Introduction

With the removal of CA/CMA mandatory external audits under GST and the beginning of GST departmental audits, it is important that a chartered accountant can support the client during their self-certification of the GSTR 9C. This increases the risk of completeness and accuracy of details filed by the entity and burdens top management. Being aware of the various issues/clarifications that can be obtained by reading the Audited Financial Statements (AFS) is an important tool presently. In this article, we aim to provide some insights on important areas to focus upon, areas not having a bearing under indirect taxes and value additive indicators.

Reading of Financial Statements under Indirect Taxes

Utility of reading AFS correctly

1. Integral part of ‘Desk Review’ function – informed about client and industry before first meet.

2. Indicators to verify indirect tax compliance/non-compliance

3. Clarification on queries without disturbing the client

4. Indicators of areas that need to be considered outside of AFS

5. Enhanced services during GST reviews, GSTR 1, 3B, 9 & 9C filing assistance.

Useful tips on reading AFS:

  • Notes to Accounts may be used to understand related party transaction and details against information provided in Balance sheet and Profit & Loss.
  • Opinion of auditor – sometimes, qualifications are made in dire circumstances w.r.t going concern, non-compliance of major statutory provisions. Basis of Opinion, Emphasis of Matter helps identify other important issues.
  • Director’s report – summarized performance, changes in nature of business, capital expenditure details, remuneration to non-executive/independent directors, etc. gives concise IDT indications.

 AFS Areas not having IDT Impact

1.Reserves & Surplus 2.  Bad debts written off/back
3. Interest Income (borrowings) (although exempt supply no ITC reversal) 4. Provisions against expenses (other than associated enterprises-RCM)
5. Finance costs 6. Other statutory dues payable (other than RCM possibility)
7. Loans & Advances (assets) 8. Cash flow statements/balances
9. Depreciation & Amortization (ITC not be availed on depreciation) 10. Forex gain/loss
11. Majority of employee benefits 12. Change in inventory
13.  Deferred tax 14. Earnings per Share

Indicators from Balance Sheet (BS) with Notes 

Balance sheet & Notes GST Impact
Share holding GST liability & ITC impact w.r.t merger/de-merger/transfer; Registration in portal – Amend & Signing (change in signatory)
Gratuity ITC eligible on gratuity insurance as it is not life/health insurance
Govt. Grants Other than CG/SG, consideration received in form of grants/subsidy would be liable under GST. (Ex: NGOs/ NPOs)
Trade payables Rule 37 – 180 days ITC reversal provision can be verified.

ITC to be reversed and re-claimed upon payment.

Note: Rule not applicable w.r.t Retention money unpaid.

Current liabilities GST not applicable on mobilization advance.

GST applicable on advance against services only (not goods)

Property, Plant & Equipment

 

1.  Land & Buildings: Additions – GST eligible on ancillary; Deletions – ITC reversal (common credits)

2.  Plant & Machinery (others): Additions – ITC eligibility incl. civil structures/ construction; Deletions – Section 18(6)

3. Motor Vehicles: Additions – ITC eligibility check; Deletions – Margin method/full rate liability.

Note: Rule 43 – ITC reversal w.r.t Capital Goods used for taxable + exempt supply. (Computational challenge)

Intangible assets

 

Cross charge implications if multiple GSTINs.

Absence of asset/expense may indicate related party transaction.

Trade Receivables Decision to raise credit note before September month GSTR3B due date following the financial year (only due to deficiencies)

Note: Option of Refund against write-off of non-receivables – Payment from customer and valuation can be said to be linked, and if payment fails, levy fails. (disputable)

Inventories

 

1. Imports: Possible Customs/FTP benefits to be explored

2. Related party purchase: Valuation check

3. Write-off/disposals: Raw material – ITC reversal, semi/FG – ITC eligible (as used in business – disputable)

4. Scrap/Further supply: Classification & Rate applicability

5. Loss: ITC reversal may be required for abnormal loss only

GST dues & Balance with govt. authorities 1.  Indicates – interest & possible SCN/demand on past dues

2.Identify – Status, accumulation reason & re-claim to bank

3. Credit & cash balance – books vs GST portal

Other current assets 1. Type of incentives (Ex: MEIS, CER, etc.), possible GST on scrip/security sale

2.Time of supply implication (Accounting standards vs GST)

Profit and Loss & Notes GST Impact
Revenue from operations (goods/services) 1. Levy, valuation, classification, Time & Place of Supply verification

2. Exempt supplies/certain Sch III items – ITC reversal impact

Other indicators: E-invoice compliance/ PLI scheme/State incentives

Other Income (identify goods/services only) Levy, valuation, classification, Time & Place of Supply verification

Indicates – Non-GST supplies/Sch III items for GSTR 9 disclosure.

Segment reporting 1.  SEIS, MEIS/RODTEP benefits realized against exports.

2. Imports – FTA between countries, CEPA and can also be explored.

Employee benefit expenses

 

1. Sch III no GST. (incl. ex-pat salary)

2. ITC eligibility to be verified (ex: insurances, necessity goods like water, medicine, gifts, recreational/business trip, etc.)

Conveyance

 

1. Women employee travel beyond 8:30 pm – statutory obligation – ITC eligible (Ex: in Karnataka)

2. 13-seater + vehicles – ITC eligible

3. Goods vehicle – ITC eligible

4. Reimbursements GTA/rent-a-cab – RCM liability

Power & fuel Table 5 GSTR 3B – inward – exempt & non-GST supply disclosure
Freight

 

1. GTA (agency) vs GTO (operator – exempt and not under RCM)

2. FCM vs RCM (5% vendor beneficial if credit ineligible)

Rent

 

1.  ITC eligibility (different state billing – ineligible)

2.Residential – exempt – even if recovered from employees

Repairs & Maintenance/Building expenses 1. Motor Vehicle: Depends on vehicle eligibility

2. Premises: Eligible when it is an expenses

3. Plant & Machinery: Eligible

Communication costs & Bank charges ITC eligible but GSTIN missed in Tax Invoices – Internet, Telephone, bank charges (tax invoice not just statements.)
Food & Beverages (F&B)

 

Canteen – mandatory – ITC eligible as per Factories Act/Rules.

Water – ITC eligible (it is not ‘beverage’)

Others F&B – ITC ineligible

Professional fee

 

1. ITC eligibility

2. Possible RCM on import of services

Legal fee

 

1.  RCM & ITC

2. Non-advocates/non-legal activity considered under this head for RCM incorrectly.

Rates & Taxes; Subscriptions

 

1. RCM on CG/SG/LA services not being exempt (ex: Leased line license from Ministry of Telecom). Verification of ‘supplier’ not being governmental authority/entity and transaction if liable/ exempt as per rate notifications.

2. Subscriptions – Import of services – Form 27Q/Credit card forex payments

CSR

 

Possibility to claim ITC subject to general ineligibility. (disputable)

Helps increase social expenses, positive for India.

Other common costs (Ex: IT Costs) Requirement of ISD to transfer credit to GSTINs utilizing such services. (multiple GSTINs)
Profit/Loss of sale of FA

 

1. Motor Vehicle: Margin/full value liability

2. Section 18(6) – 5% per quarter reduction requirement.

3. WDV block concept can be adopted instead of date of sale.

Generally, a reconciliation item for GSTR 9C Vs AFS.

Related Party disclosures

 

1. Classification of goods/services

2. Valuation supply-wise

3.  ITC eligibility

RPT – Directors

 

RCM liable on directors sitting fees/any other services rendered in the capacity of director.
Advertisement, Sales promotion expenses 1. RCM on sponsorship

2. ITC eligibility on sales promotion

Other Inferences & Areas outside AFS

Few important areas being part of the Notes to Accounts but not part of BS / PL is:

  • Globally accepted HSN code for business conducted
  • Annexure IV import of service details
  • Key concerns from management’s report
  • CARO Report – to identify consideration in kind.
  • Requirement of registration under Acts – possible RCM liability
  • Foreign currency transactions – Indicates:
    • Possible RCM liability on Import of services (obtain Form 27Q for verification).
    • ITC eligibility against Import of Goods & RCM payments
    • Refund issues due to non-receipt of forex (FIRC/e-BRC)
    • FTP & Customs benefits on outward forex. (Exemptions, SEIS, RoDTEP, MOOWR)
  • Contingent Liability – Indicates:
    • Possible liability which may have GST impact when transaction is with related party (ex: corporate guarantee)
    • Disputed payments which may be liable under RCM (ex: Govt./related expenses)
  • Pending Disputes – Indicates:
    • Areas of contention, and ability to provide an independent view on the dispute under indirect taxes – Reason for dispute, value, status can be identified.
  • Other areas outside AFS
    • RCM on purchases from unregistered persons (Jul – Oct 2017)
    • ITC on import of goods received free of cost (Delivered Duty Paid)
    • Refund eligibility on Exports without receipt of forex. (Ex: Samples)
  • Absence of certain common expenses or incomes may indicate possible GST/RCM liability, different accounting practices followed too.

Conclusion

The self-certification of Form 9C by the taxpayer would need the ability to identify issues and provide solutions. In the process of doing so, value addition is also possible. Interpreting and analyzing a Financial Statement keeping in mind GST, Customs, FTP rules and regulations, helps to also focus on critical areas, reduces costs & client interaction and therefore results in overall client satisfaction. This article would be useful for qualified professionals, assistants and articles engaged in GST compliance.

*****

Acknowledgement This article was uploaded in KSCAA Journal September 2021 (modifications made post upload).

Suggestions or feedback can  be sent to [email protected] or [email protected]

Author Bio

Qualification: CA in Practice
Company: Hiregange & Associates
Location: Bangalore, Karnataka, India
Member Since: 01 Feb 2019 | Total Posts: 13
Partner of Audit and Assistance in Hiregange and Associates (BLR), having 15 locations across India. Expertise in Indirect taxes especially GST. View Full Profile

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