Introduction
Goods & Services Tax (GST) is a self-assessment and trust-based system of taxation wherein the registered person himself assesses and deposits his tax liability without any interference of tax officers. Due to such nature of the tax system, various types of audit mechanism have been incorporated to ensure compliance with the provisions by verifying the correctness of declared turnover, taxes paid, refunds claimed and tax credit availed.
The following types of audit mechanism has been provided under GST laws:
- Audit as per Section 35 - To be conducted by a Chartered Accountant or a Cost Accountant, if aggregate turnover exceeds the specified limit in terms of Section 35(5) of the CGST Act, 2017 (“the Act”)
- Audit by Tax Authorities/ Departmental Audit
- To be undertaken by Commissioner or any officer authorized by him in terms of Section 65 of the Act.
- Special Audit to be conducted as per Section 66 of the Act.
The new tax regime has already completed its first anniversary and the first financial year i.e. FY 2017- 18 post implementation of GST has also ended on 31st March 2018. Now it is time for the members of trade and industry to get ready for undertaking the exercise of GST audit and file the first GST Annual Return. In this article, we will discuss GST audit of registered persons (taxpayers) to be conducted as per Section 35(5) of the Act read with Rule 80(3) of the CGST Rules, 2017 (“CGST Rules”) and the obligation to file annual return.
Statutory provisions for GST audit and annual return
Section 44(1) of the Act states 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.”
Section 35(5) of the Act states that “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.”
Rule 80 (3) of the CGST Rules provides “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 audited annual accounts and a reconciliation statement, duly certified, in FORM GSTR-9C, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner.
On reading the above provisions, the applicability of GST Annual Return and Audit can be summarized as under: Annual Return - Every registered person, except an ISD, person paying TDS/TCS, casual taxable person & non-resident taxable person.
GST Audit - Every registered person with aggregate turnover of Rs.2 crores.
Turnover and aggregate turnover
It is to be noted that Section 35(5) uses the word “turnover” whereas in Rule 80 (3) the words used are “aggregate turnover”. CGST Act contains definition for ‘aggregate turnover’ which is computed on all India basis. There is no definition for ‘turnover’ in CGST Act as it defines only turnover in a State. As wordings in section and rule are not identical, an issue may arise as to whether GST audit is required for all the GST registrations once the aggregate turnover at all India level exceeds INR 2 Crores or the turnover threshold is to be seen at registration level. If there is a registration with turnover less than INR 2 Crores, whether such registration is required to comply with GST Audit requirement is an issue requiring clarification from the authorities.
Annual Return – Additional reporting requirements
Annual Return as per Section 44 of CGST Act is to be filed on or before 31st December, 2018 for the FY 2017-18. CBIC has recently notified the form for annual returns – GSTR-9 applicable to normal taxpayers and GSTR-9A applicable to taxpayers operating under composition scheme. These forms seek details of outward supplies, inward supplies, taxes paid and credits availed besides information on demands and refunds. HSN-wise summary of outward supplies for the FY 2017-18 have to be provided in a consolidated manner. Though these forms essentially seek to consolidate the figures / information submitted through monthly returns filed by the assessee, yet there are certain additional reporting requirements for which the assessee will have to work overtime to compile the required information. Additional data / information required in annual return which are not captured in monthly returns are:
- HSN wise summary of inward supplies (purchases)
- Segregation of inward supplies received from different categories of taxpayers like composition taxpayers
- Inputs / Capital Goods / Input Services – Segregation of inward supplies
- Particulars of the transactions for the previous FY declared in returns of April to September of current FY.
GST Audit – Not mere accounting exercise
GST is just-born and several taxpayers are still trying to get accustomed to the new regime in so far general compliances are concerned. Considering the number of amendments made to provisions, taxpayers may find it difficult to comprehend implications of all such changes. Therefore a lot of efforts would be required on the part of both GST Auditor and GST Auditee to prepare for highly specialized compliance like GST Audit. Certain areas which would require special attention from legal angle are briefly mentioned in the following paragraphs.
Intra-company transactions
Intra-company transactions such as stock transfer, which are taxed in GST regime in case of inter-State supplies, are not strictly speaking taxable supplies for a company. The effect of these transactions gets nullified at the consolidated financial statement level and therefore, identifying and reporting of such transactions for audit purposes would require special attention in terms of compliance with provisions of GST law. Liability and valuation of every transaction of this nature will require verification with the law so as to effectively comply with audit obligations.
Cross-charging intra-company expenses
There are many transactions which even without an accounting entry are liable to GST such as cross-charging of promotion and advertisement expenses incurred by head office or corporate office for the company as a whole. Such transactions are in the nature of HO providing service to its various other registrations in different States. Identification and valuation of such transactions under GST law will be key before GST audit. Reconciliation of such transactions with books of accounts will be a major challenge. GST implications on transactions with employees such as provision of various facilities and perquisites, deductions from salary, welfare schemes, etc., need to be appropriately addressed and then accounted for during GST audit.
The upcoming first GST audit shall cover the entire range of transactions undertaken in the new GST regime and therefore shall be very crucial in identification of discrepancies and in taking corrective measures timely to reduce future litigation wherever possible.
[The author is an Associate, GST Practice, Lakshmikumaran & Sridharan, New Delhi]