GST
Audit – Some Basics
Audit – Some Basics
1. Introduction
1.1 The
concept of audit by a Chartered Accountant in the area of Indirect Taxes was
confined to State Value Added Tax and Central Sales Tax laws of certain States.
In Central Excise and Service tax only in case of suspicion of undervaluation
or excessive credit special audits were prescribed (not much used) which
continue in GST. Therefore, Chartered Accountants engaged in rendering
professional services in the areas of State taxes would be familiar with those
provisions. The GST law has subsumed several Indirect Tax laws – among others,
it subsumed Central Excise, Service Tax, Luxury Tax, Entertainment Tax,
VAT/CST, Entry tax laws etc.; certain levies under the Customs laws have also
been subsumed into the GST laws.
concept of audit by a Chartered Accountant in the area of Indirect Taxes was
confined to State Value Added Tax and Central Sales Tax laws of certain States.
In Central Excise and Service tax only in case of suspicion of undervaluation
or excessive credit special audits were prescribed (not much used) which
continue in GST. Therefore, Chartered Accountants engaged in rendering
professional services in the areas of State taxes would be familiar with those
provisions. The GST law has subsumed several Indirect Tax laws – among others,
it subsumed Central Excise, Service Tax, Luxury Tax, Entertainment Tax,
VAT/CST, Entry tax laws etc.; certain levies under the Customs laws have also
been subsumed into the GST laws.
1.2 It
would be relevant to note that the skill sets acquired in the understanding of
the statutes that have been subsumed into the GST laws would help in better
understanding of the GST laws since several provisions of the Central and State
enactments have been replicated (fully or partially) in the GST laws – say, for
instance, the provisions of Place of Supply of Services, Time of Supply of
Services, Valuation of Supply Rules, etc. That being said, one needs to
exercise caution in reading and understanding the subtle departures or changes
in the statute in comparison with the erstwhile legislations, in which case,
one has to enhance the understanding of the fully taken forward provisions. He
also needs to unlearn the old laws and learn the GST laws afresh for a complete
understanding of the taxing statute.
would be relevant to note that the skill sets acquired in the understanding of
the statutes that have been subsumed into the GST laws would help in better
understanding of the GST laws since several provisions of the Central and State
enactments have been replicated (fully or partially) in the GST laws – say, for
instance, the provisions of Place of Supply of Services, Time of Supply of
Services, Valuation of Supply Rules, etc. That being said, one needs to
exercise caution in reading and understanding the subtle departures or changes
in the statute in comparison with the erstwhile legislations, in which case,
one has to enhance the understanding of the fully taken forward provisions. He
also needs to unlearn the old laws and learn the GST laws afresh for a complete
understanding of the taxing statute.
1.3 In
terms of Section 2(13) of the CGST Act, 2017, “audit” means the
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.
terms of Section 2(13) of the CGST Act, 2017, “audit” means the
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.
1.4 The
following three types of audits are envisaged under the GST laws:
following three types of audits are envisaged under the GST laws:
The first type of audit is
to be done by a chartered accountant or a cost accountant;
to be done by a chartered accountant or a cost accountant;
Second type of audit is to
be done by the commissioner or any officer authorised by him in terms of
Section 65 and 66 of the CGST Act, 2017 read with Section 20 of the IGST Act,
2017 and Section 2 of UTGST Act, 2017.
be done by the commissioner or any officer authorised by him in terms of
Section 65 and 66 of the CGST Act, 2017 read with Section 20 of the IGST Act,
2017 and Section 2 of UTGST Act, 2017.
The third type of audit is
called the Special Audit and is to be conducted under the mandate of Section 66
of CGST Act, 2017 read with Rule 102 of CGST Rules, 2017.
called the Special Audit and is to be conducted under the mandate of Section 66
of CGST Act, 2017 read with Rule 102 of CGST Rules, 2017.
An audit in terms of Section 65 / 66 of the
CGST Act, 2017 is not a part of this write-up.
CGST Act, 2017 is not a part of this write-up.
1.5 While
the GST regime emphasizes self-assessment processes, the complexities involved
in the new statute make one wary. At this juncture, it is clear to tax
professionals that the GST law is not presently simple enough for an assessee
to compute his total and taxable turnovers and duly report the same, under the
new statute.
the GST regime emphasizes self-assessment processes, the complexities involved
in the new statute make one wary. At this juncture, it is clear to tax
professionals that the GST law is not presently simple enough for an assessee
to compute his total and taxable turnovers and duly report the same, under the
new statute.
1.6 The
new statute lays substantive emphasis on e-governance. It is presumed that over
a period of time, the complexities of the GSTN and the GST law would be subject
to several changes / amendments to enhance ease of compliance and transparency.
Several errors occurring in the GSTN while attempting to furnish the details
are brought to the attention of the registered persons almost immediately,
owing to the use of extensive technology. Examples:
new statute lays substantive emphasis on e-governance. It is presumed that over
a period of time, the complexities of the GSTN and the GST law would be subject
to several changes / amendments to enhance ease of compliance and transparency.
Several errors occurring in the GSTN while attempting to furnish the details
are brought to the attention of the registered persons almost immediately,
owing to the use of extensive technology. Examples:
– Transitional
credit claims being processed with error in case of mismatch in GSTIN;
credit claims being processed with error in case of mismatch in GSTIN;
– Discrepancy
with the amount of credit / cash being utilized to off-set the liability;
with the amount of credit / cash being utilized to off-set the liability;
– Duplication
in invoices.
in invoices.
1.7 Nevertheless,
errors that cannot be traced by the system are bound to have been committed by
registered persons while filing the returns. It is also a fact, that GST law is
in the process of being properly interpreted and understood by each of us. The
difficulty also arises on account of the fact that there are no precedents on
each such issue. One has to overcome these intricate issues by properly
understanding the nuances of the law which is still
evolving.
errors that cannot be traced by the system are bound to have been committed by
registered persons while filing the returns. It is also a fact, that GST law is
in the process of being properly interpreted and understood by each of us. The
difficulty also arises on account of the fact that there are no precedents on
each such issue. One has to overcome these intricate issues by properly
understanding the nuances of the law which is still
evolving.
1.8 The
Revenue, with the aid of information technology, is expected to identify
patterns / spike in liability, credits, reconciliations through online tools /
resolutions and intelligent reporting.
Revenue, with the aid of information technology, is expected to identify
patterns / spike in liability, credits, reconciliations through online tools /
resolutions and intelligent reporting.
1.9 The
level of tax compliances prevailing and the complex nature of tax laws in our
country makes it necessary for audit of records under various laws. Therefore,
in order to ensure tax compliance by the assessee, the GST law provides for
audit by the tax department and by professionals in certain cases.
level of tax compliances prevailing and the complex nature of tax laws in our
country makes it necessary for audit of records under various laws. Therefore,
in order to ensure tax compliance by the assessee, the GST law provides for
audit by the tax department and by professionals in certain cases.
1.10 Ordinarily, the
smaller assessees do not prefer to get their books of account and records
audited for indirect tax compliances, when there is no mandatory requirement to
do so. However, larger entities who wish to avoid any disputes opt for caution
checks. Audit is perceived as a cost rather than as a tool in identifying
errors or to optimize the tax incidence though it can actually be a value
adder, directly and indirectly.
smaller assessees do not prefer to get their books of account and records
audited for indirect tax compliances, when there is no mandatory requirement to
do so. However, larger entities who wish to avoid any disputes opt for caution
checks. Audit is perceived as a cost rather than as a tool in identifying
errors or to optimize the tax incidence though it can actually be a value
adder, directly and indirectly.
1.11 In the past, certain
tax-compliant assessees have been known to voluntarily engage experts to
conduct audits under the Excise or Service tax laws. The exercise was
undertaken to evaluate compliance, as also to ensure that all benefits lawfully
accruing to the assessees are availed by them, in good time. The financial
impact on account of indirect taxes is always substantial, and therefore, those
assessees who engage tax professionals for a review from the indirect tax
perspective would have witnessed a great deal of value addition.
tax-compliant assessees have been known to voluntarily engage experts to
conduct audits under the Excise or Service tax laws. The exercise was
undertaken to evaluate compliance, as also to ensure that all benefits lawfully
accruing to the assessees are availed by them, in good time. The financial
impact on account of indirect taxes is always substantial, and therefore, those
assessees who engage tax professionals for a review from the indirect tax
perspective would have witnessed a great deal of value addition.
Audit
Exercise-Advantages
Exercise-Advantages
1.12 To an
assessee –Normally, the tax department conducts an audit or assessment
after the close of a financial year. It is customary to expect that the
departmental audit / assessment is conducted after the close of the financial
year except in cases where investigations, inspections or special audits are
taken up. Naturally, any levy of additional taxes either due to non-compliance
or incorrect comprehension of the complex tax laws would result in taxes plus
consequential interest and penalty. GST being a tax on supplies, would tend to
wipe out the top line in such cases.
assessee –Normally, the tax department conducts an audit or assessment
after the close of a financial year. It is customary to expect that the
departmental audit / assessment is conducted after the close of the financial
year except in cases where investigations, inspections or special audits are
taken up. Naturally, any levy of additional taxes either due to non-compliance
or incorrect comprehension of the complex tax laws would result in taxes plus
consequential interest and penalty. GST being a tax on supplies, would tend to
wipe out the top line in such cases.
1.13 Given the time lag
between the date of committing an error and the date of ascertaining /
rectifying such error, the consequence in such situations can be quite alarming
in as much as the very liquidity of an entity can be under jeopardy. This would
be the scenario, even where there is no mala fide intent on the part
of the assessee to evade or avoid taxes that are legally due to the Government.
Consequences that can arise in respect of issues that arise on account of
classification or interpretation or judicial pronouncements can be disastrous.
between the date of committing an error and the date of ascertaining /
rectifying such error, the consequence in such situations can be quite alarming
in as much as the very liquidity of an entity can be under jeopardy. This would
be the scenario, even where there is no mala fide intent on the part
of the assessee to evade or avoid taxes that are legally due to the Government.
Consequences that can arise in respect of issues that arise on account of
classification or interpretation or judicial pronouncements can be disastrous.
1.14 It is a basic fact,
that no assessee would be in a position to collect such additional tax levies
from customers long after the transaction stands closed. On the other hand,
there may also be cases where eligible credit may not have been availed, and it
cannot be claimed at a later date since it is either time barred or claims have
not been preferred through the returns.
that no assessee would be in a position to collect such additional tax levies
from customers long after the transaction stands closed. On the other hand,
there may also be cases where eligible credit may not have been availed, and it
cannot be claimed at a later date since it is either time barred or claims have
not been preferred through the returns.
1.15 Therefore, where a
review is undertaken periodically, the discrepancies will be noticed at the
time of omission / commission and corrective measures can be taken in a timely
manner. Thus, it would lead to maximization of credit availment and
minimization of tax / other outgoes owing to proper planning and timely
compliances.
review is undertaken periodically, the discrepancies will be noticed at the
time of omission / commission and corrective measures can be taken in a timely
manner. Thus, it would lead to maximization of credit availment and
minimization of tax / other outgoes owing to proper planning and timely
compliances.
1.16 To the department
/ Government – The tax department / Government would also stand to
benefit from a periodic review by way of receipt of information that are duly
classified, correct determination of total and taxable turnovers, review of
rates of taxes, proper application of relevant notifications, circulars,
clarifications, Government orders and adherence to the tax compliances. The
audit report would also take into cognizance the relevant judicial precedents
that are applicable to the registered person. Unlawful claims for benefits /
unethical tax management practices adopted by the assessees would be filtered
out, since tax professionals would intimate and persuade the assessees of the
consequences of such practices, and also bring out the discrepancies in their
reports. When audits are performed by tax experts, the time spent by the tax
authorities on the scrutiny would be minimized, thereby allowing them to
utilize the available time for more meaningful and productive purposes.
Voluntary compliances by the assessee would encourage the department /
Government to simplify the law and procedures, and develop a mechanism for ease
of doing business. It would be a win-win situation.
/ Government – The tax department / Government would also stand to
benefit from a periodic review by way of receipt of information that are duly
classified, correct determination of total and taxable turnovers, review of
rates of taxes, proper application of relevant notifications, circulars,
clarifications, Government orders and adherence to the tax compliances. The
audit report would also take into cognizance the relevant judicial precedents
that are applicable to the registered person. Unlawful claims for benefits /
unethical tax management practices adopted by the assessees would be filtered
out, since tax professionals would intimate and persuade the assessees of the
consequences of such practices, and also bring out the discrepancies in their
reports. When audits are performed by tax experts, the time spent by the tax
authorities on the scrutiny would be minimized, thereby allowing them to
utilize the available time for more meaningful and productive purposes.
Voluntary compliances by the assessee would encourage the department /
Government to simplify the law and procedures, and develop a mechanism for ease
of doing business. It would be a win-win situation.
1.17 To the
professionals –Tax Professionals are compelled to conclude the audits
(mandated by statutes) in a time bound manner within a fixed period of
time.
professionals –Tax Professionals are compelled to conclude the audits
(mandated by statutes) in a time bound manner within a fixed period of
time.
However, where auditees
engage them to carry out periodic reviews voluntarily, the said tax
professionals will be in a position to deploy experts and spend adequate time
and efforts, in order to go through the records and documents in detail. This
will help them to better understand the operations of the auditee, resulting in
value addition. Instead of carrying out the audit at the end of the year, for
all the assessees, a periodic audit will help the auditee in understanding the
short-comings that can be duly adhered to within time and would, in a way,
avoid any further consequences
engage them to carry out periodic reviews voluntarily, the said tax
professionals will be in a position to deploy experts and spend adequate time
and efforts, in order to go through the records and documents in detail. This
will help them to better understand the operations of the auditee, resulting in
value addition. Instead of carrying out the audit at the end of the year, for
all the assessees, a periodic audit will help the auditee in understanding the
short-comings that can be duly adhered to within time and would, in a way,
avoid any further consequences
Source : ICAI
