In this article we will discuss the clauses pertaining to the GST in the revised FORM 3CD as amended vide CBDT Notification No. 33/2018 dated 20.07.2018.
1. Vide Notification No. GSR 666(E) (No. 33/2018) dated 20.07.2018, FORM 3CD as appearing in the Appendix II to the Income Tax Rules, 1962 has been amended w.e.f. 20.08.2018 to provide for certain additional details. In this article we shall be concerned with the clauses pertaining to the GST in the revised FORM 3CD.
2. Before we deal with the changes it may be noted that the revised form is made applicable only in cases where the audit report is filed on or after 20.08.2018. Hence for Tax audit report filed before such date, old form shall apply. This appears to be discriminatory because for the same year, some auditors shall be filing the new form whereas some will be filing the old form. Also as we shall see later, the information sought in the revised form will be very difficult to dig out and hence it would have been better if such requirements could have been communicated well in advance i.e. before the implementation of GST so that the tax payers can maintain such information from the start. Now let us deal with the specific clauses. Two clauses have been modified/inserted with respect to GST.
3. Clause 4 of Form 3CD is being amended to seek details of GSTIN in cases where the assessee is liable to pay the GST. This is very much necessary since we do come across cases where a person though liable to pay indirect taxes was not registered but declares the turnover exceeding the thresholds in the Income Tax Return. Hence asking for GSTIN where the assessee is liable to pay the GST seems to be fair.
BREAK-UP OF TOTAL EXPENDITURE
4. Clause 44 in Form 3CD is being inserted to provide for the disclosure of the break-up of total expenditure in respect of the entities registered or not registered under GST in the below format:
|Sl. No.||Total amount of Expenditure incurred during the year||Expenditure in respect of entities registered under GST||Expenditure relating to entities not registered under GST|
|Relating to goods or services exempt from GST||Relating to entities falling under composition scheme||Relating to other registered entities||Total payment to registered entities|
5. Key concerns with respect to the above clause of Form 3CD are as under:
a. In Ghai Construction State of Maharashtra  184 Taxman 52 (Bom.), the Court explained that the audit under section 44AB was introduced following the recommendations of the Wanchoo Committee in its final report in December 1971. The Wanchoo Committee, inter alia, recommended mandatory audit at least in the big cases. The recommendation was with a view to saving considerable time for the Assessing Officer which could then be utilized by them for more important investigational aspect of a case. The Finance Minister’s speech presenting the Union Budget for 1984-85 explains the rationale as “intended to ensure that the books of account and other records are properly maintained and faithfully reflect the true income of the taxpayer.” Hence the whole idea of audit u/s 44AB of the Income Tax Act, 1961 was to ensure that the books are correctly maintained and income is rightly computed as per the provisions of the law.
With the above background, seeking the break-up of total expenditure will not have any bearing on the computation of income since the allowability of expense does not depend on whether the expenditure is incurred in respect of entities registered under GST or otherwise. Moreover a needless bias may get created in respect of expenditure from unregistered persons which may lead to making fishing inquiries. Hence we submit that the Tax Audit Report is not the correct place for such details.
b. Word “audit” is not defined in the Income Tax Act, 1961. In Bajrang TextilesDy. CIT  3 SOT 115 (Jodh.) it was held that the word “audit” does not refer to preparation and compilation of books of account. It only refers to expression of opinion on such books of account to verify the true and fair financial results of the assessee. The details sought under Clause 44 are merely factual in nature and does not warrant an opinion of an auditor on the same. Hence such details, even if sought, should not be part of the Audit Report.
c. Information sought under Clause 44 is, in another way, already part of the Annual Return under GST which is to be filed along with the reconciliation statement as per Sec. 35(5) read with Sec. 44(2) of the CGST Act, 2017. Due date for furnishing the Annual Return is 31st December and hence what is the point in seeking similar details in the tax audit report which precedes the date of filing under GST. Said reconciliation statement under GST is a much better tool to ensure the correctness of data than the table under Clause 44. This is because such reconciliation statement starts with figures as per audited accounts and reaches the figures as per the GST annual return. What is asked under Clause 44 is not possible since it requires the “total expenditure” to be bifurcated into only two categories.
d. Tax auditor will not be in a position to certify the same since he may have limited time as well as knowledge of the GST. It is best that such details are certified by the GST Auditor as part of the reconciliation statement which is already provided under the CGST Act, 2017.
e. Quantum of such break-up will not serve any purpose under the Income Tax. Department will not be able to do any data mining on the basis of the data sought and identify the revenue leakages by cross-confirmation of the turnover of various suppliers with the expenditure of their recipients.
f. Every expenditure may not necessarily lead to a supply under GST. As an example, salary expense is treated as neither supply of goods nor supply of services as per Entry No. 1 of Schedule III to the CGST Act, 2017. Another instance can be of capital goods wherein only depreciation forms part of the expenditure whereas input tax credit is claimed on entire purchase. Hence it is impossible to provide break-up for “total expenditure” into GST and non-GST expenditure without doing the reconciliation.
g. Accounting system at many small and medium enterprises is not geared for pulling out such information since the said requirement has been announced after the end of the year.
h. One should appreciate that during FY 2017-18, first three months were under the old regime and nine months thereafter are under the GST regime. Hence it is not possible to break-down the “total expenditure” into only two categories as sought.
i. Seeking the quantum of total payments made to the registered entities will not serve any purpose since the expenditure is recorded on accrual basis. Such information is also very difficult to obtain.
j. Separate field is not there for import of goods/services. Hence the quantum to be shown in the field “Expenditure relating to entities not registered under GST” will not give the accurate picture of goods/services obtained only from the unregistered suppliers since the said field will also include imports.
We thus suggest the Government to kindly appreciate the above concerns and appropriately modify/omit Clause 44 of Revised Form 3CD. In our opinion it is better to omit the clause since the details in much granular form will be captured in the GST returns. Income Tax officer can always scrutinize such returns for any irregularities.