December 22, 2020

GST Audit and Checklist for GST Audit

Goods and Service Tax (“GST”) is the major source of revenue for both center and state governments and any non-compliance on part of the taxpayer may result in huge losses to the government. Government keeps various checks to ensure that taxpayers are complying with the provisions and all transactions are genuinely entered such as Reconciliation ITC appearing in GSTR-2A with ITC availed in GSTR-3B, Assessment by departmental officer, Audit by specified professional etc.

Audit is defined under Section 2(13) of CGST Act 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”. Therefore, audit is a verification exercise conducted by an independent professional to ensure that all provisions of GST law have been complied with.

In the financially growing world where everyone wants to earn big in a short period of time some of them manipulate their books of accounts to evade tax and adopt various kinds of malpractices such as wrong data in the books, bogus purchase or supply inward transaction without any underlying movement of goods or not filing the proper returns as per the CGST act 2017, thus in this scenario government need to take the steps to stop these activities to ensure the good practices in the tax system.

1. Who is required to get GST audit

1.1 GST Audit by Taxpayer

As per Section 35(5) of CGST Act, if aggregate turnover of a person exceeds INR 2 Crores* during a year then such person shall get his accounts audited by a Chartered Accountant or Cost Accountant.

Further, as per Section 44(2) of CGST Act, If aggregate turnover of a person exceeds INR 2 Crores * then he shall file following documents:

Annual Return
Copy of Audited Financial Statement
A Reconciliation statement reconciling values declared in Annual return and value appearing in Audited Books of Accounts. Reconciliation statements should be submitted in Form GSTR-9C.

* For FY 2018-19, the threshold of INR 2 Crores has been increased to INR 5 Crores.

2. Audit by Departmental Officer

2.1 General Audit under GST

Taxpayers whose turnover is within the threshold limit of INR 2 crores are waived off from being audited. However, no threshold limit is prescribed for Audit by Departmental Officer.

As per Section 65(1), commissioner or any other officer authorised by him may undertake audit of any registered person for any financial year or part of financial year or multiple parts of Financial year. Audit must be completed within a period of 3 months from date of commencement or such extended period as may be prescribed.

2.2 Special Audit under GST

During any audit, investigation or assessment, if Assistant commissioner or officer above his rank is of the opinion that value is not correctly declared by the taxable person or credit availed is not correct and then considering the interest of revenue, he may direct such registered person to get his accounts audited by Chartered Accountant or Cost Accountant nominated by the commissioner.Prior approval of commissioner is required for this purpose.

3. Objective of GST Audit

Efficiently manage the taxation- the most important objective is to manage the tax system of the country more efficiently. GST has narrowed down all the indirect taxes to one tax which made the task easy for taxpayers as well as the tax departments.
Compliance of the taxpayer – It is not possible for the department officer to scrutinise books of accounts of each and every taxpayer. Therefore, the concept of GST Audit was envisaged. GST audit main objective is to measure the compliance of the taxpayer with respect to GST Law. CGST act 2017 and rules stated in the act.
GST audit checks whether all the tax has been followed by the Taxpayer– Audit of GST not only checks the accuracy of the accounts but also the credibility of the taxpayers and his business. Audit actions discover the taxpayer’s under declare and manipulative liability also stopped them to do further.
Eliminate the manipulative trading- WIth introduction of GST, practise of issuance of fake invoices, invoice issuance without underlying supply of goods or services, has increased significantly to pass on fake ITC..Audit helps in prevention of such practises and makes the owner stop to enter into false transactions and trading

4. Due date of filing of GST Audit Report

GST Audit report is to be filed alongwith Reconciliation statement in form GSTR-9C. It should be filed by the 31 December of year following the relevant year.

However, considering the fact that GST was a newly introduced tax, therefore, due date of filing of GSTR-9C was extended till 31st January, 2020 for FY 2017-18. However, due to the covid-19 pandemic, the central board of indirect taxes and customs have postponed the reconciliation of FY 2018-19 till 31st December 2020.

5. Areas to be covered under GST Audit

Each and every transaction related to the GST has to be analysed thoroughly by the Auditor keeping in mind provisions of GST Law.

Following are the certain key areas to be analyzed by an auditor to make the audit report authentic.

5.1 Correctness of Effective GST Rates:

First and the basic point to be checked is whether the rate of GST for different products or services have been correctly plotted, i.e., GST rates are correctly allocated to goods or services in the category to which they belong (i.e. 5%, 12%, 18% and 28%).
Whether any changes in the rate during the financial year have been given effect or not?
Any exemption or abatement claimed, if any, is post satisfying all the underlying conditions given for the purpose of claiming such exemption or abatement. E.g., GST is payable on restaurant service at a reduced rate of 5% subject to the condition that no ITC is claimed related to such service.

5.2 Comparison of Data as per Books of Accounts and GST Returns

For outward supply, Auditors need to carry out the comparison between sales and output liability recorded in books of accounts and data furnished in GSTR-3B and GSTR-1. Any difference should be properly reconciled.
For inward supply, comparison should be made between the ITC Claimed in Books of Account, ITC claimed in GSTR-3B and ITC auto-populating in GSTR-2A. Any variation in the same should be properly reconciled in order to prevent the taxpayer from claiming any excess input tax credit. As per amendment in CGST Rules, No ITC is admissible for invoices not appearing in GSTR-2A. Therefore, ITC against invoices not appearing in GSTR-2A should be reversed or necessary amendments should be made by suppliers in his GSTR-1.
Auditor should check that ITC must be claimed within the due date given under Section 16 of CGST Act, i.e., due date of filing of GST return of September Month of the following year or date of filing of annual return of concerned year, whichever is earlier.

5.3 Compliance of provisions related to Job-Work

If a person is obtaining services of a job-worker then the auditor should check whether the principle has generated challan and E-way bill for movement of goods from its location to the location of the job-worker.
Whether all inputs or capital goods, sent to the job-worker, have been received back within 1 year or 3 years respectively from date of removal. In case of non-compliance, whether applicable GST has been paid on or not with applicable interest.
Whether the principal has filed ITC-04-”Details of goods/capital goods sent to the job worker and received back” within due dates.
In case of direct supply of goods from a job-workers location, whether GST has been paid on such supply or not?

5.4 Reversal of ITC in case of default in payment beyond 180 days

If the assessee has failed to make payment of consideration for inward supply alongwith applicable GST within 180 days from date of Invoice then whether ITC corresponding to such amount has been reversed or not in accordance with Section 16 of CGST Act read with Rule 137 of CGST Rules.
Further, whether ITC has been reclaimed or not once such payment is made?

5.6 E-waybill

Whether, E-way bill has been generated for all movement of goods of value exceeding INR 50,000 in case of inter-state supply or threshold limit applicable for intra-state movement.
Necessary reconciliation should be made between e-way bill data with the sales invoices to check if there was any bogus entry to evade the tax.

5.7 Reversal of ITC on Exempt Supply

In case of exempted supply, the auditor should make sure that Input Tax Credit related to inward supplies directly related to such exempted supply has not been taken.
In case of use of inward supply partially toward exempted supply and partially toward taxable supply then whether proportional ITC has been reversed in accordance with Section 17 of CGST Act. For example Mr. A is using rented property for his two businesses namely shirt stitching and flour trading. Supply of shirt is taxable under GST. However, supply of flour is an exempted supply. Therefore, proportionate ITC attributable toward exempted supply should be reversed.

5.8 Reversal of Ineligible ITC

Auditors should check that no ITC is available on inward supply on which ITC is restricted under Section 17(5) of CGST Act such as inward supply of motor vehicle, rent-a-cab service, Life insurance, work contract service for construction of an immovable property etc.

5.9 Tax Invoicing under GST

Whether Tax invoice or Bill of supply or any other document has been prepared in accordance with Chapter VII of CGST Act, 2017 read with Chapter VI of CGST Rules, 2017. Further, whether the invoice contains all information as mentioned in CGST Rules or not?
Whether Invoice is issued within the time limit given under CGST Rules.
Whether self invoice is raised for inward supply received from unregistered persons on which recipient is liable to pay GST under Reverse Charge Mechanism.
Whether all applicable invoices or vouchers are being prepared or not such as refund voucher, receipt voucher etc.

5.10 Export of Goods or Services

In case of export of goods, whether all the underlying conditions have been duly complied with or not?
In case of export of service, whether all underlying conditions are satisfied such as place of supply of service falls outside India, payment for such service is received in convertible foreign exchange etc.?

5.11 Other

Whether GST has been charged on all supplies between distinct persons, i.e., stock transfers between units of the same person have different GST registrations.
Whether the place of supply is correctly determined or not?
Value of supply has been determined in accordance with Section 15 of CGST Act or not?

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

Extension of due dates of Income Tax Return, Tax Audit and GST Annual Return

Vide press release dated 24th October, 2020, CBIC has extended the due date of filing of GST Annual return (GSTR-9/GSTR-9A) and Reconciliation Statement (GSTR-9C) for FY 2018-19 from 31st October, 2019 to 31st December, 2019.

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