Audit in GST is a very vast topic. However for the purpose of quick applicability in business and fast learning of the topic in year 2020 a detailed discussion has been done below.
Topics
- What is audit ?
- Importance of audit in GST.
- Types of Audit in GST.
- Departmental Audit in GST
- Time line for raising demands by department.
- Things verified during the departmental audit
- Brief on what to be done after departmental audit.
- Special Audit
- Mandatory audit after a certain turnover
- Why audit is more accountable and less dispute creating?
1. What is an Audit?
Audit is basically a process of verifying the records and books of accounts of the tax payer/ assessee. The accounts should match with the declaration of the assessee with the department. Besides the aim of the audit is to identify the problems in the accounting process of the assessee and suggest suitable remedy. If the classification of the supplies is not as per the law then the auditor is responsible to identify the cause. The accounts and process has to be in adherence to what is prescribed in law. For the purpose of our discussion we would be concerned about Goods and Service Tax laws.
2. Importance of Audit in GST
Audit, for many, may seem like a monster coming to engulf your hard earned money. However audit comes with many advantages which we should discuss now
- It checks deficiencies in the process of accounting in the business which is not compliant with the law and suggests suitable remedies.
- It identifies wrong classification of supplies.
- If an account is already audited by a professional then the department instills more faith on the assessee’s assessment of tax.
- A point detected by a professional during audit may save you penalty which would have aroused upon identifying the same point by departmental officers. It would also save you interest as a point detected early would amount to lesser interest.
- It helps to streamline the internal process of the company according to the law.
3. Types of Audit in GST.
There are three types of audit
- Departmental Audit
- Special Audit
- Audit by professionals like CA, Cost Accountants etc.
4. Departmental Audit in GST
- It is carried out by the Goods and Service Tax department. The internal monitoring committee selects the units based on various parameters like risk scores, turnover, tax payment and other parameters which change from time to time.
- The Commissioner or any other officer authorized by him can undertake the audit.
- Once the units (assessees) are selected for the conduct of audit the audit team intimates the assessees for the same. The team is required to give the intimation 15 days in advance of the audit. Such intimation is given in FORM GST ADT 01. This is the stage where the assesses are called to furnish the relevant documents necessary for audit.
- The audit team verifies all the documents and records made available to them and bring out observations which may or may not have revenue implications. These audit observations are provided to the assessee in FORM GST ADT 02. Any departmental audit must be completed within 3 months from the date when the assessee has furnished the documents or the start of audit whichever is later. This period may be extended for another 6 months.
- The assessee is expected to reply to the audit contention. However if he is in agreement to any liability arising during the course of audit he may make payment. In other situation demand proceedings may be initiated by the department.
- Special Audit may also be directed if the department is of the opinion that valuation has not been properly done.
5. Time line for raising demands by department.
The department is supposed to raise demand within 3 months from the date when the assessee has furnished the documents or the start of audit whichever is later. This period may be extended for another 6 months.
6. Things verified during the departmental audit in GST
There is no definite list which could be provided for such audits. However a general checklist could be given for the benefit of the readers who are also witnessing audit in their units. The preparedness of the assessee will not only help them to be tax compliant but avoid unnecessary penalty that could be levied if points are made during the audit.
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Books of accounts and Balance Sheet
– These documents reveal the incomes and expenses of the concerned unit. Any additional liability for output supply or liability under Reverse Charge Mechanism is ascertained.
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Returns and Statements
– The correctness of output supply by reconciling values of the balance sheet/ books of accounts with that declared in the annual returns. The reason for any difference in values shall be noted.
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Exemption
– If any exemption is availed then the applicability of the exemption and conditions there in needs to be ascertained.
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Deductions-
The audit team ascertains the correctness of any deduction claimed by the assessee.
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Rate of Tax
– The supplies of the assessee is analyzed for correct classification. The audit team must ensure that the rate of tax is correctly applied by the assessee.
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Input Tax Credit availed and utilized
– The assessee’s returns, purchase invoices and payments for purchases are examined during the audit. Thereafter the eligibility of input tax credit availed and utilized by the assessee is determined. The payment for purchases on which the credit is availed shall be within180 days of raising the invoice. The same is verified by the audit team.
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Refund-
The audit looks whether the refunds are correctly claimed or not.
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E-way bill-
The value of e way bill shall match with the outward invoices. Reason for any outward supply without e –way bill must be in accordance with law.
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Valuation of supply –
The audit team ascertain that the supplies on which tax has been paid is not undervalued for the purpose of Goods and Service Tax calculation.
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Other observation
– The audit process is not limited to the above mentioned documents. The department may ask for any other documents or invoices which they feel have tax implications.
7. Brief on what to be done after departmental audit.
It is already said that after audit the observations are provided to the assessee in GST ADT 02. Now the assessee needs to reply in respect to these observations. There may two situations
- Assessee may agree to the audit objections– The assessee is required to pay for the demand arising from the audit along with applicable interest and penalty. The audit may hence be concluded.
- Assessee may disagree with the findings- In this case demand proceedings are initiated by the department. To know more about demand proceedings and assessee’s follow up process go ahead to read this.
8. Special Audit in GST
- If department is of the view that the valuation is not done correctly, then it may direct special audit. The assessee is informed about special audit in FORM GST ADT 03.
- The assessee is required to get his books of accounts examined and audited by an nominated Chartered Accountant.
- All the cost of audit by the Chartered Accountant shall be borne by the department.
- The nominated Chartered Accountant after audit gives report within 90 days of starting the audit. This period may be extended for another 90 days.
- In case of any revenue observation demand proceeding is initiated.
9. Mandatory audit after a certain turnover
For entities having turnover more than Rs.2 crores in any financial year has to carry out Goods and Service Tax audit from a chartered accountant or a cost accountant. The format of the report FORM 9C has to be filled and certified by authorized persons who are conducting the audit. Thereafter the report is to be submitted to the department. You may read about the process of such audit from the following link.
10. Why audit is more accountable and less dispute creating?
The audit process is more accountable in the Goods and Service Tax regime. The main reason is because the audit is already performed by professional Chartered Accountants and Cost Accountants for entities having turnover above Rs. 2 crores. The report is already available for the departmental officer to rely upon. Hence most of the demands or revenue points get settled at an early stage. The department may not feel it necessary to conduct audit for most of the cases.
Secondly, the departmental audit is not able to cover all the taxpayers in its jurisdiction. Mandatory audit above Rs. 2 crores would have greater coverage. This would make the GST payers more compliant.
Thirdly, a point detected in the early stage by a Chartered Accountant or Cost Accountant would save penalty for the taxpaying entities. Such entities are more likely to pay and resolve issues rather than later when the same point is detected by tax authorities and demand is imposed with penalty. So disputes would be lesser.
Fourthly, the process of audit is clearly mentioned in the law unlike the previous Service Tax regime. This would bring more transparency and accountability in the audit process.
You may also read about GST in food sector