GST Audit: Are You Ready?

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.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.