It’s been more than five years since the implementation of the new Goods and Services Tax (GST) law in July 2017. The new regime of indirect taxes brought a paradigm shift in the way businesses conduct their operations across India. However, the journey has been full of uncertainties and the rules have changed every few months. If one were to reconcile their GST returns across the past five years, it would be an ardent task to complete. Even today, many small businesses are still struggling to cope with all the changes which the government has been introducing repeatedly. One such significant change that the new law brought was ‘Departmental Audits’. Under the GST laws, the GST officers are equipped with the option to call for an audit of books of accounts. Departmental Audits will be carried out systematically audit and the procedure thereof has been well clarified. As a significant period has now passed since the introduction of the law, the GST department has started issuing audit notices to many taxpayers for verification and scrutiny of records. The State and Central GST officers have been extensively trained for this and are also equipped with the necessary resources. The Central Board of Indirect Taxes and Customs (CBIC) has also issued a GST Audit Manual for Departmental Audits.
Given the complexity involved in departmental GST proceedings, it has become important for taxpayers to start preparing for audit proceedings by undertaking activities such as re-assessing the tax positions, reconciliations of the tax credit, periodic review of books, etc. to ensure that they are well-prepared to face the departmental audit. Most of the notices have been based on requests for information involving comparison of the data as per books and the same as per returns. This is something which is a significant part of filing Annual Returns. Therefore, with little effort and awareness, one can file annual returns correctly and also simultaneously prepare for departmental audits. This also helps in avoiding errors and sometimes, tax notices altogether. One can also make note of possible conflicts and their resolutions right now when the details are easily available instead of 2-3 years later when the notice is served.
Form GSTR 9 – Annual Return
The Annual Return is a summary of all the returns filed during the year along with certain additional information. The due date for filing GSTR-9 is December 31 unless otherwise extended. If the taxpayer does not have a turnover exceeding INR 2 Crore, filing an Annual Return is not mandatory. Filing of GSTR-1 and GSTR-3B for all tax periods is mandatory before filing the Annual Return. Form GSTR-9 once filed cannot be revised. Some of the key changes that the Form GSTR-9 has undergone this year are, as follows:
- Table 4 – Amendments, credit notes and debit notes cannot be shown as net figures in the outward supplies tables. Tables 4I to 4L are now required to be disclosed separately.
- Table 5 – Exempted and Nil-rated sales can now be consolidated in the ‘Exempted’ column. However, Non-GST supplies are to be shown separately in Table 5F.
- Table 17 – HSN code and summary of outward supplies are now mandatorily required to be submitted. For the same, the data as per GSTR-1 can be used. Such disclosures concerning HSN classification are required at a 6-digit level if the turnover is more than INR 5 crores or else at a 4-digit level if the turnover is less than INR 5 crores.
- It has been clarified that the disclosures from Table 9A, 9B and 9C of monthly GSTR-1 returns filed during the year are required to be disclosed in tables 10 and 11 of GSTR-9.
- Wherever in Form GSTR-9 the months ‘April – September’ of the subsequent period are mentioned for amendments, the same should be read as ‘April-November’ as the same has been extended recently.
Certain relaxations from the past year that continue to be available are as follows:
- Table 5 – Unlike taxable sales, exempt, Nil-rated, Non-GST supplies etc. can be disclosed as net figures after considering all credit notes and debit notes
- Table 6 – Bifurcation of input tax credit into inputs and input services is not mandatory and the entire value can be consolidated under inputs. Further, an input tax credit under the reverse charge mechanism from registered and unregistered persons can also be clubbed under the head registered persons.
- Table 7 – The reversal of input tax credit can be consolidated under Table 7H. However, the reversal of transitional credit is required to be shown separately.
- Tables 12 and 13 – Reversal or availment of input tax credit in the previous year is not a mandatory disclosure.
- Tables 15, 16 and 18 – Refund details, information on inward supplies and deemed supply, and HSN disclosure of inward supplies are optional disclosures and the same are not mandatory.
Form GSTR-9C – Reconciliation Statement
Form GSTR-9C is an annual reconciliation statement which requires disclosure concerning reconciliation between books of accounts and the GSTR-9 annual return. The due date for filing GSTR-9C is December 31 unless otherwise extended. This form is no longer required to be certified by a Chartered Accountant and instead the same can be filed on a self-certification basis. Filing of GSTR-9 is a mandatory pre-requirement for filing GSTR-9C. Taxpayers with a turnover of more than INR 5 crore have to file the GSTR-9C form mandatorily while those with a turnover of less than the same may file this reconciliation statement voluntarily or choose not to file the same. Form GSTR-9C once filed cannot be revised. While there are no major changes in Form GSTR-9C there are certain relaxations from the past that continue to be available, as mentioned below:
- Table 5B to 5N – All turnover-related adjustments can be disclosed under Table 5O instead of providing a detailed reconciliation
- Table 12B and 12C – These details concerning input tax credit are optional disclosures
- Table 14 – It is optional disclosure and not mandatory to provide expense-wise details of the input tax credit.
Key Workings for Annual Returns
Before filing annual returns, a taxpayer or the professional filing on behalf of the taxpayer should ideally prepare or perform the following workings and reconciliations for accurate disclosures in the annual return.
- Turnover Reconciliation – Reconciliation of turnover as per Audited Financial Statements, as per GSTR-1 returns and as per GSTR-3B returns. Details in table 17 which are now mandatory to disclose i.e. HSN summary of outward supplies, should also be reconciled here.
- Reconciliation of output tax – Liability as per books and the same as per GSTR 3B considered along with liability for reverse charge mechanism should be reconciled. Differences if any should be paid through DRC-03. This output tax should also be reconciled rate-wise as per books and as per returns.
- Reconciliation of input taxes – Input tax credit as per books, the same as per GSTR-3B return and also the same as per Table 8A i.e. system generated summary should also be reconciled. The closing balance as per books and the same as per the GST portal should also be compared. Invoice level reconciliation of GSTR-2B and the input tax credit as per books for GSTR-8 is an important exercise for filing annual returns. Unclaimed ITC should be expensed off in the books of account, after the reconciliation of tax credit up to November of the next financial year.
- Separate details of ITC claimed, reversed, and reclaimed after fulfilling the conditions mentioned under section 16.
- Details of outward supplies amended including original invoice details as well as amended invoice details and similarly for debit notes and credit notes as well.
- Maintain a GST management report which contains details such as locations where final workings and filed Form GSTR-1, GSTR-3B, GSTR-9 and GSTR-9C for every financial year are kept and maintained, Summary of the reconciliations performed and also reasons for variances and the action taken to correct the same.
The procedure of departmental audits
The departmental audits are conducted for a particular financial year only. Based on various risk parameters (mentioned below) the GST department selects certain taxpayers for additional scrutiny by way of Departmental Audit. In such cases, the audit officer after receiving due authorization from the department issues a notice 15 working days before the conduct of the audit. The audit officer is required to complete the audit within 3 months from the date of commencement of the audit. However, this period can be extended for a maximum of 6 months by the Commissioner. The taxpayer on receipt of notice should respond promptly within the time specified. Failure to respond can allow GST authorities to take legal action as the taxpayer it is considered that the taxpayer is purposefully defaulting. The taxpayer has to mandatorily comply with the GST-ADT-01 notice and all the correspondences from the audit officer concerning the audit. It is the responsibility of the taxpayer to make available all the necessary books of accounts i.e. physical records as well as access to the accounting system and electronic records. The registered person or the authorised representative should be present at the place of business when the audit is being conducted to explain the operations and transactions.
During the audit, if the tax officer finds any mistake, then there are penalties and offences according to the nature of the default. The common defaults are a) Issuing fake or wrong invoices b) providing false information in financial records or GST returns c) GST collected but not deposited within 3 months d) availing input tax credit without actual delivery of goods or provision of services e) deliberate suppression of outward liability to evade taxes and mistakes. If the default does not involve fraud or wilful misstatement then the penalty is INR 10,000 or 10% of the differential tax due owing to the default, whichever is higher. If the default involves fraud or wilful misstatement then the penalty is INR 10,000 or the entire amount of tax due whichever is higher. These penalties are over and above the differential tax that the taxpayer is already liable to pay.
Risk parameters for departmental audits
- The selection of taxpayers for departmental audits is based on a set of criteria or risk parameters. Some of the important risk parameters as per the Goods and Services Tax Audit Manual issued by the Central Board of Indirect Taxes and Customs (CBIC) are as follows:
- Taxpayer’s turnover and net profit
- Comparison of turnover and net profit with the previous years
- The volume of exemptions claimed by the taxpayer
- Higher incidence of supplies without the issuance of e-way bills in case of goods, or inconsistency between periodical returns and e-way bills
- Financial ratio analysis and variations observed
- Amount of tax refund claimed by the taxpayer compared year to year
- The multitude of the taxpayer’s legal relationships with other entities
- The number of branches of the taxpayer
- A taxpayer who has requested a waiver or is declared bankrupt
- Taxpayers who have been categorized as high-risk, or previously investigated for evasion
- Taxpayers who have not been audited in the pre-GST era for a long period
- Specific information received from other Government authorities or written complaints from any person
- A difference in the turnover as declared in Form GSTR-1 and GSTR-3B returns for a continuous period
- A difference in input tax credit availed and utilized as per GSTR-3B and input tax credit available as per GSTR-2A
- Wrong classification of goods or services with the wrong levy of taxes
- Mismatch in the details of export reported under GSTR-1 and information lodged on the customs portal.
Documents for departmental audit
Following are some of the common documents and workings that are required at the time of departmental audit.
- Books of accounts maintained as per section 35 of the CGST act read with relevant rules which prescribe accounts and record requirements for a registered person
- Tax Invoices, bills of Supply, delivery challans, credit notes, debit notes, etc. as per the specific rules concerning invoicing under GST laws
- Stock register reflecting opening balance, receipts, supply and goods lost, stolen, destroyed and the closing stock. If the taxpayer is having multiple branches, details of all the stock transfers.
- In the case of manufacturers, production records indicating the break up of raw materials, finished goods, scrap etc
- In case goods are sent on an approval basis, or goods are sent for job work, the record of the movement thereon.
- Details of advances received and paid during the year
- Records about input tax credit availed and utilized as per books of accounts, details of reversals
- If the records are maintained electronically, a log of all the entries modified or deleted
- Copy of registration certificate
- Copies of GSTR-1, GSTR-2A, GSTR-3B and GSTR-9 and GSTR-9C along with payment challans. Also, ITC-01, ITC-05, ITC-05A and other such forms, if applicable.
- Copy of Audited Financial Statements, Audit Report, Income Tax Return filed, Annual Tax Statement (Form 26AS),
- Details of e-way bills for the audit period for inward and outward supply of goods and services
- List of show cause notice issued if any and their present status
- Date of last departmental audit and the period covered, along with a copy of the findings and correspondence with the department
- Annexure – GSTAM-I, Annexure – GSTAM-V and Annexure-GSTAM-VI as per the proforma prescribed in GST Audit Manual 2019
The activity of filing Form GSTR-9 and GSTR-9C carries more importance than expected, as it shows the final values along with corrections if any for a financial year. These forms are also the basis for the selection of cases for scrutiny and departmental audit as the GST officers evaluate the detailed information provided in the return vis-à-vis information available with them from the e-way bill portal, e-invoice portal and GST returns filed by the taxpayer, their customers and the suppliers. Therefore, putting in place procedures to ensure accurate data capture and reporting is imperative.