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AUDIT at a glance under the GST Law

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AUDIT at a glance under the GST Law
By: RameshKumar Patodia
December 6, 2018
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The Goods and Services Tax regime which was introduced with effect from the 1st day of July 2017 consolidating most of the indirect taxes with a view to increasing the tax base has been considered to be the most revolutionary move in the arena of indirect taxes. The new tax law has brought about a paradigm shift in the process of levy and collection of taxes with a special emphasis on compliances in the light of which due importance has been given to self-assessment and audit procedures for ensuring proper compliance under law, similar to that as was given in the erstwhile regime.

The previous direct tax and indirect tax legislations provide for audit in various manners in order to ensure compliance of the respective laws and the GST legislation also provides for the same considering the fact that under the GST regime emphasis is given to the self assessment with checks and balances in the light of artificial intelligence available through the modern GST network to ensure that all the concerned assesses under the GST law properly assess and pay the GST so that there is no loss of revenue to the Central and State Governments  and with this end in view Section 35(5) of the Central Goods and Services Tax Act, 2017 [CGST Act, 2017] mandates that all registered persons whose turnover during a financial year exceeds the prescribed limit which is Rupees two crores, should get their accounts audited by a chartered accountant or a cost accountant.

The present article seeks to analyse the salient features of the provisions relating to audit under the GST law as well as the amendments that have been carried out in the direct tax laws in so far as they relate to the audit under the Income Tax Act, 1961.

General meaning of the term “Audit”

An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain as to how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern in pursuance of the requirements of law. The auditor perceives and recognises the propositions before them for examination, obtains evidence, evaluates the same and formulates an opinion on the basis of his judgement which is communicated through his audit report.

Meaning of the term “Audit” under the GST law

Now, after understanding the general meaning of the term “audit” and its importance, it is pertinent to note that audit under the GST law is defined under sub-section (13) of Section 2 of the Central Goods and Services Tax Act, 2017 as examination of records, returns and other documents maintained or furnished by the registered person under this Act or the Rules made thereunder or under any other law for the time being in force, to verify 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 the rules made thereunder.

Mandate of Audit under the GST Law

Section 35(5) of the CGST Act, 2017 and Rule 80(3) of the CGST Rules, 2017

In this regard, it is imperative to note that as per sub-section (5) of Section 35 of the Central Goods and Services Tax Act, 2017, 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. Further, Rule 80(3) of the Central Goods and Services Tax Rules, 2017 states that “every registered person whose aggregate turnover during a financial year exceeds two crore rupees shall get his accounts audited as specified under sub-section (5) of section 35 and he shall furnish a copy of the audited annual accounts and a reconciliation statement, duly certified, in GSTR 9C, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner”.

Section 44(2) of the CGST Act, 2017 – requirement to furnish annual return in Form GSTR -9, Reconciliation statement in Form GSTR-9C and a copy of the audited annual accounts

In this regard, it is further imperative to note that section 44(2) of the Central Goods and Services Tax Act, 2017 provides that “every registered person who is required to get his accounts audited in accordance with the provisions of sub-section (5) of section 35 shall furnish, electronically, the annual return under sub-section (1) along with a copy of the audited annual accounts and a reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement, and such other particulars as may be prescribed”.

Section 44(1) of the CGST Act, 2017 and Rule 80(1) of the CGST Rules, 2017

In this regard, it is important to note that sub-section (1) of section 44 as referred in sub-section (2) of section 44 as quoted hereinabove provides that “every registered person, other than an Input Service Distributor, a person paying tax under section 51 or section 52, a casual taxable person and a non-resident taxable person, shall furnish an annual return for every financial year electronically in such form and manner as may be prescribed on or before the thirty-first day of December following the end of such financial year. In this regard the relevant Rule 80(1) of the Central Goods and Services Tax Rules, 2017 provides that “every registered person, other than an Input Service Distributor, a person paying tax under section 51 or section 52, a casual taxable person and a non-resident taxable person, shall furnish an annual return as specified under sub-section (1) of section 44 electronically in Form GSTR -9 through the common portal either directly or through a Facilitation Centre notified by the Commissioner”.

Meaning of terminologies employed in the provisions referred to hereinabove

Now, after taking note of the relevant provisions of the GST law which specifically deals with audit, in order to understand the scope of the applicability of audit under the GST law, it is imperative to understand the meaning of certain terminologies as stated herein under and which have been employed in the provisions of GST law as discussed and reproduced hereinabove:

  1. Records
  2. Returns
  3. Other documents
  4. Turnover
  5. Aggregate Turnover
  6. Audited annual accounts
  7. Reconciliation statement

Records:

The term “records” have not been specifically defined under the Act. Hence, recourse has to be had to the general meaning of the term as given in various legal dictionaries. In this regard, the advanced law lexicon by P. Ramanatha Aiyar [3rd Edition, 2005] at page no. 3994 defines record as “documents which a historian would regard as original or primary sources, that is documents which either give effect to a transaction itself or which contain a contemporaneous register or information supplied by those with direct knowledge of the facts”.

Further, the Black’s law dictionary (ninth edition) on page no. 1387 defines record as “1. a documentary account of past events, usu. designed to memorise those events. 2. Information that is inscribed on a tangible medium or that having been stored in an electronic or other medium is retrievable in perceivable form”.

Moreover, in the absence of any specific definition in the GST law, it must be ensured that whatever records are maintained are appropriate to determine a true and correct account of information as prescribed under section 35(1) of the Act which is as under:

  1. Production or manufacture of goods;
  2. Inward and outward supply of goods or services or both;
  3. Stock of goods
  4. Input tax credit (ITC) availed
  5. Output tax payable and paid
  6. Such other particulars as may be prescribed

Return:

Further, the term “return” has been defined under section 2(97) of the Act, as any return prescribed or otherwise required to be furnished by or under this Act or the rules made thereunder.

Other documents:

The term “other documents” has again not been defined under the Act but while defining the term “audit” under section 2(13), ibid. the language used is “other documents maintained or furnished by the registered person under this Act or the Rules made thereunder or under any other law for the time being in force” which implies that for the purposes of audit under this Act, other documents maintained or furnished under this Act or under any other law for the time being in force may also be examined in addition to documents maintained under the GST law.

Turnover:

Further, the term “turnover” has not been defined specifically instead “turnover in State” or “turnover in Union territory” has been defined under section 2(112) as the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess”;

Aggregate Turnover:

Further, the term “aggregate turnover” has been defined under section 2(6) of the Act as “the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess”.

Audited Annual Accounts:

The reference to ‘audited annual accounts’ in section 44(2) of the Act, when analysed in the light of the GST law can only be taken to mean the audited annual accounts as required to be maintained by the registered tax payer under the other laws by which the tax payer is governed in absence of any specific definition under the GST law. The relevant provisions of Section 128 and Section 134 of the Companies Act, 2013, Section 44AA and Section 44AB of the Income Tax Act, 1961 therefore assumes importance.

Reconciliation Statement:

Reconciliation Statement has been discussed in section 44(2) of the Central Goods and Services Tax Act, 2017 as a statement (which is required to be furnished in Form GSTR 9C) reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement, and such other particulars as may be prescribed.

Role of the auditor:

Now, after taking note of the above, it is important to note that since GST audit would be undertaken for the very first time in F.Y. 2017-18, a lot of preparation is required both on the part of the auditor and the auditee and in this regard, it is important to note that an auditor should verify that the following processes inter alia have been completed before finalisation of the books of accounts:

1.

Registration:

a.

Whether registration has been obtained in accordance with the provisions of the GST Law and any correction/changes in the particulars incorporated in the application form have been suitably given effect by way of amendment in the registration certificate?

b.

Whether details of each place of business have been incorporated in the registration certificate?

2.

Transitional Credit:

a.

Whether transitional credit as carried forward in Form GST TRAN-I is in accordance with the law?

b.

Whether credit carried forward inappropriately has been reversed along with applicable interest?

3.

Valuation and Payment of tax liability and review of GST returns filed:

a.

Whether valuation has been done in accordance with the provisions of law and applicable taxes both under forward charge and reverse charge has been correctly discharged under the correct head or not and whether there is any short payment of tax?

b.

Whether payment of GST under forward Charge as well as reverse charge has been made on time?

c.

Whether GST is paid on receipt of advances, requisite documents have been issued at the time of receipt thereof and proper adjustment thereof has been made at the time of issuance of final invoice?

d.

Whether interest liability has been discharged in case of delay in payment of taxes?

e.

Whether all the required GST returns have been filed correctly with complete particulars and within the due date?

f.

Whether GSTR 1 and GSTR 3B tallies with the books of account?

4.

Input Tax Credit:

a.

Whether ITC has been availed as per the provisions of law?

b.

Whether reversal of ITC claimed done if payment not made within 180 days?

c.

Whether the supplier has reported the invoice on the basis of which ITC has been availed by the recipient in his GSTR-1 and the same is being reflected in Form GSTR-2A of the recipient?

5.

Turnover

a.

Whether the turnover declared in the GST returns are in consonance with that declared in the books of accounts?

6.

Refund

a.

Whether the refund claimed, if any has been claimed in pursuance of the provisions of GST law?

b.

Whether the documentation aspect necessary for filing the claim for refund has been undertaken in accordance with law?

7.

Documents:

a.

Whether the tax invoice, debit and credit notes, receipt voucher etc. have been issued in accordance with the provisions of law?

b.

Whether all the tax invoices and other documents issued for the supply of goods or services or both have been accounted for in the books of accounts and reported in the GST Returns?

c.

Whether e-way bill, wherever applicable has been issued and duly recorded in the books of accounts and also to verify whether there is any variance in the data recorded in the e-way bill and the corresponding tax invoice?

d.

Whether HSN code has been correctly mentioned (specifically in case of mandatory cases i.e. where the turnover exceeds ₹ 1.5 crores) in the documents issued or received under the Act?

8.

Miscellaneous

a.

Whether the reconciliation of ITC claimed in GSTR 3B with that available in GSTR 2A has been done and in case of difference to ensure whether any action has been taken to blacklist such suppliers who do not pay GST on time and/or file returns on time so as to protect the interest of the recipient of goods or services or both?

b.

Whether the provisions of Section 171 of the CGST Act 2017 i.e. Anti profiteering are followed and accordingly the benefit of the additional input tax credit as well as the benefit of the tax reduction is passed on?

Thus it can be seen that there is an onerous responsibility cast upon the auditor while auditing and reporting as per the mandate of section 35(5) of the CGST Act, 2017 r/w Rule 80(3) of the CGST Rules, 2017 and other relevant provisions of the GST law in this regard.

Consequence of failure to submit the annual return

Section 47(2) provides that in case of failure to submit the return required under section 44 by the due date, a late fee shall be leviable. The said late fee will be ₹ 100 per day during which such failure continues subject to a maximum of a quarter percent of the turnover in the State/UT.

Consequence of failure to get the accounts audited

There is no specific penalty prescribed in the GST Law for not getting the accounts audited by a Chartered Accountant or a Cost Accountant. Therefore, in terms of Section 125 of CGST Act, 2017 which prescribes the provisions regarding general penalty, the person who fails to get his accounts audited as per the mandate of section 35(5) of the Act, shall be subjected to a penalty which may extend to ₹ 25,000/-.

Offences and penalties under section 122 of the Act

Besides the above failures and their consequences, it is imperative to note that section 122 of the CGST Act provides for certain offences the penalty for which has been prescribed to be ten thousand rupees or an amount equivalent to the tax evaded whichever is higher. Such offences by a taxpayer which inter alia include:

  1. falsification or substitution of financial records or production of fake accounts or documents or furnishing of any false information or return with an intention to evade payment of tax due under this Act
  2. suppression of his turnover leading to evasion of tax under this Act;
  3. failure to keep, maintain or retain books of account and other documents in accordance with the provisions of this Act or the rules made thereunder;

Welcome provisions under Section 126 of the Act

Section 126 of the Act is a welcome provision for genuine cases which states that no officer under this Act shall impose any penalty for minor breaches of tax regulations or procedural requirements and in particular, any omission or mistake in documentation which is easily rectifiable and made without fraudulent intent or gross negligence, where minor breach has been defined as a breach if the amount of tax involved is less than five thousand rupees; and an omission or mistake in documentation easily rectifiable is defined as an omission or mistake if the same is an error apparent on the face of record.

Power of the Government to waive penalty or fee or both – Section 128 of the Act

Section 128 of the Act provides that the Government may, by notification, waive in part or full, any penalty referred to in section 122 or section 123 or section 125 or any late fee referred to in section 47 for such class of taxpayers and under such mitigating circumstances as may be specified therein on the recommendations of the Council.

Changes brought about in the Direct Tax laws in the light of the GST Law

With a view to ensure improvement of compliance under the Income Tax Act, 1961, certain changes have been notified by the Central Board of Direct Taxes vide CBDT Notification No. GSR 666(E) (No. 33/2018), dated 20.07.2018 under the Direct tax Laws in the light of the new GST Law.

In this regard, it is imperative to note that the aforesaid Notification seeks to amend the FORM 3CD as appearing in the Appendix II to the Income Tax Rules, 1962, to provide for certain additional details by amending/inserting two clauses viz. clause 4 and clause 44 respectively, which have been discussed herein under:

Amendment of Clause 4 to provide for GST number

Clause 4 of Form 3CD has been amended to seek details of GST number in cases where the assessee is liable to pay GST.

In this regard, the reason for this amendment seems to be to capture the GST related details of the assessee as it was done for other indirect taxes in the existing clause 4. Further, this seems to be important or necessary because in many instances it is observed that a person though liable to pay indirect taxes does not get himself registered under the relevant law even if his turnover exceeds the threshold limit prescribed for obtaining registration solely with a view to evade taxes but declares the turnover exceeding the threshold limit in the Income Tax Return. Hence asking for GST number where the assessee is liable to pay GST seems to be fair enough to put a check on such evaders in the light of the interest of the revenue. However, this may not be the sole reason.

Further, the auditor while reporting the GST number should verify the same with the registration certificate as well as the details available on the GST portal to ensure that the registration number belongs to the assessee whose constitution as well as other particulars are in accordance with the details which the auditor is already having.

Insertion of new clause 44 to seek the break-up of total expenditure

New Clause 44 has been inserted in Form 3CD 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 format given herein below:

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)

The purpose behind insertion of the above mentioned clause may be to see whether the expenditure being claimed for deduction under the Income Tax Law has actually been reported under the GST law in the relevant columns as prescribed in the GST returns and that no expenditure which is not allowable under the Act is being claimed by the assessee. Further, another reason may be to put a check on tax evasion which may happen in instances where GST liability has to be discharged under the reverse charge mechanism of tax and which may not have been discharged by the assessee by resorting to non-disclosure of expenditure under the GST law.

Further, it is important to note that the report of the auditor under the Income Tax Act, 1961 in Form no. 3CD would definitely be part of the audited financial statements and other documents which the authorities under the GST law can requisition.

However, it is important to note that in view of representations received by the Board, the applicability of the said clause 44 have been deferred and kept in abeyance till 31st of March ‘2019 on account of which the provisions of the said clause will be applicable for the F.Y. 2018-19. [vide Circular No. 6/2018, dated 17.08.2018]

Now, after taking note of the above changes brought in the Direct tax laws, it is imperative to take note of the fact that the auditor while reporting in Form 3CD must bear certain points in his mind:

  1. Primarily the auditor has to cross verify the details of expenditure as per the books of accounts with that furnished by the assessee in his GST returns. Any variance in the expenditure reported has to be highlighted by the auditor.
  2. Further he has to ensure that the applicable taxes under the GST law have been discharged on the expenditure being claimed.
  3. Further, he has to ensure that the assessee has claimed the benefit of either input tax credit or depreciation in case of the expenditure reported and not both.

The changes which have been brought about in Form No. 3CD requiring an auditor to certify certain details in the light of GST law brings us to the following issues:

  1. The way the financial statements and audited accounts are required to be maintained under the Income Tax Act, 1961 which can be on cash basis as well as mercantile basis cannot at once enable any person to arrive at a conclusion whether the same are in accordance with both the Acts or otherwise unless detailed scrutiny is made in order to ensure whether the audited annual accounts are in compliance with both the laws.
  2.  There are several expenditures which are deductible under the Income Tax Act, 1961 but are not liable for GST under the GST laws like salary. Again, even within a particular head of expenditure, there may be liability to GST for one part and no liability for other part) say where an expenditure is incurred for purchase of exempted goods from a supplier who besides being a trader is also a registered GTA and he supplies both the goods which are exempted under the GST law from the levy of GST and the GTA service to the recipient which is liable to tax under the reverse charge mechanism.
  3. The audit related to GST is basically a reconciliation between the accounts maintained as per the Income Tax Act and that maintained as per the GST Act and therefore the question of true and correct creeps in rather than the question of true and fair which is an onerous task on the auditor and the task may get aggravated when two different auditors audit under the different Acts.

Conclusion

The provisions relating to audit are relatably new and cast an onerous responsibility on the auditor. The fact that National Financial Reporting Authority (NFRA) have already notified the new rules will keep the auditors on their toes since their audit would be audited not only by ICAI but by NFRA also and above all even though there are no direct provisions under the GST law as is there in the Income Tax Act, 1961 in the form of Section 271J but there is sufficient catch available with the authorities to put a check on the errant assesses as well as auditors.


By CA Ramesh Kumar Patodia, assisted by CA Megha Agarwal

For any queries, you may reach us at-

ramesh.patodia@rkrr.in , megha.agarwal@rkrr.in

 

By: RameshKumar Patodia - December 6, 2018

 

 

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