The government introduced two eagerly-awaited Goods and Services Tax compliance forms in September: GST Annual Return (GSTR-9) and GST Audit (GSTR-9C). For the 2017-18 financial year, both are due on Dec. 31, 2018.
The concept of an audit by professional accountants is not new to Indian indirect tax laws. Under the erstwhile regime too, state-level value-added tax laws required the submission of a chartered accountant-certified VAT audit report at the end of each financial year, within the prescribed timelines. Such audit compliances were introduced in VAT laws, as a step that would aid tax officers in expediting their verification process. With similar intent and as a measure to aid stronger tax governance, under the GST regime as well, the government has kept alive the concept of audit by professional accountants, which would be in addition to the routine statutory and tax audits. Such audits, though based on foundations similar to erstwhile the VAT audits, are more diverse and distinctive than the earlier process.
This is assuming all taxpayers would be eligible for GST audit.
In the first year of GST audit, it is very important for a taxpayer to be aware of the nuances of this new compliance system.
Journalists use the ‘Five Ws and How’ questions to gather information on a story. Taxpayers need to do the same to comply with the GST audit process.
‘Five Ws And How’ Of GST Audit
1. Who Needs To Comply With GST Audit?
Under GST, all registered taxpayers are required to submit an annual return. This is broadly an aggregation of the disclosures made in periodic returns filed through the year.
The GST audit, on the other hand, is a requirement for registered taxpayers with an aggregate annual turnover exceeding Rs 2 crores.
Under GST, ‘aggregate turnover’ is computed on on the basis of the Permanent Account Number. An entity with an aggregate turnover exceeding the minimum prescribed limit is required to obtain a GSTIN registration in each state or union territory in which there is a place of business.
Reading the definition of ‘aggregate turnover’ together with the requirement of the GST audit, it can be inferred that for determining the applicability of GST audit, the turnover criteria would be analysed on basis of PAN.
However, an audit will be required to be conducted for all GSTINs obtained for the PAN. For instance, in case an entity has obtained 10 GSTINs, 10 GST audits will be required to be submitted if the aggregate turnover during the financial year exceeds Rs 2 crores on a pan-India basis.
2. What Form Needs To Be Submitted Under GST Audit?
Form GSTR-9C is required to be submitted. The format was released by the government in September, through notification 49/2018 – Central Tax, dated September 13, 2018.
Prior to the introduction of Form GSTR-9C, a number of draft forms and suggestions were circulated. This had led to a commonly-held belief that the GST audit form would be a very detailed and complex form running over 50 odd pages.
However, the notified Form GSTR-9C is crisp, spans 10 pages and is divided in two parts – the reconciliation statement, and certification from the auditor.
Although the form is not as complex as was expected, the kind of reconciliation required—coupled with auditor attestation on GST records and documents—will make the exercise one that will be challenging and time-consuming for businesses as well as auditors.
3. Why Does A Taxpayer Need To Submit A GST Audit Form?
Section 35(5) of the Central GST Act 2017 reads: “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…”
Section 42(2) asks for a reconciliation statement for “reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement…”
4. When Does A Taxpayer Need To Submit The GST Audit Form For FY18?
As per Section 44 of the Central GST Act, the GST audit form for FY18 is to be submitted by December 31, 2018.
5. Where And How Does A Taxpayer Submit The GST Audit?
Technically, Form GSTR-9C is to be filed electronically through the common GSTN portal.
How To Prepare For The GST Audit
- Filing annual return a prerequisite: Primarily, the annual return is an aggregation exercise whereas the audit is a reconciliation between the audited financial statements and the annual return. As a result, although the two are due on the same date, in principle, the annual return becomes a prerequisite for the GST audit. Businesses would need to submit annual return earlier than the deadline, to ensure smooth compliance with the GST audit. Also, any disclosure errors in the annual return may lead to reconciliation differences that would require to be separately disclosed in the GST audit reports with specified reasons. The taxpayer would need to ensure the annual returns have accurate disclosures, with no room for errors.
- Registration/branch-wise break-up of financial statements: Reconciliations of turnover or input tax credits are sought in Form GSTR-9C at the GSTIN level. This means taxpayers will require to maintain GSTIN-level bifurcation of audited financial statements. This could be an arduous task, especially in cases where the company does not maintain branch-wise financial statements.
- Multiple types of ITC bifurcation and reconciliation: Practically, the preparation of an annual return and the reconciliation part of an audit will require businesses to prepare different types of reconciliations of their input tax credit. For instance, the annual return requires a reconciliation of ITC availed in monthly returns vis-à-vis the ITC available as per the auto-generated Form GSTR-2A. It also requires a three-way split of ITC availed into inputs, input services, and capital goods credits. On the other hand, GST audit Form GSTR-9C requires an expense wise break-up of ITC availed. Till now, there was no such requirement under GST law to maintain bifurcation of ITC availed, either nature-wise or expense-wise. Even in monthly GST returns, the credit is availed on a consolidated basis and reflected accordingly in the electronic credit ledger. These new bifurcations and reconciliations would be onerous for businesses and would need planning to ensure that appropriate data is made available to the auditors.
- No facility for corrections and rectifications: Contrary to expectations, neither the annual return nor the GST audit provides a mechanism to rectify errors made by taxpayers in their monthly compliance. This is a departure from legacy laws, where annual return was filed after the submission of VAT audit reports, after giving effect to all mismatches, errors, differentiating items.
- Reasons for non-reconciled items to be investigated: The GST audit is the first of its kind, as it not only requires reconciliation to be prepared but also requires detailed reasons for non-reconciled items to be furnished in the Form GSTR-9C. So, a taxpayer will not only require to prepare rupee-to-rupee reconciliation but also investigate the reasons for any non-reconciled item.
- IT facility still awaited: Although the forms have been notified and released to the public, the facility on the GST portal to submit the audit, as well as the annual return has not been made available. Clarity is also awaited on some other intricacies, such as whether physical submissions would be required.
- Selection of auditor: Form GSTR-9C contains two different certifications as part of the GST audit format. One where the reconciliation statement is prepared and certified by statutory audit, and the other where it is prepared and certified by a person other than the statutory auditor. Further, the language and scope of certification varies for both the certificates – where certification on the books of accounts is sought from statutory auditor, in case of a third person the certification is restricted to GST records and documents apart from the reconciliation statement. As per the latest ICAI announcement, internal auditors are not allowed to be appointed as GST auditors. Given the significance of the GST audit and amount of information required by the audit forms, business should select the GST auditors judiciously, as per the policies of relevant professional institutes.
Given past experience of last-minute technical glitches with GST filings, the volume of information required to be collated and prepared, with less than three months to go for the deadline, it is highly recommended that businesses not only commence the activity of annual return filing but also simultaneously begin the GST audit process.
Given the fact that the due dates for GST audit and GST annual return coincide, and going through the volume and types of data required to comply on both, it is likely that the days to come will be strenuous for businesses and tax professionals alike.
To ensure a smooth journey through the GST audit phase, a business should promptly appoint the GST auditor, prepare a project plan, start collating documents and information, and devise internal checks and controls for filing annual returns. This would also be helpful in future reconciliation with audited financial statements with the GST audit.