GST audit deadline’s close! When is taxpayer chosen for audit? What are kinds of audit? All you need to know

The GST law for the first time has defined the term “audit” as an examination of records, returns and other documents maintained or furnished by the taxpayer.

By L Badri Narayanan & Shweta Walecha

After one year of Goods & Services Tax (GST) regime, it is now critical for the taxpayers to start focusing on various GST compliances such as reconciliations, annual return and GST audit certification. All of these compliances will form an important basis for the first audit/scrutiny/assessment under the GST law.

The law prescribes multiple audits conducted by or on behalf of the authorities or audit certification by a professional appointed by the company. It is interesting to note that the GST law for the first time has defined the term “audit” as an examination of records, returns and other documents maintained or furnished by the taxpayer 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.

On the basis of audits conducted under the Act, the Department can raise demands and make recoveries, in case, it is observed that the tax was not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by the registered person.

Let us have a look at various audits prescribed under the GST Law:

General Audit (Section 65 of the CGST Act/ Rule 101 of the CGST Rules): This is a general audit of the business transaction conducted by the Commissioner or any other officer authorised by it.

Special Audit (Section 66 of the CGST Act/ Rule 102 of the CGST Rules): This Audit is conducted by a nominated Chartered Accountant/ Cost Accountant on the directions received by an officer not below the rank of Assistant Commissioner. This audit can be conducted at any stage of proceeding before an officer not below the rank of Assistant Commissioner. It audit is ordered considering the nature and complexity of the case and in the interest of revenue if it is observed value has not been correctly declared or the credit availed is not within the limits.

Audit by Professionals (Section 35(5) of the CGST Act/ Rule 80(3) of the CGST Rules): An audit done by the taxpayer himself if the aggregate turnover exceeds Rs. Two crores. This audit can be done by a Chartered Accountant or a Cost Accountant.

In addition to the above, audits to verify the transitional credit were done earlier this year to verify the correctness of the credit availed by the taxpayer. The categories of person and time within which the transitional audit was to be concluded was communicated internally by the Department.

As can be seen from the above, there are multiple audits that a taxpayer can be subjected to. One may question that once an audit has been done by a professional, is there a need for conducting a general or special audit by the Department itself? Will this not result in duplication of efforts or harassment at the end of the taxpayer? Is there going to be a difference in the protocols adopted between the two audits?

The answer to this is simple. Similar to the erstwhile indirect tax regime as also the existing direct tax provisions, the GST law promotes self-assessment. However, a variety of potential “triggers” in GST returns tend to raise questions and attract unwanted attention from the Department. The Department uses a computer scoring system which analyzes tax exemptions, compares taxpayer’s data, refunds and is often the basis for initiating an audit.

Typically, a taxpayer is chosen for audit when something is entered in its return which seems out of the ordinary. While the chances of being “the chosen one” for a closer scrutiny are statistically low, there are certain factors that increase the odds of receiving an audit notice.

These factors include sudden decrease in the tax payments or sudden increase in the input tax credits or in the refund amounts. At times, based on some insider knowledge, members of a particular industry may also be chosen for the purpose of getting audited. Many times, a malpractice at the end of the taxpayer comes to the knowledge of the Department based on the information gathered from the customers/ vendors/ suppliers etc.

Having received an audit notice, a taxpayer’s first question is what should I do? It should be kept in mind that once an audit notice is received, it must be responded. One of the best ways to reduce your chances of being caught in a wrongdoing is to regularly keep a check on the transactions and review all the positions taken on the same considering the legal changes that have happened. Another important step for being audit-prepared is to keep detailed records. This also helps to ensure that if the taxpayer is questioned by the Department, he will be able to substantiate the claims made by it.

It is also recommended to invest time at the time of getting a self-audit done. With the certification of a knowledgeable auditor, issues can be vetted and rectifications can be made beforehand. Having stated the above, the taxpayer should keep a close check on amendments in GST law and accordingly align its ERP system & business practices to minimise the errors at the time of self-audit.

To conclude, taxpayers should be receptive to the idea of audit. This will not only help in identification of discrepancy and taking corrective action in timely manner but will also help in finding out business opportunity, if the same was missed out earlier.

(L Badri Narayanan is Partner and Shweta Walecha is Joint Director at Lakshmikumaran & Sridharan Attorneys.)


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