm shift in the way tax administration functions by placing trust in the taxpayer for self-compliance, coupled with a strong audit mechanism to ensure compliance. This requires a stark change in the attitude of the tax authorities from one of suspicion, to that of trust.

The highlight of the audit provision is the emphasis on transparency and the manner in which audit is to be conducted by the tax authority. It is said that, “Not only the justice should be done but also seen to be done”. The same perceptive factor applies to the function of the audit as it is important that the audit is conducted in a transparent and equitable manner within a well-defined time period. The essence of timeline for the carrying out of audit gives an insight into the thinking of the Department which is to instill a sense of discipline among the officers and also have an objective time frame for the activities of the taxpayer to be verified.

Guidelines provided herein are intended to ensure that the audit of taxpayers is carried out in a professional, efficient and comprehensive manner while adhering to the stipulated principles and policies and as per best international practices.

TABLE OF CONTENTS

S. NO. CHAPTER NO. DESCRIPTION PAGES
FROM TO
1 1 GST AUDIT -BASIC OVERVIEW 5 20
2 2 OBJECTIVE& PRINCIPLES OF AUDIT 21 24
3 3 AUDIT-PREPARATION 25 33
4 4 AUDIT-VERIFICATION 34 40
5 5 PREPARATION OF AUDIT REPORT AND FOLLOW UP 41 42
6 6 SPECIAL AUDIT 43 46
7 GSTAM- Annexure I AUDITEE’S MASTER FILE 47 54
8 GSTAM- Annexure II GST ADT01 – notice OF INTIMATION FOR CONDUCT OF AUDIT 55 55
9 GSTAM- Annexure III DOCUMENTS REQUIRED FOR DESK REVIEW 56 62
10 GSTAM- Annexure IV RATIO ANALYSIS OF DATABASE 63 64
11 GSTAM- Annexure V COMPARATIVE CHART OF ITEMS FROM FINANCIAL STATEMENT/RETURNS 65 69
12 GSTAM- Annexure VI QUESTIONNAIRE FOR REVIEW OF

INTERNAL CONTROL AND
WALKTHROUGH

70 77
13 GSTAM- Annexure VII AUDIT PLAN 78 81
14 GSTAM- Annexure VIII WORKING PAPERS 82 97
15 GSTAM- Annexure IX VERIFICATION OF RECORDS/REGISTERS DURING COURSE OF AUDIT 98 112
16 GSTAM- Annexure X DRAFT OF notice TO BE WRITTEN BY AUDITEE UNDER SECTION 73(6) OF THE PGST ACT, 2017. 113 113
17 GSTAM- Annexure XI GST ADT 02- COMMUNICATING AUDIT REPORT TO AUDITEE 114 114
18 GSTAM- Annexure XII CHECK LIST FOR AUDIT OF TRADERS 115 117
19 GSTAM- Annexure XIII CHECK LIST FOR TAXPAYERS UNDER COMPOSITION SCHEME 118 120

CHAPTER 1 GST AUDIT- BASIC OVERVIEW

1.1 The objective of this manual is to outline the principles and procedures for audit conducted under the Punjab Goods and Services Tax Act, 2017 (hereinafter referred to as, “PGST Act, 2017”) and the Rules made there under. In this document registered person selected for audit is referred to as an “Auditee”.

1.2 Provisions of PGST Act, 2017 for Audit:

Clause (13) of Section 2 of the PGST Act, 2017, defines ‘Audit’ as “the examination of records, returns and other documents maintained or furnished by the registered person under this Act or Rules made there under or under any other law for the time being in force to verify, inter alia, 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 rules made there under”.

Accordingly, ‘Audit’ implies –

(a) Detailed examination of-

(i) records;

(ii) returns; and

(iii) other documents- maintained / furnished by an auditee, under GST law/any other law or rules;

(b) For verification of correctness of-

(i) Turnover declared;

(ii) Taxes paid;

(iii) Refund claimed;

(iv) Input tax credit availed; and

(v) Assessment of compliances with provisions of GST law and rules.

Thus, GST audit is not only for reconciliation of tax liability and payment thereof but also encompasses the verification of compliance of the provisions of the GST Act and rules there under by an auditee.

1.3 Relevant Statutory Provisions:

A) General Audit: Audit by tax authorities (Sec. 65 of PGST Act, 2017)

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.

B) Section 66 – 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 thereunder.

(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 utilised, the proper officer may initiate action under section 73 or section 74.

C) Section 35 – Accounts and other records

(1) Every registered person shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, a true and correct account of—

(a) production or manufacture of goods;

(b) inward and outward supply of goods or services or both;

(c) stock of goods;

(d) input tax credit availed;

(e) output tax payable and paid; and

(f) such other particulars as may be prescribed:

Provided that where more than one place of business is specified in the certificate of registration, the accounts relating to each place of business shall be kept at such places of business:

(2) Provided further that the registered person may keep and maintain such accounts and other particulars in electronic form in such manner as may be prescribed.

(3) Every owner or operator of warehouse or godown or any other place used for storage of goods and every transporter, irrespective of whether he is a registered person or not, shall maintain records of the consigner, consignee and other relevant details of the goods in such manner as may be prescribed.

(4) The Commissioner may notify a class of taxable persons to maintain additional accounts or documents for such purpose as may be specified therein.
Where the Commissioner considers that any class of taxable person is not in a position to keep and maintain accounts in accordance with the provisions of this section, he may, for reasons to be recorded in writing, permit such class of taxable persons to maintain accounts in such manner as may be prescribed.

(5) Every registered person whose turnover during a financial year exceeds the prescribed limit shall get his accounts audited by a chartered accountant or a cost accountant and shall submit a copy of the audited annual accounts, the reconciliation statement under sub-section (2) of section 44 and such other documents in such form and manner as may be prescribed.

Provided that nothing contained in this sub-section shall apply to any department of the Central Government or a State Government or a local authority, whose books of account are subject to audit by the Comptroller and Auditor-General of India or an auditor appointed for auditing the accounts of local authorities under any law for the time being in force.

(6) Subject to the provisions of clause (h) of sub-section (5) of section 17, where the registered person fails to account for the goods or services or both in accordance with the provisions of sub-section (1), the proper officer shall determine the amount of tax payable on the goods or services or both that are not accounted for, as if such goods or services or both had been supplied by such person and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of such tax.

D) Section 36 – Period of retention of accounts

Every registered person required to keep and maintain books of account or other records in accordance with the provisions of sub-section (1) of section 35 shall retain them until the expiry of seventy-two months from the due date of furnishing of annual return for the year pertaining to such accounts and records:

Provided that a registered person, who is a party to an appeal or revision or any other proceedings before any Appellate Authority or Revisional Authority or Appellate Tribunal or court, whether filed by him or by the Commissioner, or is under investigation for an offence under Chapter XIX, shall retain the books of account and other records pertaining to the subject matter of such appeal or revision or proceedings or investigation for a period of one year after final disposal of such appeal or revision or proceedings or investigation, or for the period specified above, whichever is later.

1.4 Rules prescribed for Audit:

A) Rule 101 of PGST Rules, 2017:

1) The period of audit to be conducted under sub-section (1) of section 65 shall be a financial year or part thereof or multiples thereof.

2) Where it is decided to undertake the audit of a registered person in accordance with the provisions of section 65, the proper officer shall issue a notice in FORM GST ADT-01 in accordance with the provisions of sub- section (3) of the said section.

3) The proper officer authorized to conduct audit of the records and the books of account of the registered person shall, with the assistance of the team of officers and officials accompanying him, verify the documents on the basis of which the books of account are maintained and the returns and statements furnished under the provisions of the Act and the rules made thereunder, the correctness of the turnover, exemptions and deductions claimed, the rate of tax applied in respect of the supply of goods or services or both ,the input tax credit availed and utilized, refund claimed, and other relevant issues and record the observations in his audit notes.

4) The proper officer may inform the registered person of the discrepancies noticed, if any, as observed in the audit and the said person may file his reply and the proper officer shall finalize the findings of the audit after due consideration of the reply furnished.

5) On conclusion of the audit, the proper officer shall inform the findings of audit to the registered person in accordance with the provisions of sub- section (6) of section 65 in FORM GST ADT- 02.

B) Rule 56 of PGST Rules, 2017: Maintenance of accounts by registered persons-

(1) Every registered person shall keep and maintain, in addition to the particulars mentioned in sub-section (1) of section 35, a true and correct account of the goods or services imported or exported or of supply attracting payment of tax on reverse charge along with the relevant documents, including invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers and refund vouchers.

(2) Every registered person, other than a person paying tax under section 10, shall maintain the accounts of stock in respect of goods received and supplied by him, and such accounts shall contain particulars of the opening balance, receipt, supply, goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample and the balance of stock including raw materials, finished goods, scrap and wastage thereof.

(3) Every registered person shall keep and maintain a separate account of advances received, paid and adjustments made thereto.

(4) Every registered person, other than a person paying tax under section 10, shall keep and maintain an account, containing the details of tax payable (including tax payable in accordance with the provisions of sub-section (3) and sub-section (4) of section 9), tax collected and paid, input tax, input tax credit claimed, together with a register of tax invoice, credit notes, debit notes, delivery challan issued or received during any tax period.

(5) Every registered person shall keep the particulars of –

a) names and complete addresses of suppliers from whom he has received the goods or services chargeable to tax under the Act;

b) names and complete addresses of the persons to whom he has supplied goods or services, where required under the provisions of this Chapter;

c) the complete address of the premises where goods are stored by him, including goods stored during transit along with the particulars of the stock stored therein.

(6) If any taxable goods are found to be stored at any place(s) other than those declared under sub-rule (5) without the cover of any valid documents, the proper officer shall determine the amount of tax payable on such goods as if such goods have been supplied by the registered person.

(7) Every registered person shall keep the books of account at the principal place of business and books of account relating to additional place of business mentioned in his certificate of registration and such books of account shall include any electronic form of data stored on any electronic device.

(8) Any entry in registers, accounts and documents shall not be erased, effaced or overwritten, and all incorrect entries, otherwise than those of clerical nature, shall be scored out under attestation and thereafter the correct entry shall be recorded and where the registers and other documents are maintained electronically, a log of every entry edited or deleted shall be maintained.

(9) Each volume of books of account maintained manually by the registered person shall be serially numbered.

(10) Unless proved otherwise, if any documents, registers, or any books of account belonging to a registered person are found at any premises other than those mentioned in the certificate of registration, they shall be presumed to be maintained by the said registered person.

(11) Every agent referred to in clause (5) of section 2 shall maintain accounts depicting the,-

(a) particulars of authorisation received by him from each principal to receive or supply goods or services on behalf of such principal separately;

(b) particulars including description, value and quantity (wherever applicable) of goods or services received on behalf of every principal;

(c) particulars including description, value and quantity (wherever applicable) of goods or services supplied on behalf of every principal;

(d) details of accounts furnished to every principal; and

(e) tax paid on receipts or on supply of goods or services effected on behalf of every principal.

(12) Every registered person manufacturing goods shall maintain monthly production accounts showing quantitative details of raw materials or services used in the manufacture and quantitative details of the goods so manufactured including the waste and by products thereof.

(13) Every registered person supplying services shall maintain the accounts showing quantitative details of goods used in the provision of services, details of input services utilised and the services supplied.

(14) Every registered person executing works contract shall keep separate accounts for works contract showing –

(a) the names and addresses of the persons on whose behalf the works contract is executed;

(b) description, value and quantity (wherever applicable) of goods or services received for the execution of works contract;

(c) description, value and quantity (wherever applicable) of goods or services utilized in the execution of works contract;

(d) the details of payment received in respect of each works contract; and

(e) the names and addresses of suppliers from whom he received goods or services.

(15) The records under the provisions of this Chapter may be maintained in electronic form and the record so maintained shall be authenticated by means of a digital signature.

(16) Accounts maintained by the registered person together with all the invoices, bills of supply, credit and debit notes, and delivery challans relating to stocks, deliveries, inward supply and outward supply shall be preserved for the period as provided in section 36 and shall, where such accounts and documents are maintained manually, be kept at every related place of business mentioned in the certificate of registration and shall be accessible at every related place of business where such accounts and documents are maintained digitally.

(17) Any person having custody over the goods in the capacity of a carrier or a clearing and forwarding agent for delivery or dispatch thereof to a recipient on behalf of any registered person shall maintain true and correct records in respect of such goods handled by him on behalf of such registered person and shall produce the details thereof as and when required by the proper officer.

(18) Every registered person shall, on demand, produce the books of accounts which he is required to maintain under any law for the time being in force.

C) Rule 57 of PGST Rules, 2017: Generation and maintenance of electronic records-

(1) Proper electronic back-up of records shall be maintained and preserved in such manner that, in the event of destruction of such records due to accidents or natural causes, the information can be restored within a reasonable period of time.

(2) The registered person maintaining electronic records shall produce, on demand, the relevant records or documents, duly authenticated by him, in hard copy or in any electronically readable format.

(3) Where the accounts and records are stored electronically by any registered person, he shall, on demand, provide the details of such files, passwords of such files and explanation for codes used, where necessary, for access and any other information which is required for such access along with a sample copy in print form of the information stored in such files.

D) Rule 58 of PGST Rules, 2017: Records to be maintained by owner or operator of godown or warehouse and transporters-

(1) Every person required to maintain records and accounts in accordance with the provisions of sub-section (2) of section 35, if not already registered under the Act, shall submit the details regarding his business electronically on the common portal in FORM GST ENR-01, either directly or through a Facilitation Centre notified by the Commissioner and, upon validation of the details furnished, a unique enrolment number shall be generated and communicated to the said person.

(1A) For the purposes of Chapter XVI of these rules, a transporter who is registered in more than one State or Union Territory having the same Permanent Account Number, he may apply for a unique common enrolment number by submitting the details in FORM GST ENR-02 using any one of his Goods and Services Tax Identification Numbers, and upon validation of the details furnished, a unique common enrolment number shall be generated and communicated to the said transporter:

Provided that where the said transporter has obtained a unique common enrolment number, he shall not be eligible to use any of the Goods and Services Tax Identification Numbers for the purposes of the said Chapter XVI.

(2) The person enrolled under sub-rule (1) as aforesaid in any other State or Union territory shall be deemed to be enrolled in the State or Union territory.

(3) Every person who is enrolled under sub-rule (1) shall, where required, amend the details furnished in FORM GST ENR-01 electronically on the common portal either directly or through a Facilitation Centre notified by the Commissioner.
Subject to the provisions of rule 56,-

(a) any person engaged in the business of transporting goods shall maintain records of goods transported, delivered and goods stored in transit by him along with the Goods and Services Tax Identification Number of the registered consigner and consignee for each of his branches.

(b) every owner or operator of a warehouse or godown shall maintain books of accounts with respect to the period for which particular goods remain in the warehouse, including the particulars relating to dispatch, movement, receipt and disposal of such goods.

(5) The owner or the operator of the godown shall store the goods in such manner that they can be identified item-wise and owner-wise and shall facilitate any physical verification or inspection by the proper officer on demand.

E) Rule 102. Special Audit. –

(1) Where special audit is required to be conducted in accordance with the provisions of section 66, the officer referred to in the said section shall issue a direction in FORM GSTADT-03 to the registered person to get his records audited by a chartered accountant or a cost accountant specified in the said direction.

(2) On conclusion of the special audit, the registered person shall be informed of the findings of the special audit in FORM GST ADT-04.

1.5 GST AUDIT

1.5.1 The statutory power to the GST officers for carrying out the function of audit has been laid down in Section 65 of the PGST Act, 2017. The power is to be exercised by the Commissioner or any officer authorized by him and is to audit the business transactions of any registered person over a particular period. The function of audit can be carried out at the business premises of the auditee or at the office of tax authority. Intimation to the registered person, not less than 15 days prior to the conduct of the audit is mandated. This is significant as this will enable the taxpayer to be prepared for the tax audit and will also help the tax authority to take prior informed decisions.

1.5.2 Further, it has been provided that the audit has to be carried out within a period of three months from the “commencement of audit” which can be extended by the Commissioner, by a further period not exceeding six months, for the reasons to be recorded in writing. The crucial question here is that when this time period is going to start from. When we can say that the audit has started and it has to be completed within a defined time frame? To answer this question an explanation has been provided in the section which states that “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. The essence of timeline for the carrying out of audit is to instill a sense of discipline among the tax authorities and to provide an objective time frame for the activities of the taxpayer to be verified.

1.5.3 In order to enable and facilitate the effective discharge of audit function by tax authorities it has been laid down that they can seek necessary facility from the auditee for verifying his books of account or other documents as well ask him to furnish such information as may be required and also render such assistance as maybe essential for the timely completion of the audit. As for the obligations of the tax authorities it has been provided that on conclusion of audit, the proper officer shall without delay inform the auditee, whose records are audited, of the findings, his rights and obligations and the reasons for the findings. If the audit results in detection of tax not paid or short paid or erroneously refunded, or input tax credit erroneously availed, the proper officer may initiate action under section 73 or section 74, as the case may be.

1.5.4 It goes without saying that the powers of the officers are corollary with the obligation of the taxpayer to assist the tax authorities in the conduct of the audit. It is important to mention here that the function of audit is primarily based upon the accounts and records maintained by the taxpayer and the returns furnished under the Act. Elaborate provisions have been laid down in the PGST Act read with rules thereunder for the maintenance of accounts and records by the taxpayer.

SR.
NO.
PROVISION PARTICULARS
1. Assessment As per clause (11) of section 2 of the PGST Act, 2017, “assessment” means determination of tax liability under this Act and includes:

> Self-assessment;

> Re-assessment;

> Provisional assessment;

> Summary assessment; and

> Best judgment assessment.

Thus, assessment is the process of determination of tax liability

of a tax payer. Self-assessment is to be undertaken by the assesse

before the audit comes into picture.

2. Requirement for Invoice Sub-section (1) and (2) of Section 31 of the PGST Act, 2017 lays down the requirements and conditions related to issuance of tax invoice for supply of taxable goods or services. Clause(c) of sub­section (3) of Section 31 specifies that for the supply of exempted goods or services by a registered person or for supply of goods or specified service by a registered person paying tax under Section 10 (Composition), a bill of supply shall be issued instead of a tax invoice.
3. Requirement for maintenance of books of account and records Section 35 of the PGST Act, 2017 specifies the requirements for maintenance of accounts and records of business. Sub-section (6) of said section empowers the proper officer to determine amount of tax payable on the goods or services or both that are not accounted for, as if such goods or services or both had been supplied by such person in accordance with provisions of section 73 or section 74.Further, the said section enables the taxpayer to keep or maintain or retain the records in electronic form.
4. Power for Determination/ Adjudication of Tax Section 73 empowers that the proper officer to determine the tax not paid or short paid or erroneously refunded or ITC wrongly availed or utilized for any reason other than fraud or any willful mis-statement or suppression of facts. The officer is required to issue a SCN specifying the amount of tax payable along with the interest thereon under section 50 and a penalty leviable as per the provisions of PGST/CGST/IGST Act(s).

Section 74 empowers the proper officer to determine the tax not paid or short paid or erroneously refunded or ITC wrongly availed or utilized by the reasons of fraud or any willful mis-statement or suppression of facts. The officer will issue a SCN specifying the amount of tax payable along with the interest thereon under section 50 and a penalty equivalent to tax specified in the notice.

1.6 Types of audit under GST

Under GST Act, the following two types of audit has been envisaged:

1.6.1 Audit by tax authorities: Section 65 of PGST Act, 2017 lays down detailed provisions regarding GST audit to be conducted by the Tax authorities. This audit is exclusively done as per the orders of the Commissioner in terms of the provisions stated below-

TABLE 2: PROVISIONS OF SECTION 65 OF PGST ACT, 2017

  PROVISION DESCRIPTION
Sec 65(1) Audit by Tax Authorities
  • Commissioner, or
  • any officer authorized by him
Sec 65(2) Place of Conduct of Audit
  • At the place of business of the registered person or in the office of tax authority.
Sec 65(3) Intimation
  • by way of a notice not less than fifteen working days prior to the conduct of audit
Sec 65(4) Period of Completion
  • within a period of three months from the date of commencement of the audit.
Extension of time
  • Reasons for extension-– Completion in 3 months not possible as per satisfaction of Commissioner
  • Period of Extension– Further period not exceeding six months
Sec 65(5) Obligation of Auditee Facilities to be provided to the auditor by the taxpayer

  • for verifying the books/ documents
  • furnishing information as required
  • rendering assistance for timely completion of audit
Sec 65(6) Audit Report
  • Within 30 days of the conclusion of audit (finalisation of Final Audit Report)
  • Information about– findings, rights, obligations and reasons for such findings
  • Conclusion/culmination of audit
Sec 65(7) Consequences
  • Results based: Where the audit conducted results in detection of:
    • tax not paid or
    • tax short paid or
    • erroneously refunded, or
    • ITC wrongly availed or utilized,

the proper officer may initiate action under Section 73 or 74 of the PGST Act,2017.

1.6.2 Special Audit: Special audit is tax audit where tax administration directs the auditee to get the records, including books of accounts, examined and audited by a nominated Chartered Accountant (hereinafter referred to as, “CA”) or Cost Accountant. As per Section 66 of the PGST Act,2017 such a power can be exercised during any stage of scrutiny, enquiry, investigation, where an officer not below the rank of Assistant Commissioner, having regard to the nature and complexity of the case and the interest of revenue, feels that the value has not been correctly declared or the input tax credit (hereinafter referred to as, “ITC”) availed is not within the normal limits, he may, with the prior approval of the Commissioner, ask the taxpayer to get his accounts audited by a CA or a cost accountant as may be nominated by the Commissioner. This power of special audit is over and above the power of audit with the tax authority and is to take care of special contingencies and circumstances where the tax authorities feel constrained in carrying out thorough audit of a particular taxpayer either due to the complexity or nature of the activity being carried out by that particular taxpayer. This special audit has to be carried out within a period of 90 days which can be extended by further period of 90 days. The audit report submitted by the auditor will serve as a relevant material for any proceeding under this Act, provided that the auditee has been given an opportunity of being heard on this matter. The expense for the carrying out of the special audit including the remuneration of the auditor will be paid by the tax authority. If the conduct of special audit results in detection of tax not paid or short paid or erroneously refunded, or input tax credit erroneously availed, the proper officer may initiate action under section 73 or section 74, as the case may be.

1.6.2 To order a special audit, the proper officer must ensure-

a) that a scrutiny/investigation/inquiry or any proceeding is being carried out;

b) he is of the opinion that:

> value declared by the auditee has not been correctly declared; or

> the input tax credit availed is not within normal limits.

c) prior approval of Commissioner has been obtained.

1.7 Coverage and scope of audit u/s 65 of PGST Act 2017;

1.7.1 Coverage:

a) The Act empowers the officers to conduct audit only of registered persons. Un­registered persons cannot be subjected to audit under Section 65 of PGST Act, 2017. As per clause (94) of section 2 of the PGST Act, 2017, a registered person is defined as “a person who is registered under section 25but does not include a person having unique identity number”. Thus, a registered person is the one who has obtained registration under section 25 of the PGST Act, 2017. On referring section 22 and 24 of PGST Act, 2017, a list of persons who are required to be registered under the Act, either on the basis of their turnover or those who must obtain registration irrespective of their turnover, can be identified. A person otherwise liable to be registered, if anyway remains unregistered is not a registered person and therefore cannot be subjected to audit. However, a person, who has been granted registration by proper officer under sub-section (8) of section 25 shall be registered person and can be subjected to audit provisions.

b) By virtue of cross empowerment of PGST and CGST officers (under Section 6 of respective Acts), any audit undertaken and assigned to Officer of State Tax (PGST) will cover the audit for PGST, CGST, IGST and Compensation Cess Act. It is important to mention that Section 20 of the IGST Act, 2017 (IGST) adopts the provisions relating to audit in the CGST Act, 2017.

c) The period of audit to be conducted under sub section (1) of section 65 shall be a financial year or multiple year or part thereof (Sub-rule 1 of Rule 101). However, an audit of tax period for which demand under Section 73 or 74 becomes barred by time should not be undertaken.

1.7.2 Scope:

The scope of tax audit under PGST Act, 2017 covers –

a) mandatorily, pre-intimation of at-least 15 working days prior to conduct of audit in prescribed form (GST ADT 01);

b) audit of all records, documents, books of accounts including electronic records relating to or incidental to business of the auditee;

c) verification of the documents based on which the books of accounts are maintained;

d) verification of the returns and statements furnished;

e) examination of correctness of the turnover, exemptions availed, rate of tax applied in respect of supply of goods or services or both;

f) verification of ITC availed and utilized and refund(s) claimed;

g) computation of output tax liability;

h) examination of such other records and documents as may be required to determine the actual tax liability of the auditee.

1.7.3 Rule 101 of the PGST Rules, 2017, envisages that audit shall be conducted by the proper officer, authorized to conduct audit with the assistance of a team of officers and officials. The team shall verify-

a) documents based on which the books of accounts are maintained;

b) books of accounts based on which the returns or statements have been furnished;

c)correctness of turnover;

d) correctness of exemptions claimed and ITC availed;

e) appropriateness of rate of tax applied in respect of supply of goods or services or both;

f) refund claimed; and

g) other relevant issues.

1.7.4 It may be noted that examination of accounts and records pertaining to the period which are not covered under audit is not provided. Financial statements may be asked for ratio analysis and comparison. Search of the premise of auditee or seizure of document, records or anything under sub-section (2) of Section 67 of the PGST Act, 2017 is not covered in scope of audit.

1.8 ACCOUNTS AND RECORDS

1.8.1 As per Section 35 of the PGST Act,2017, the books of account shall be kept at the principal place of business and at every related place(s) of business mentioned in the certificate of registration and such books of account shall include any electronic form of data stored on any electronic devices. The data so stored shall be authenticated by way of digital signature. Unless proved otherwise, if any documents, registers, or any books of account belonging to an auditee are found at any premises other than those mentioned in the certificate of registration, they shall be presumed to be maintained by the said auditee. If any taxable goods are found to be stored at any place(s) other than those declared without the cover of any valid documents, the proper officer shall determine the amount of tax payable on such goods as if such goods have been supplied by the Auditee.

1.8.2 Further, as per Section 36 of the PGST Act,2017 all accounts maintained together with all invoices, bills of supply, credit and debit notes, and delivery challans relating to stocks, deliveries, inward supply and outward supply shall be preserved for seventy-two months (six years) from the due date of furnishing of annual return for the year pertaining to such accounts and records and shall be kept at every related place of business mentioned in the certificate of registration. However, an auditee, who is a party to an appeal or revision or any other proceedings whether filed by him or by the department, or is under investigation for an offence, has to retain the records pertaining to the subject matter of such appeal or revision or proceedings or investigation for a period of one year after final disposal of such appeal or revision or proceedings or investigation, or for the period specified above (seventy- two months), whichever is later.

1.8.3 Further, as per Rule 56 of the PGST Rules,2017 any entry in registers, accounts and documents shall not be erased, effaced or overwritten, and all incorrect entries, otherwise than those of clerical nature, shall be scored out under attestation and thereafter correct entry shall be recorded, and where the registers and other documents are maintained electronically, a log of every entry edited or deleted shall be maintained. Further each volume of books of account maintained manually by the auditee shall be serially numbered.

1.8.4 Recognizing the importance of electronic maintenance of accounts and records the Act also provides for maintenance of records in electronic form. Rule 57 of the PGST Rules, 2017 provides that the taxpayer will maintain proper electronic back-up of records in such manner that, in the event of destruction of such records due to accidents or natural causes, the information can be restored within a reasonable period of time. Further, it has been provided that the same may be produced, on demand, duly authenticated, in hard copy or in any electronically readable format. Moreover, where the accounts and records are stored electronically by any auditee, he shall, on demand, provide the details of such files, passwords of such files and explanation for codes used, where necessary, for access and any other information which is required for such access along with a sample copy in print form of the information stored in such files.

1.8.5 Rule 58 of the PGST Rules, 2017 provides for elaborate provisions for records to be maintained by owner or operator of godown or warehouse and transporters. Every person engaged in the business of transporting goods shall maintain records of goods transported, delivered and goods stored in transit by him and for each of his branches. Every owner or operator of a warehouse or godown shall maintain books of accounts, with respect to the period for which particular goods remain in the warehouse, including the particulars relating to dispatch, movement, receipt, and disposal of such goods. The goods shall be stored in such manner that they can be identified item wise and owner wise and shall facilitate any physical verification or inspection, if required at any time.

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CHAPTER 2 OBJECTIVE AND PRINCIPLES OF AUDIT

2.1 The objective of audit of taxpayers is to measure the level of compliance of the tax payer in the light of the provisions of the PGST Act 2017 and the rules made thereunder.

2.1.1 Audit examines the declarations of taxpayers to not only test the accuracy of the declaration and the accounting systems that produce the declared liability, but also evaluate the credibility of the declared or assessed tax liability. The taxpayer’s anticipation of such actions has deterrent and preventive effects. The deterrent effect is the extent to which audit discovers and deters a tax payer from continuing to under-declare or manipulate their tax liability. The preventive effect is the extent to which auditee decides not to evade tax, because they are aware of audit activity and fear of detection by the tax auditors.

2.1.2 An effective audit program generally results in the discovery of under-declared liabilities either by omission, error or deliberate deception. The amount of additional revenue raised depends not only on the level of compliance by the taxpayers, but also on the effectiveness of the auditors and the audit planning and implementation. An efficient and effective audit system will assist the government in its pursuit of increasing taxpayer’s voluntary compliance and facilitate the tax administration’s aim of getting “the right tax at the right time.”

2.2 Role of audit:

The effect of a successful audit programme is not limited to the direct effects of each individual action (in terms of additional revenue, interest or penalties, and enforced compliance).

There are clear, and in many ways more important, indirect effects from audit programme in terms of maintaining levels of compliance. These effects are described as:

a. Corrective effect — influencing auditee’s behavior and persuading to move further towards the compliance.

b. Deterrent effect — persuading other taxpayers that it is in their interest to be more compliant.

c. Preventive effect — the perceived deterrent effect that audit has on others.

2.3 Principles of audit:

The basic principles of audit are –

a) Conducting audit in a systematic and comprehensive manner;

b) Emphasis on the identified risk areas and scrutinizing the records maintained in the normal course of business;

c) Applying audit techniques on the basis of materiality i.e. degree of scrutiny and application of an audit tool depends upon the identified nature of risk factors;

d) Proper recording of all checks and findings made during the entire audit;

e) Identifying the unexplored compliance verification parameters;

f) Educating the taxpayer for voluntary compliance.

2.4 General Guidelines for Auditor:

a) While conducting audit, 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 auditee operates. Therefore, the auditor should take a balanced and rational approach while conducting the audit;

b) The auditor is expected to play a key role in promoting voluntary compliance by the auditees;

c) During the course of the audit, if certain technical infractions, without any revenue implications, arising due to bona fide oversight or ignorance of the auditee, are noticed, the auditee should be guided for immediate correction. Such cases should also be mentioned in working papers;

d) An auditor is responsible for conduct of audit in a professional manner and should endeavor to take a final view on all issues raised by him during the audit;

e) The working papers for each of the step of audit should be filled in as soon as that step is completed. They should be ‘speaking documents’ that clearly explain why a particular area was included in the audit plan as well as the basis for arriving at every objection that goes into the draft audit report after audit verification. The documentary evidence which has been relied upon in arriving at certain conclusion should invariably be cited and included;

f) The documents/records obtained during the conduct of audit shall enjoy the confidentiality envisaged under Section 158 of the GST Act 2017;

g) Verification of records mandated by the statute is necessary to check the correctness of assessment and payment of tax by the Auditee in the present era of self-assessment.

h) Audit to be conducted in a transparent and systematic manner with focus on business records of the Auditee and according to the audit plan for each Auditee.

2.5 Period to be covered during audit

The period to be covered under audit is prescribed in Rule 101 (1) of the PGST Rules, 2017 as financial year, or part thereof or multiples thereof to cover the retrospective period up to the previous audit or the limitation period specified in Section 73 or 74 of the PGST Act,2017.

2.6 Time line of Audit

It has been provided in section 65 of the PGST Act,2017 that the audit has to be carried out within a period of three months from the “commencement of audit” which can be extended by the Commissioner, by a further period not exceeding six months, for the reasons to be recorded in writing. The crucial question here is that when this time period is going to start from. When we can say that the audit has started and it has to be completed within a defined time frame? To answer this question an explanation has been provided in the said section which states that “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.

2.7 Schedule of audit

Once the units are identified for audit, the audit wing may prepare and release the audit schedule to constantly monitor conduct of audits in order to ensure that at the end of the year audit of all the units allocated is completed. Changes in such schedule with reference to conduct of audit of any unit by allowing preponing/postponing from one month to another month/from one quarter to another quarter may be effected with the approval of competent authority. However, it may be ensured that audit of all the units allocated by the Head Office are completed by 31st March of the financial year so that no single unit is left uncovered. In case the audit of certain units could not be carried out in the said period, the reasons may be examined, and further course of action should be decided with approval of competent authority.

2.8 Stage wise conduct of audit

The processes involved in conduct of GST audit are enumerated hereunder:

a) Issuance of prior intimation to the auditee for the conduct of audit (GSTADT-01) and asking for information and other documents required for the purpose of audit;

b) Conduct of desk review in offline / online mode (wherever available) including review of the taxpayer data – Tax Payer at a Glance (TAG), Registration, Returns, Payments, E-way bills and Third Party data, if available, and documenting the result of the same;

c) Preparation and approval of the audit plan in offline / online mode (wherever available) and document the same;

d) Visit the premises of the auditee for the conduct of audit as per the extant administrative instructions;

e) Carry out verification and prepare the verification report including documentation of the working papers;

f) Discussion of the audit objections with the auditee;

g) Preparation of the draft audit report (hereinafter referred to as, “DAR”) within forty-eight hours of the conclusion of verification and submit the same for approval of the higher authority;

h) Forwarding the DAR for placement of the same before the monitoring committee;

i) Examining the audit paras in the Monitoring Committee Meetings (hereinafter referred to as, “MCM”);

j) Finalizing the minutes of the monthly MCM, within forty-eight hours of the meeting;

k) Preparation of the final audit report (hereinafter referred to as, “FAR”), within thirty days of the Meeting – Conclusion of the audit;

l) Communication of the FAR to the auditee (ADT-02);

m) Follow-up action, wherever required.

Follow-up action

CHAPTER 3 AUDIT – PREPARATION

3.1 Profiling of Auditee:

3.1.1 Audit requires a strong database for profiling each auditee so that risk-factors relevant to an auditee may be identified in a scientific manner and audit is planned and executed accordingly. Some of the relevant data has to be collected from the auditee during the course of audit, while the rest is to be extracted from registration documents and returns filed by the auditee including:

  • Annual returns,
  • E-way Bills,
  • Reports/returns submitted to regulatory authorities or other agencies,
  • Income Tax returns,
  • Contracts with his clients etc;
  • Reports deduced from SAS tool;
  • BIFA intelligence data.

3.1.2 A comprehensive data base about an auditee to be audited is an essential pre-requisite for selection of units as well as for undertaking preliminary desk review and effective conduct of audit. A substantial amount of data is already available on GSTN. Some of the data like those contained in annual financial statements keeps changing every year.

3.2 Reviewing the taxpayer data: The first step towards an effective audit is to review all relevant information about the auditee. Annexure GSTAM – I contain details of all the relevant data required for review.

3.2.1 The audit team conducting the audit should first review the data already available. The audit team may collect the information which is not available and same may be updated in the Master database of taxpayer.

3.2.2. The auditor may seek information, not available about the auditee, from the Head Quarter.

3.2.3 The information about each auditee should be updated periodically after completion of each audit. The audit working papers, audit report, duly approved during the MCM, along with the latest documents should be filed properly in a file of the auditee.

3.3 Allocation of auditee amongst Audit Teams:

Once the units selected for audit have been allocated to the Audit Wings, an audit schedule detailing the timing and sequencing of the audit to be carried out shall be prepared. The audit schedule should mention the details of the members of the audit team to conduct audit of a particular unit. It must be ensured that the group members of the audit party are fully trained for conducting audit in accordance with the guidelines in this manual.

3.4 Action to be taken by the Audit Team:

3.4.1 Once the audit schedule, with audit team allocation, is finalized, the action shifts to audit teams. The audit team should have adequate time to complete the preparation for audits to be conducted as per the audit schedule.

3.4.2 Calling for documents from the Registered Person: The auditor shall intimate the date of conduct of audit by issuing a notice in FORM GST ADT01 (Annexure II) at least fifteen working days prior to the conduct of audit and also request for providing records/ documents which are necessary for conducting audit. It may be noted that till the time the audit module on GSTN is not operationalized the tax authority may deploy the modes envisaged under Section 169 of the PGST Act,2017 for issuing of the notice. In case the auditee does not respond to the notice, a reminder should be issued within a reasonable time period. Where the auditee does not volunteer to submit the same on the basis of notices issued by the auditor, another notice should be issued giving details of penal provisions contained in Section 122, 123 and 125 of the PGST Act, 2017. Thereafter, if the auditee still fails to comply, then a self- contained note may be sent to the Head Quarter. Further, the details of such auditee should be included in the Risk Parameters, so that in future the said person may be identified for audit on priority. Details of said person may also be provided to the concerned authorities to down grade his GST compliance ratings.

3.5 Desk Review

3.5.1 Objective:

The desk review lays emphasis on gathering data about the auditee, his operations, business practices and an understanding of the potential audit issues, understanding his financial and accounting system, studying the flow of materials, cash and documentation and run tests to evaluate the vulnerable areas. The preliminary review assists in development of a logical audit plan and focus on potential issues.

3.5.2 This is the first phase of the audit programme done in the office. The idea is to gather as much relevant information about the Auditee and its operations, as is possible, before visiting the unit. A good desk review under the supervision of senior officers is critical to the drawing up of good audit plan. The auditor should refer to the information of the Registered Taxpayer (Annexure- GSTAM- I). Study of the information could throw up important points, which may merit inclusion in the audit plan. In addition, the auditor should also obtain the latest Trial Balance, Tax Audit Report, Annual Financial Statement, Cost Audit Report or any such document prepared or published after the last updating of information. From the scrutiny of these documents, certain points may further emerge for inclusion in the audit plan. The auditor should also incorporate the result of any parameters brought to light by risk analysis into the desk review for pin pointing specific issues for examination during audit. An illustrative list of examination of important documents from the audit perspective is given at Annexure– GSTAM-III.

3.5.3 All receipts of the taxpayer need to be tested for GST liability. Analysis of exports turnover, turnover of non-taxable and exempted goods and services gives a clear picture of the amounts which were not considered for tax payment. It also helps to conclude whether such exemptions claimed are proper or not. The auditor should reconcile the ITC credit availed as shown in FORM GSTR-3B with that shown in FORM GSTR- 2A and FORM GSTR- 2B and identify any gaps in the ITC availment. This gap should be mentioned in the Audit Plan for verification at the time of audit.

3.5.4 Cost Accounting Records/ Cost Audit:

As per Companies Act, 2013 (as on 31st October, 2020), cost audit is expected to be carried out in respect of:

a) regulated sectors like Telecommunication, Electricity, petroleum and Gas, Drugs and Pharma, Fertilizers and Sugar with either turnover of Rs 50 crores for all products and services or Rs 25 crores for individual product and services.

b) non-regulated sectors -The threshold is Rs100 crores and Rs. 35 crores respectively.

For latest amendments and existing norms, the Companies (Cost Records and Audit) Rules, 2014 may be referred to. These records may be studied in order to correlate the data furnished therein with the information in the GST returns.

3.5.5 From the Trial Balance and Annual Financial Statements (Profit & Loss Account and Balance Sheet) it is possible to work out important financial ratios. The said ratios should be compared with the ratios of earlier year and wherever significant variation is noticed, these areas may be selected for audit verification. It may be kept in mind that any adverse ratio is only an indicator for verification of such an area and there may be valid reasons for the same. Therefore, an adverse ratio may require further examination and verification in order to ascertain the reason for the same. An illustrative list of important ratios is given at Annexure-GSTAM-IV.

3.5.6 Reconciliation of data: GST payment shown in the annual return in FORM GSTR-9 can be reconciled with the information in the financial accounts. Further, from the reconciled figure of GST payment, value of the supply can be worked out. This can then be compared with the sales figure shown in financial records. The difference, if any, must be analyzed. The assessable value of the auditee can be compared with that of another taxpayer supplying the same goods or services. This would give an idea whether the valuation and determination of the tax by the auditee is a high/low risk area. A comparative chart of items from financial statement to be drawn for reconciling the data is annexed as Annexure GSTAM-V. The auditor should check the data available in the annual return in FORM GSTR-9 with other documents such as Trial Balance, Income Tax Returns, Annual Audited accounts, Income Tax Audit report etc. and carry out a preliminary reconciliation for the purpose of identifying any amount that might have escaped GST.

3.5.7 Revenue Risk Analysis:

Risk Analysis is a method of identifying potential revenue risk areas by employing modern techniques. It can be carried out by:

a) reconciling various specific financial data, comparing it with different business accounts/documents;

b) deriving certain data and comparing with the actual figures of the financial documents; and

c) comparing the key data figures of the unit with the average of all industry figure of similar kind (if available) or past figures of the same auditee.

The result of such analysis should be filled in the relevant column of working papers.

3.5.8 Trend Analysis:

Trend analysis is a type of computational support that enables planning by analyzing historical data and working out future projections. Historical data is analyzed to discover patterns or relations that would be useful in projecting the future production, clearances and values etc.

3.5.9 For audit purposes, either absolute values or certain ratios are studied over a period of time to see the trend and the extent of deviation from the average values during any particular period. The analysis of trends as mentioned in the relevant table of working papers may be carried out. (refer Annexure –GSTAM-VIII)

3.5.10 For audit of Traders, a check list is provided in Annexure XII. For audit of tax payers under composition scheme, a check list is provided in Annexure XIII.

3.6 Audit Plan:

3.6.1 The significance of preparing an audit plan is to outline a logical series of review and examination steps that would enable the achievement of the objectives of audit in an efficient and effective manner.

3.6.2 Audit Plan is the most important stage of audit. All the previous steps are actually aimed at preparation of a purposeful Audit Plan. Therefore, it is important that all previous steps are completed and the relevant Working Paper of each of the steps is filled up before commencing preparation of an audit plan. By now, the auditor should be in a position to take a reasonable view regarding the vulnerable areas, the weak points in the systems, abnormal trends and unusual occurrences that warrant detailed verification. Certain unanswered or inadequately answered queries about the affairs of the auditee may also be added to this list.

3.6.3 Audit plan should be a detailed plan of action, preferably in a standard format. The audit plan should be consistent with the complexity of the audits (Annexure–GSTAM-VII).

3.6.4 The summary results of desk review, along with the completed Working Papers, should be submitted to the head of the audit team for approval and guidance, if any.

3.6.5 The audit plan should be finalized after approval of the competent authority as per the extant instructions of the Department. The audit team should put up draft audit plan along with documents received, filled in questionnaire and working papers in the prescribed Performa, related to such auditees to the competent authority. The audit team is expected to carry out preliminary reconciliation, identify discrepancies, if any, and conduct a detailed examination of the records and information (including that already captured in the Master File of auditee) before preparing and submitting audit plan for consideration by higher authorities.

3.7 Objectives of Audit Verification

The objective of audit verification is to perform verification activities and document them in order to obtain and record audit evidence. The verification techniques must be appropriate for audit objectives identified in the audit plan. It is important that in an audit, the objections that are raised are technically correct and stand up against scrutiny or challenge. Law being open to interpretation; it may be difficult to test the technical correctness of all objections. However, it should be correct to the extent that any professional auditor, working with and having access to the same research material would likely to come to the same conclusion. It also means that the auditor must demonstrate, in writing, the research and reasoning used to base her application of legislation, policies and jurisprudence.

3.7.1 Audit verification involves verification of data and actual verification of documents submitted at the time of desk review, verification of points mentioned in the audit plan.

3.7.2 Evaluation of the Internal Controls: The objective of review of internal controls is to assess whether the auditee has reliable systems and controls in place that would produce reliable accounting/business records.

a) Most medium to large companies have ERP systems in place, which account for all transactions from entry of raw material to clearance of final products.

b) Auditors must have a look at these systems and determine whether software being used exclusively for the transactions related to GST matters is integrated to the main ERP system or is running parallel to the main ERP.

c) This assessment would be useful for the auditor to decide on the extent of verification required and to focus on areas with unreliable or missing controls.

d) It should be noted that this review must be commensurate with the size of operations.

e) If the internal controls are well designed and working properly, then it is possible to rely on the books maintained by the auditee. The scope and the extent of the audit can be reduced in such a case. The reverse would be true if the internal controls are not reliable.

f) Audit should evaluate the soundness of internal control of sub-systems/areas like sales, purchase tax, accounting etc., and grade them as good, acceptable and poor (refer Annexure-VIII).

3.7.3 In this regard, an auditor should normally examine the following:

a) Characteristics of the company’s business and its activities;

b) System of maintenance of records and accounts;

c) Identifying the persons handling records for accounting purposes;

d) Allocation of responsibilities at different levels;

e) System of internal checks;

f) Inter-departmental linkages of documents and information;

g) System of internal audit.

3.7.4 Techniques for evaluation of the Internal Controls.

A. Interviewing the Auditee:

The purpose of interviewing the auditee is to obtain information about his business and accounting records. The discussions with the auditee should not be dealt with as a formality to be completed. The discussions should not be rushed as more can be gained by talking to the auditee than looking at the records and understanding how the business works. The accounts will only show the auditor what the auditee wants him to see and what has been declared. Any abnormalities will get highlighted in the discussions/interview. The following aspects need to be kept in mind:

a) Interviews and discussions should be conducted with the person or persons that are knowledgeable about the business and related tax matters. In small to medium sized audits, the interviews will usually be with the auditee himself;

b) In situations where the auditee’s representative is interviewed, the appropriate authorization from the auditee for such representative must be obtained and kept in the audit file;

c) It needs to be ensured that appropriate questions are asked, and auditee is provided with an assurance that audit will be conducted in a professional manner;

d) The information received during the interview should be subject to confidentiality envisaged under section 158 of the PGST Act,2017.

Information may be solicited on following aspects:

a) Business stakeholders;

b) Business banking;

c) Business history;

d) The extent and type of books and records maintained;

e) Non-business history.

It may be noted that a good interview will establish the “Normal” and question the “abnormal.”

B. Touring: Tour the business premises/ factory/ warehouse etc. to establish the equipment/ capital goods in use and the outputs produced by the auditee.

C. Walk-through: This is a process by which the auditor elects any transaction by sampling method and traces its movement from the beginning through various sub systems to the end. The auditor verifies this transaction in the same sequence as it had moved. By this method the auditor can get a feel of the various processes and their inter linkages. It is also a useful method to evaluate the internal control system of an auditee. The auditor can undertake walk through process of sales, purchase, account adjustment systems etc. Certain model ‘Walk- through’ routes are given in Annexure-GSTAM-VI. Similarly, key controls may be examined for recording of all cash transactions: these controls may include scrutiny of numbered cash transaction invoices, daily reconciliation of cash invoices, separation of taxes etc. Undertaking a ‘walk- through’ and conducting ABC analysis during this process would help the auditor in evaluating the system of internal controls in a scientific manner.

D. ABC Analysis: It is a known fact that in any field of activity, enormous data is generated but all may not be equally important. In order to filter out relevant or relatively insignificant data, various techniques are applied. The ABC Analysis is one of such data management techniques. This technique is particularly useful where auditor is required to scrutinize and examine a large volume of data/documents within a limited time period. In ABC analysis the whole data population is classified into three categories (i.e. A, B and C categories) based on the importance, as given below:

> A-category is the class of data that is the most important from the point of view of managing and controlling the same.

> B-category is the class of data, which should invariably be controlled, but the degree of control is not as intense as for A-category.

> C-category is the class of data, which has far less revenue- implications and can be controlled by suitable test-checks.

The auditor can apply ABC Analysis especially where the quantum of data/ information to be analyzed is voluminous. In such a case, the auditor can classify them according to their tendency towards potential risk into A, B and C categories. To give an example, transactions with top five customers/clients of a Auditee may alone be taken up for detailed examination by auditors. Similarly, while verifying credit utilization by the auditee, documents relating to the receipt/procurement of major inputs may be examined. The technique of ABC analysis can also be suitably applied for evaluating the systems of internal controls while carrying out verification.

The above steps viz., tour/study or evaluation of internal controls/walk through etc., are required to be carried out during the stage of actual audit verification.

3.7.5 The auditor should invariably record the findings of the above steps, in the Working Paper (Annexure–GSTAM-VIII).

3.7.6 Verification of points mentioned in the audit plan: While conducting the verification, the auditor is expected to take into account the following aspects:

a) Verification to be conducted in a systematic manner, following the sequence of steps envisaged in the working papers;

b) While conducting audit verification, special care should be taken to examine all those issues pointed out in the audit plan;

c) The auditor should try to determine whether the apparent weaknesses in the internal control system of the auditee have led to any loss of revenue;

d) He should also identify the procedural infractions on part of the auditee, which are recurrent in nature and which may obscure a significant fact;

e) During the process, he must cross check the entries made by the Auditee in various records and note discrepancies, if any;

f) In all cases involving discrepancies, the auditor should make detailed enquiries regarding the cause of the discrepancies and their revenue implication.

Third Party information: The auditor should also examine the documents submitted to various Government Departments/ Regulatory Authorities such as Customs, Income Tax, Banks, etc. by the auditee. This should be used in cross verification of the information filed by the auditee for the assessment of GST. Annexure GSTAM-IX gives utility of some of the documents/ registers of the Auditee that can be deployed by the auditor during the course of verification. Extensive use of information available with open sources such as electronic and print media, internet etc. may also be resorted to for verification of information furnished by the auditee.

3.7.8. The audit verification gives maximum opportunity to the auditor to go through the auditee’s records in his unit. Therefore, auditor may come across a new set of information or documents, not earlier known, during any of the earlier stages. Further, while examining an issue, the auditor may come across a fresh issue also requiring detailed examination. In such a situation, the auditor should go beyond the verification envisaged under the Audit Plan and record the reasons for doing so. Despite audit verification being a structured process, it is flexible enough to accommodate needs on the spot. At the end of each entry in working papers, auditor must indicate the findings. If any of the planned verifications is not conducted, the reasons for the same must also be recorded. While the process of verification for each audit would be unique in terms of Audit Plan, it should involve some general steps as discussed below.

3.8 Physical Verification of Documents: A detailed scrutiny of the financial records of the auditee is an essential exercise to be carried out at the stage of Desk Review. The documents to be examined include Annual Financial Accounts containing Director’s Report, Statutory Auditor’s Report, Balance Sheet and Profit & Loss Account. If necessary, the auditor must go into details of the figures mentioned in the Annual Financial Statements and for that he must examine Trial Balance, Ledgers, Journal Vouchers, 26 AS Statement, Invoices and E-way bills. The auditor may also examine Cash Flow Statement, Groupings, Cost Audit Report and Tax Audit Report. The auditor should also check whether the auditee is maintaining the statutory records as required under various statutes especially those under the Companies Act,2013.

3.9 Working Papers (Annexure –GSTAM-VIII):

a) The working papers form the basis of audit objection. They show the detailed steps undertaken by the auditor during the preparation and conduct of the audit. Therefore, they should be filled carefully, giving observations and conclusions of the auditor duly supported by evidences/documents, wherever required.

b) Each part of the working papers should be filled up on completion of the relevant audit step. The date on which such part is completed and working paper filled in should be mentioned.

c) The working papers should be filled in by the auditors themselves and in no case should be handed over to the Auditee for filling them up.

d) The completed working papers must be submitted by the Audit team with the draft audit report.

e) Copies of supporting documents/records/evidences referred to in the working papers must be annexed at the end. Each copy should have a cross-reference to the relevant entry in the working paper.

3.10 Working papers should support the audit effort and results. They should:

a) be clear, concise, legible, organized, indexed, and cross-referenced;

b) disclose the audit trail and techniques used in the examination of each significant item;

c) support the conclusions reached and cover all queries raised;

d) include audit evidence (eg., copy of a financial statement, an invoice, a contract, a bank statement, etc.) to support the assessment; and

e) link results to supporting working papers e.g. the objections identified in the working papers must agree with the summary of audit results or statement of audit objections and the audit report.

3.11 Apparently, the financial and other documents maintained by the auditee for his private use and in compliance of other statutes are of great importance which may reveal substantial short/non-payments of tax. Annexure-GSTAM-IX provides an illustrative list of such records/documents, as also the relevant information that can be gathered from them. The auditor may take note of the same during gathering of information about the auditee and the system followed by him and go through them during ‘Audit Verification’.

3.12 Apprising the Auditee of irregularities noticed and ascertaining his view point: It is important that the auditor explain and discusses all the objections with the auditee before preparing DAR. The auditee should have the opportunity to know the objections and to offer clarifications with supporting documents. This process will resolve potential disputes at an early stage and avoid unnecessary litigation.

3.13 All the audit objections noticed by the Audit team are to be conveyed to the Auditee with a view to ascertain his point of view before preparing the DAR. Accordingly, the audit objections should be intimated in writing to the auditee, clearly stating that the same is not in the nature of any show cause notice and is only a part of participative and fact-finding audit scheme under which even the preliminary and tentative audit observations are being shared with the Auditee for ascertaining his point of view. Where satisfactory explanation or evidence is submitted to the auditor, the findings should be revised as necessary after obtaining competent authority’s approval. However, if a response from the auditee is not forthcoming, draft audit paras should be prepared on the basis of available records after citing the lack of cooperation on part of the auditee in the Audit Report. It is also the auditor’s responsibility to make sure that the higher authorities are made aware of potential disagreement and the position taken by the auditee.

3.14. Suggestions to Auditee for future compliance

3.14.1. Before leaving the auditee’s premises, the auditor must discuss future compliance issues with the senior management of the auditee. The auditor should also discuss the steps that management can take to reduce specific errors detected during the audit and to improve compliance by suggesting improvements in the accounting systems etc. Written or verbal assurances as given by auditee should be recorded in the Audit Report.

CHAPTER-4 AUDIT – VERIFICATION

4.1 Audit would ideally require checking the following parameters:

a) Outward supply turnover;

> Taxable supply;

> Exempt supply;

> Zero-Rated supply.

b) Rate wise (HSN/SAC wise) bifurcation of the taxable turnover;

c) Inward supply subject to reverse charge;

d) ITC-availment and eligibility;

e) Refund claims, basis thereof, verification of support documents/records, validating granted refunds;

f) Interest for late payments.

4.1.1 Audit of outward supply: Audit of outward supply would comprise of following verification:

a) Declaration of aggregate turnover in return for the period (for each tax period);

b) Correctness of classification of supply;

c) Correctness of tax rate applied;

d) Correctness of exemption claimed;

e) Correct calculation of Output Tax Liability.

4.1.2 Supply:

Supply includes the following:

f) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

g) import of services for a consideration whether or not in the course or furtherance of business;

h) the activities specified in Schedule I, made or agreed to be made without a consideration.

4.1.3 Verification of supply against cash:

The auditor must follow the auditee’s system from the supply of goods or services to the receipt of the money and accounting in cash book of the same. The auditor may be required to check the following aspects:

a) Whether banking is daily or weekly and that all the days in the sample period are accounted for;

b) Check the accuracy of the entries transferred from daybook to supply book;

c) Match the day book to supply book to ensure that entries are correct;

d) Total the day book for the entire tax period to ensure that the gross supply is mathematically correct.

4.1.4 Verification of supply against credit:

a) Understand the auditee’s system of recording supply made against credit.

b) Ensure that the records in support of such supply are in place.

c) Identifying the credit period being extended to various kinds of customers;

d) Ascertaining whether the payment for such supply has been made by customers within time period.

e) Where interest or late fee or penalty has been charged by the auditee for any delay in payment, examine whether applicable GST has been charged on that amount?

4.1.5 Verification of supply against payment through Credit Card:

Where the auditee accepts credit card as payments, the auditor should check that the full value of the supply has been shown in returns. Some credit card companies only return the net value of the transaction after deducting their commission and the auditee may show only the net amount received in their supply.

Example-A registered person supply goods for the value of Rs 20,000/- and accepts credit card as payment. Registered person then files claim to the credit card company for payment, which is received less for the credit card company’s commission (say, 5%)

Supply – Rs 20,000/-

Net received from credit company (-5%) –Rs 19,000/-

Registered person may incorrectly account for supply amounting to Rs 19,000/- in his return. The correct amount of supply would be Rs 20,000/- and same needs to be reflected in the return.

4.1.6 Lease transactions:

Any lease charge received or receivable for the tax period will be part of gross supply. Auditor should be alert in identifying such receipts and to see that output tax, where payable, has been calculated and paid on such value.

4.1.7 Hire purchase transactions:

In relation to delivery of goods on hire purchase or any other system of payment in instalments, value of supply would include the consideration payable to a person for such delivery including hire charges, interest and other charges incidental to such transaction. Output tax liability arises when the hire purchase agreement is entered into and the auditee has to account for output tax in the period in which the agreement is entered into.

In hire purchase transactions, the title of the goods remains with the supplier or the finance company that has the right to repossess those goods, should the customer default in making their payments. Normally, the re-possessor will re-supply those goods to recover the outstanding debt with the customer. Such re-supply is liable to GST and the re-possessor will have to account for output tax liability on such re-supply.

4.1.8 Exchange transactions:

As per Rule 27 of PGST Rules, 2017, in such transactions, there are offers made by the manufacturer or stores to exchange the old item if customer chooses to buy a new item. Usually, discount for the old item is determined as a reasonable price for the used old item. In such cases, the value of supply for output tax liability will be the actual price of product had it not been supplied under exchange and not the reduced price. The value would not be reduced by what has been discounted to customer as price of old item at the time of exchange. The old item received under exchange would be treated as inward supply from an Un­registered person.

For example, a LED TV manufacturer comes out with a scheme for exchange of old CRT Televisions, whether working or not, against buying of new LED TV. The new TV is offered at Rs 25,000 without exchange while it’s offered at Rs 20,000 along with exchange of old TV. The supply value of new TV would remain Rs 25,000 despite the discount in price owing to exchange of old TV.

4.1.9 Discounts:

A bare perusal of Section 15 (3) of the PGST Act,2017 reveals that, only discounts allowed before or at the time of supply, (if such discount has been duly recorded in the invoice issued in respect of such supply) and shown separately in bill/invoice would be deductible from the transaction value.

For example, a discount of Rs 2,000 mentioned in a tax invoice of Rs 10,000 is deductible from the taxable value.

However, the discounts provided after the supply can be excluded while determining the taxable value provided the following conditions are met, namely –

(a) Discount is established in terms of a pre-supply agreement between the supplier and the recipient;

(b) such discount is linked to relevant invoices; and

(b) Input tax credit attributable to such discount has been reversed by the recipient.

4.1.10 Goods/services for own use (Section 17(5)(d)):

Taxpayer will not be entitled for ITC in relation to goods or services availed by him from his business for personal use.

4.1.11 Outward supply to Related/Distinct Persons:

As per Rule 28 of the PGST Rules, 2017 where the goods or services are supplied at a value less than its market value to a related/distinct person, they should be valued at the open market value of such goods or services for output tax liability. However, it may be noted that where the recipient is entitled to avail full ITC for such supply, valuation by supplier need not be questioned.

4.1.12 Damaged goods:

As per Section 17(5)(h), goods purchased that have subsequently been damaged or destroyed in accident/calamity or looted or stolen and cannot be further supplied are to be treated in a way that ITC on such goods, if any, would not be allowed.

4.1.13 By-products:

In any process of manufacture or processing or mining some by-products, in addition to main products may be obtained. The prevailing industry norms on by-products may be checked for cross-verification of the declared share of by-products. In certain trades like food and beverages, the notifications and circulars issued by the relevant government department may also be referred to. If there is significant deviation, it should be recorded in writing. Supply of such by-products, if not exempt, shall attract rate applicable to description of such by-product and not applicable to main product. However, where such by-product(s) are exempt, the claim of ITC on inputs or input services or capital goods used in such manufacture to be proportionately reversed.

While auditing a business engaged in manufacture, audit team should visit/inspect the process at every stage, from initial stage to final output stage, to take stock of any such generation (of by-product) at some stage(s) of production. Ascertain from the disposal of such by-product –

i) Whether such by-product has been supplied; If yes, whether it has been supplied intra-State or inter-State or exported;

j) Whether correct valuation has been applied to such supply;

k) Whether value of supply has been duly accounted for;

l) Whether output tax liability has been declared and due tax is quantified and paid.

It should also be checked if there is some disposal of such by-product (party or fully) by the following means:

a) given away free of consideration;

b) exchanged for other material/ cost of service(s);

c) consumed/used in non-business activity;

d) disposal in any other manner not amounting to supply.

4.1.14 Waste products and scrap:

In any process of manufacture or processing or mining, some waste-products as also scrap, in addition to main products and by-products may be obtained. Supply of such waste-products or scrap, if not exempt, shall attract output tax liability at the output tax rate applicable to description of such waste-product or scrap and not that which is applicable to the main-product. They would be accorded same treatment as that of by-products.

4.1.15 Supply of capital goods:

Where some capital goods of the business, new or used, are supplied during a tax period, such supply would be subject to tax. The audit team should verify from fixed assets/depreciation chart, the disposal of capital goods. Such disposal may be due to supply of such good(s) or parting away for some compensation or loyalty-acknowledgement.

Usually, the value of supply of such capital goods should not be less than the current book value (value net of depreciation) of the same and in case such supply is declared to be of a lesser value than book value, audit must ask for explanation(s)/reason(s) for the same. There may be a case where auditee has deliberately declared less value to reduce output tax liability and is receiving extra money underhand. Further it may be noted that as per Section 18, on disposal of capital goods, taxpayer is liable to pay either tax on transaction value or tax equal to ITC (proportionate), whichever is higher.

Sometimes, organizations felicitate their senior employees on superannuation or retirement by allowing possession/ownership of the capital goods of concern, like cars, refrigerators, air- conditioners, furniture etc. which were being used by such senior employees, at token price or free of cost. Such disposals should also be examined during audit for output tax liability or reversal of ITC.

Further, where discarded machineries are exchanged for new machineries, the exchange value will attract output tax liability.

While auditing, the audit team should tour the premises to ascertain that all the assets, as per assets chart/depreciation chart, really exist in the premises. Items not found to exist may lead to the conclusion of their disposal by supply, unless otherwise is not established. There may be a case, where on verification, new installations of plant/machineries are discovered. Audit team should verify whether the receipt of such Plant & Machinery is recorded in accounts or not. If not, production out of such Plant & Machinery may also have not been declared. Audit team should trace such production and output tax liability on the same, together with input requirements.

4.1.16 Unserviceable infrastructure goods:

Apart from plant and machinery, other scrap material(s), worn-out machinery spares/accessories, furniture, office equipment etc. may have been generated which may have been supplied during the tax period under audit. Supply of furniture and office equipment can be traced from fixed assets depreciation chart. If the office equipment was supplied, it shall attract tax. It may be noted that even disposal of those assets against which ITC has not been availed would be subject to output tax liability on disposal.

4.2 Audit of deductions

4.2.1 Exempt supply:

Exempt supply may be classified into following categories:

a) Supply of goods or services which are taxed at nil rate;

b) Supply of good or services which have been notified as exempt in exercise of power under section 11 of PGST Act, 2017;

c) Non-taxable supply;

d) Supply declared as exempt supply under sub-section (3) of Section 17 of PGST Act, 2017.

To audit exempt supply, the bills of supply issued may be examined in order to verify that:

a) the description and HSN/SAC of supply is same as that mentioned in rate or exemption notification;

b) no output tax has been charged on such supply from the recipient;

c) the auditee normally deals in such goods/services and it is not a standalone transaction. A standalone transaction should always be viewed with suspicion and extra care should be taken while examining such transaction.

It may be noted that exemption notification should be strictly construed and the burden of proof for claiming exemption is upon the auditee.

4.2.2 Zero-rated supply:

To verify the correctness of the refunds claimed, the audit team may examine the following:

a) a statement containing the number and date of shipping bills or bills of export and the number and date of relevant export invoices;

b) a statement containing the number and date of invoices and the relevant Bank Realization Certificates or Foreign Inward Remittance Certificates, as the case may be;

c) a statement containing the number and date of invoices as prescribed in the rules, along with the evidence regarding endorsement specified in the third proviso to sub-rule (1) of Rule 89 of PGST Rules, 2017 in case of supply of goods made to a SEZ unit or a SEZ developer;

d) a statement containing the number and date of invoices, the evidence regarding endorsement specified in the fourth proviso to sub-rule (1) of Rule 89 of PGST Rules, 2017 and the details of payment, along with proof thereof, made by the recipient to the supplier for authorized operations as defined under the SEZ Act, 2005, in a case where the refund is on account of supply of services made to a SEZ unit or a SEZ developer:

In order to verify the correctness or otherwise of the refund claims, the audit team may examine the following documents:

a) Invoices issued;

b) Recipient’s order(s);

c) Delivery documents;

d) Custom’s documentation;

e) Letter of credit (LC);

f) Bill of lading;

g) Insurance documents;

h) Correspondence with the recipients;

i) Banking records;

j) Any other documents that the auditor may deem necessary.

In case of direct export, invoices should be raised to a person who is non-resident of India. There must be a purchase order from purchaser. Normally, there must be an LC issued against supply. Verify from banking records that payment has been received from the same person to whom supply has been declared in invoice.

4.2.3 ITC claim(s):

ITC is another important aspect of GST which requires auditing with utmost skill, caution and expertise.

4.2.4 Important components for auditing ITC claims –

a) Claimant is entitled;

b) Claim is as per entitlement;

c) Inward supply is not put or subjected to a use or consumption which restricts ITC;

d) Goods or services for which ITC have been availed were received by the claimant;

e) Payment for value of inward supply including GST was made within 180 days of receipt;

f) Auditing apportionment and reversals of ITC;

g) Tracing inward supply from unregistered persons.

4.2.5 Inward supply:

The focus while conducting audit of inward supply of an auditee should be on-

a) Gross inward supply of inputs, input services and capital goods;

b) Gross inward supply of inputs or input services liable to reverse charge;

c) Receipts of inputs from an unregistered supplier or otherwise which is liable to reverse charge;

d) Inward supply from related/distinct persons;

e) Inward Imports (direct import from outside India);

f) Own acquired materials such as mined out minerals/material(s).

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CHAPTER 5 PREPARATION OF AUDIT REPORT AND FOLLOW-UP

5.1 Preparation of Draft Audit Report (DAR) and submission of same to Higher Authority 5.1.1 After completion of audit verification, the auditor should prepare the verification report in the prescribed Performa as mentioned in GSTAM-VIII for each issue of the approved Audit Plan. This document should record the results of verification conducted as per the audit plan. Any additional issue (not mentioned in the original plan) verified/ point noticed should also be mentioned. The auditor would then discuss each of such issues with the auditee pointing out either non-payment or procedural infractions. The initial views of auditee must be recorded in the verification document. The auditor should also apprise the auditee of the provisions relating to voluntary compliance and encourage him to take advantage of those provisions in order to avoid disputes and litigation.

5.1.2 Where the auditee agrees with the short levy, as noticed, the auditor should explain the benefit available under Section 73(6) / 74 (6) as the case may be and use persuasion as a measure of recovery of dues along with interest, if any, promptly. Details of spot recoveries and willingness of the auditee to pay short levy should also be recorded. This document would then become the basis for preparation of the draft audit report.

5.1.3 The DAR for the audit conducted by an audit team headed by the ACST shall be approved by DCST and of that headed by STO shall be approved by ACST. The Audit wings shall bring the NIL DARs to the notice of the higher authority for review, who has to record his findings in audit file based on Desk Review.

5.1.4 The narrative of the objections in the audit report should be concise, to the point and self-contained and should convey the gist of objection raised. Telegraphic narration should be avoided. Where the objections are backed by any circulars or clarifications issued by the Department, they should be suitably cited. Cases, in which certain specified conditions are not fulfilled, giving rise to objections, should be clearly brought out. Similarly, where objections are backed by interpretations as decided by the court judgments, decisions of Appellate authorities or supported by technical literature, those should be cited.

5.1.5 The draft audit report may be prepared, preferably within 45 days of the commencement of the audit, and placed before the Monitoring Committee for decision.

5.2 Monitoring Committee Meetings (MCM)

5.2.1 The auditor should submit the DAR to the head of the Audit wing for approval and after approval of DAR the same is to be considered for placing before Monitoring Committee.

5.2.2 MCM should be convened by the competent authority, at least once a month, to which the jurisdiction tax officer as well as the audit wings shall be invited to attend. This will not only facilitate prompt decision making but will also ensure that there is uniformity in raising of audit objections. During the MCM each of the audit objections/ observations would be examined for its sustainability. The MCM should also decide as to whether the extended period of limitation can be invoked or not and also on the applicability of the provisions relating to waiver of SCN in respect of each para (refer Section 73(5) &73(6)/ 74(5) & 74(6) of PGST Act, 2017). The minutes of each such meeting should be drawn, pointing out the decision on each audit objection regarding its sustainability and directions for future action. The objections rejected by the MCM will be treated as closed. Any un-reconciled objection that could not be finalized during MCM on account of any reason may be taken up with higher authority.

5.3. Final Audit Report (FAR)

Based on the decision of the MCM, the FAR should be finalized within thirty days from the date of the meeting. Once the FAR is prepared, it will be treated as conclusion of the audit. As per sub-section (6) of Section 65 of the PGST Act,2017, the auditor is obligated to share the FAR with the auditee. Accordingly, a copy of the FAR, even if it is a NIL report, should be shared with the auditee and necessary records confirming such action should be kept in auditee’s Master File.

5.4 Follow up action

An audit objection should be closed after requisite follow up action i.e., either recovery of amounts due or issuance of SCN, has been taken on it. After the issuance of FAR, wherever further action such as issue of SCN is required, same should be taken in accordance with the administrative instructions issued by the Commissioner of State Tax from time to time.

5.4.1 Each audit report should be examined by the head of the audit wing for any objection with major revenue implication, objection specific to a particular issue or any objection describing novel modus operandi. The same should be selected for issuance of Modus operandi circular within the Department.

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CHAPTER 6 SPECIAL AUDIT

Legal provisions:

Section 66. 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 thereunder.

(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.

Rule 102. Special Audit. –

(1) Where special audit is required to be conducted in accordance with the provisions of section 66, the officer referred to in the said section shall issue a direction in FORM GSTADT-03 to the registered person to get his records audited by a chartered accountant or a cost accountant specified in the said direction.

(2) On conclusion of the special audit, the registered person shall be informed of the findings of the special audit in FORM GST ADT-04.

Following detailed provisions have been laid down in the PGST Act, 2017 regarding the GST Audit to be conducted under special circumstances. This audit is to be exclusively done by CA/ CMA appointed by the Tax authorities.

TABLE 4: PROVISIONS RELATING TO SPECIAL AUDIT

SECTION DESCRIPTION
Sec 66(1) Special audit on direction of Tax Authorities.
Sec 66(2) Period of Completion
Sec 66(3) Effective notwithstanding that the accounts of the registered person have been audited under any other provision of this Act or any other law for the time being in force.
Sec 66(4) Opportunity of being heard to auditee
Sec 66(5) Expenses of the Audit & Submission of Audit Report
Sec 66(6) Consequences

When will be conducted?

During any scrutiny / investigation/inquiry/ any other proceedings, if the ACST feels that the taxable value has not been correctly declared or wrong credit has been availed, then he may direct a Special Audit to be carried out by a CA or a Cost Accountant with the prior approval of the Commissioner.

Table 5: Special Audit

SECTION DESCRIPTION
Sec 66(1) Audit by Tax Authorities
Who exercise Power can the When can this be Exercised

 

– the value has not been correctly declared or

– the credit availed is not within the normal limits

– the value has not been correctly declared or

Triggers – the value has not been correctly declared or

– the credit availed is not within the normal limits

Intimation Assesse to – a communication in writing to get his records including books of account examined and audited
Audited by – by a CA or a Cost Accountant nominated by the Commissioner

Sec 66(2) Period of completion

> 90 days

Extension in period by Assistant Commissioner

> Further period of 90 days

Submission of report by CA/ CMA appointed

> within the period of ninety days of start Report to whom

> Assistant Commissioner (who ordered for special audit)

Sec 66(3) – Effective notwithstanding that the accounts of the Registered person have been audited under any other provision of this Act or any other law for the time being inforce.
Sec 66(4) – Opportunity of being heard to auditee after completion of audit
Sec 66(5) – Expenses of Audit and submission of Audit Report

  • All incidental expenses of conducting audit
  • All direct expenses of conducting audit
  • Remuneration of auditors

Determined & Paid by– Commissioner

Sec 66(6) Consequences -Results based consequences

– Where the audit conducted results in detection of

  • tax not paid or
  • such short paid or
  • erroneously refunded, or
  • ITC wrongly availed or utilized, the proper officer may initiate action under Section 73 or 74

Documentation/ Records to be reviewed while conducting Special audit

Records to be kept by the registered person who is required to get his accounts audited by a CA or Cost Accountant under Section 66 are detailed here under:

a) Account of Production or manufacture of goods;

b) Details of inward supply and outwards supply of goods and services;

c) Records of stock of goods;

d) Account of ITC availed;

e) Details of Output Tax Payable and paid.

Requirement of situation for invoking provisions of special audit:

(i) There must be a proceeding pending in respect of auditee, of-

a) Scrutiny;

b) Inquiry;

c) Investigation; or

d) Any other proceedings.

(ii) There must be an observation by ACST that such auditee-

a) has not correctly declared value; or

b) has not availed credit within the normal limits;

(iii) Prior approval of Commissioner has been obtained.

‘Any other proceedings’ used for initiating special audit is wide enough. However, there must be observation for need of special audit. Specific issues on which audit of accounts is to be carried out should be listed and communicated to CA or Cost Accountant authorized to carry out Special Audit. Such audit is to be completed in prescribed time.

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ANNEXURE — GSTAM – I

(Auditee’s Master file— RPM F to be updated on regular intervals)

ANNEXURE II

FORM GST ADT – 01

ANNEXURE — GSTAM — III

ILLUSTRATIVE LIST OF IMPORTANT DOCUMENTS FOR SCRUTINY AT DESK REVIEW STAGE

ANNEXURE – GSTAM – IV

RATIO ANALYSIS OF DATABASE

ANNEXURE V

Only for those registrants who are required to file Annual return u/s 44 of the PGST Act

COMPARATIVE CHART OF ITEMS FROM FINANCIAL STATEMENTS/ RETURNS

ANNEXURE – GSTAM- VI

QUESTIONNARE FOR REVIEW OF INTERNAL CONTROL SYSTEM AND WALK THROUGH.

ANNEXURE — GSTAM — VII

AUDIT PLAN

ANNEXURE VIII:

WORKING PAPERS

ANNEXURE — GSTAM — IX

VERIFICATION OF RECORDS/REGISTERS DURING THE COURSE OF AUDIT VERIFICATION

ANNEXURE — GSTAM- X

DRAFT OF THE notice TO BE WRITTEN BY THE AUDITEE UNDER SECTION 73(6) OF THE PGST ACT, 2017

ANNEXURE — GSTAM- XI

Form GST ADT — 02- Audit Report under section 65(6)

GSTAM ANNEXURE – XII

CHECK LIST FOR AUDIT OF TRADERS

Download Full Text of Punjab GST Audit Manual with Annexures

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