1. There are two clauses (viz. Clause 4 & 44) pertaining to the GST in the revised 3CD tax audit report which has been made applicable from 20.08.2018.

2. Clause 4 deals with the factual information regarding the GSTIN, if the assessee is registered. Since Income Tax is PAN based (i.e. entity level) whereas GSTIN is at State level or business-vertical level, all the GSTIN’s which are obtained under a single PAN during FY 2017-18 are required to be mentioned in the report. As an example, even ISD GSTIN is to be reported under the said Clause. Tax Auditor is not however expected to venture into an investigation as to whether an assessee was required to obtain GST registration in some State or not. As an auditor under the Income Tax, he is only required to report the facts.

GST Clauses in 3CD Form

3. Clause 44 reporting seems to be like throwing darts in the dark. We say this because apparently there seems to be no logical connection between a claim made under the Income Tax Law with the information sought. But like many experiments of the present Government, this experiment may lead to some unexpected consequences for some tax payers.

4. Clause 44 deals with the break-up of expenditure. Said break-up is sought firstly into two broad categories viz. expenditure from registered entities and expenditure from un-registered entities. In the case of expenditure from registered entities, further sub-classification is sought into expenditure attracting nil rate or exemption, expenditure from composition supplier & the balance expenditure from registered entities. Further even the amount of the payments made to the registered entities is sought. It must be remembered that only break-up of expenditure is sought and not income.

5. Presently following data is captured in GSTR-3B:

a. Taxable value and tax payable on the inward supplies liable to reverse charge (Table 3.1(d)).

b. Tax amount in case of supplies eligible as well as ineligible for Input Tax Credit (ITC) (Table 4).

c. Supplies received from a supplier under composition scheme, Exempt and Nil rated Supply as well as Non-GST supply, all of them, bifurcated into inter-state & intra-state supplies (Table 5).

6. On the other hand, Clause 44 requires data in the following 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
(1) (2) (3) (4) (5) (6) (7)

7. From the above, it clearly appears that there is disconnect between the two data sets. GSTR-3B is based on “inward supplies” whereas Clause 44 is based on “total expenditure”. Hence an assessee will have to prepare two sets of reconciliation statements. One under the GST Laws to reconcile the figures reported in audited accounts with the annual return (which will be “supply” driven reporting) and another under Income Tax Laws to reconcile the figures reported in the audited accounts with the figures which “can be” reported under clause 44 (which is an “expenditure” driven reporting bifurcated into “supply” driven reporting but different from the annual return under GST !!) since the said clause seeks break-up of expenditure into that from GST registered entities and otherwise.

8. However, if an assessee has filled all the relevant fields of GSTR-3B (most wouldn’t have !!) and hence has working in support of the same, the task of reconciliation can get somewhat easier. As an example, if an assessee has filled up Table 5 in GSTR-3B, the working in respect of the same can facilitate bifurcation as sought under Clause 44.

9. Following further points may be noted to fill up the information sought under Clause 44:

10. For FY 2017-18, since the first three months were under the earlier regime & next nine months under the GST regime, assessee will have to prepare two sets of trail balance along with financial statements for the concerned period since the data sought under Clause 44 only pertains to GST (i.e. nine months). For the listed companies, this should not be an issue since they would have already prepared quarterly financial statements. For other assessee’s extra work will be required.

11. Once the nine months’ financial statements are ready, assessee is required to go head-wise for every expenditure to work out the break-up. Let us deal with major heads of expenditure now.

12. Cost of Goods sold: This head will contain the purchases adjusted for the stock movements. Break-up of the purchase data needs to be obtained as required under Clause 44. One option can be to show only the break-up of all the purchases under Clause 44 and show stock adjustment in the reconciliation statement. Alternatively, on the basis of FIFO method, the break-up of the expenditure can be obtained by identifying the invoices pertaining to the goods in stock (i.e. opening as well as closing). Since there are no separate columns for reporting imports, the same must be shown as an expenditure from the unregistered entity.

13. Salary & Wages: It may be noted that services provided by the employee to the employer in the course of employment is not regarded as a supply as per Entry No. 1 of Schedule III to the CGST Act. Hence such expenditure cannot be broken up into that from registered entity and that from non-registered entity. Said expenditure can be shown in the reconciliation statement.

14. Depreciation: Since this is a non-cash expenditure, the same cannot be broken up into that from registered entity and that from non-registered entity. Said expenditure can be shown in the reconciliation statement. As far as capital procurements are concerned, one may take a view that since the same is not an expenditure claimed under the Income Tax Law (since depreciation is allowed), the same need not be reported. Another view can be that since the capital procurements are in the nature of “capital expenditure” which can form part of the “total expenditure”, the same needs to be reported under Clause 44. A clarification from the Government in this regard shall be greatly helpful to ensure uniform practice.

15. Interest: Supply of services by was of lending where the consideration is in the form of interest is treated as an exempt supply. Hence interest expenditure from a financial institution, which is registered, must be shown as an expenditure related to exempt services from the registered entity.

16. Provisions: Since the actual expenditure is yet to be incurred in respect of provisions, the said shall not form part of the break-up as only upon receiving the invoices that one can come to know about its type for the purpose of classification. Said view gets support from the fact that such expenditure will be reported as “inward supplies” under GST only upon receiving the services for claiming the input tax credit.

17. Reimbursements: It is possible that an employee might have claimed reimbursements in respect of expenses incurred for the purpose of business. Such expenses might have been incurred from registered entities or unregistered entities. Hence details required under Clause 44 can be obtained only if such reimbursements are properly accounted into the categories sought.

18. Discounts: Such deductions need to be adjusted based on whether the same are from registered persons or otherwise and accordingly reported.

19. Loss on sale of assets: Since the said expenditure does not involve any supply from registered entity or otherwise, it shall form part of the reconciliation statement.

20. Provision for taxation: Since the said expenditure does not involve any supply from registered entity or otherwise, it shall form part of the reconciliation statement.

21. From the above it appears that the details sought under Clause 44 cannot be readily obtained. Reconciliation statement is must. Whether one should attach such statement along with the Tax Audit Report ?? Before answering the question, it is essential that a tax auditor obtains a certified reconciliation statement from the assessee (assessee may approach GST Auditor for the same) which can act as a base for certifying the figures reported under Clause 44. As far as attaching the reconciliation statement with the tax audit report is concerned, legally one is not obliged to attach such statement. One may however decide to attach the same to avoid any query on the preliminary scrutiny of the tax audit report as well as the financial statements by the tax officer.

22. Before we end we may also address whether the details sought under Clause 44 are to be reported in aggregate or nature-wise. Readers would observe that there is no separate column under Clause 44 to report the nature of expenditure. Hence aggregate figures can be reported which are duly supported by a reconciliation statement. Alternatively, head-wise reporting can also be done (although the tax auditor will not be able to report the description of the head against every figure of the expenditure) duly supported with the head-wise reconciliation statement.

23. It is submitted that without any clear cut guidelines on the way to report the information called for under Clause 44, there will be no uniformity as well as comparability of the information sought under the said clause over the years. Hence it is suggested to the Government to come out with a format of a reconciliation statement (they will have to anyway do the same for GST Annual Return) for reporting under the said Clause, if the reporting requirement is going to stay.

(views are strictly personal)

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June 2021