GST AUDIT
GST AUDIT U/S 35(5), READ WITH SECTION 42(2), READ WITH RULE
80(3): SOME IMPORTANT DISCUSSIONS FOR GST AUDITOR FROM MY POINT OF VIEW:
Meaning of Audit in GST law: According to Section
2(13), Audit means the examination of records, returns and other documents
maintained or furnished by the registered person under this Act or the rules
made thereunder or under any other law for the time being in force 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.
Type of Audits in GST Law: In GST law there
are 3 types of audit. First one is Aggregate Turnover based
audit of books and records, including examination of GST returns and data and
certification of reconciliation statement by a CA or CMA according to Section 35(5), read with section
44(2), read with rule 80(3). Second one is audit by Tax Authories u/s 65, read with rule 101 and
the third one is special audit according to Section 66, read with Rule 102, which is done by a
CA or CMA nominated by prescribed designation holder departmental officers.
I describe and discuss only audit u/s 35(5) regarding
matters in that write-up.
Applicability of audit and auditor’s Certification u/s 35(5),
read with section 44(2), read with rule 80(3): Section 35(5) says, 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.
Sec 44(2) is saying regarding reconciliation statement.
It says, every registered person who is required to get his accounts audited in
accordance with the provisions of sub-section (5) of section 35 shall
furnish, electronically, the annual return under sub-section (1) along with a
copy of the audited annual accounts and a reconciliation statement, reconciling
the value of supplies declared in the return furnished for the financial year
with the audited annual financial statement, and such other particulars as may
be prescribed.
Now as per Rule 80(3), 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.
Now the interpretation become start when watch the word “turnover” in act and “aggregate turnover” in
rule. We all know that word “Turnover” is not defined in GST Act, “Turnover in
State/Union Territory” and “aggregate turnover” are defined in the act.
According to section 2(6), “aggregate turnover” means aggregate value of all
taxable supplies (excluding the value of inward supplies on which tax is
payable by a person on reverse charge basis), exempt supplies, exports of goods
or services or both and inter-State supplies of person having the same
Permanent Account Number, to be computed on all India basis but excludes
central tax, State tax, Union territory tax, integrated tax and cess. Now we
have to take “Aggregate Turnover” for determining audit applicability of an
entity (PAN) I mean if any registered person have more than one registration
(GSTIN), every GSTIN are treated as distinct persons according to section
25(4). And for determining audit applicability of that PAN (Entity), we have to
consider summation figure of all GSTIN’s turnover (it means aggregate turnover
of the entity). If the
figure (aggregate turnover as per GST law) crosses 2 Core then GST audit is
applicable for the entity (PAN) so all GSTIN are covered in audit preview. Now
if we watch technically, we can say that every distinct person (GSTIN) has full
compliance liability and treated as separate registered person though the
person is same in entity level so every GSTIN (distinct person) of the entity
(PAN) have to file GSTR 9C separately along with Financial Statements for each
GSTIN duly certified by a CA or CMA. It is not the fact that, one auditor can
certify all the GSTR 9C, separate auditors may appointed for separate GSTIN.
Auditor’s roll in GST audit u/s 35(5): Auditors are going
to take a very important role in GST audit u/s 35(5) from auditee’s angel and
also from government’s angel. From my point of view, audit u/s 35(5) of CGST
act is not only the GST books checking with relevant, record, returns and
documents after considering the provisions of GST law with certifying
reconciliation statements, GST audit u/s 35(5) is a stage of performance
for auditors where they have to work as a breeze between registered
person and GST law by verifying the correctness of Turnover declared, Taxes
paid, Refund claimed and Input tax credit availed. Auditor’s lawful
recommendations and observations can save auditee for any kind of future
litigations, fine, penalties etc. Auditors recommendations can aware them and
motivate them for paying correct taxes according to GST law before starting any
assessment process. We all know Chapter XIX of CGST act is very vast. Section
122 to section 138 are posted in Chapter XIX. Various offences and penal
provisions are descried in that chapter. Then also arrest provision are there
in GST law. Section 69 of CGST act talks about arrest. Other than the above,
GST law have many more provisions where many kind of demand may imposed. So auditor’s lawful recommendations and
auditee’s acceptance by paying those kind of tax with applicable interest can
save the auditee from future litigations, penalty etc. Not only that, while
departmental audit u/s 65 or special audit u/s 66 (cases where already
mandatory audit u/s 35(5) done) will impose for any reason, a good auditor’s
lawful observation in reconciliation statement GSTR 9C in time of audit u/s
35(5), which was already in the hands of registered person can take a major
role for establishing the right tax according to GST law in front of audit u/s
65 and u/s 66. From government’s point of view, a good lawful observation by
GST auditor can help the departmental officers for taking actions (for
collecting lawful tax from the auditee) also. I want to say from my view point
that 35(5) is a stage where practicing C.A. or C.M.A who conducting audit have
to take a major role to establish the total GST law rightly in India.
GST Auditor and GST Audit : When we go through
section 35(5), read with section 44(2), along with notified forms, we can see
two types of situations, First one is a case where no audit is required in any
other statute but GST audit needed u/s 35(5) and duly certified reconciliation
statement [Certified by CA, defined in 2(23) of CGST act / CMA (Cost
Accountant) defined in section 2(35) of CGST act] also need to file as
per section 44(2) by the registered person (auditee). Second one is the case
where Audit is required in other statute like Income Tax Act, Companies Act etc
along with GST Act u/s 35(5). When Audit in other statute was done then, same
auditor can certify the reconciliation statement GSTR 9C and alternatively an
auditor, other than the auditor who conducted the audit of financials, can
certify the reconciliation statement GSTR 9C after considering the GST matters
and records, returns and other required data. Now we can say when the
second option is applicable, there is no requirement of audit of financial
statements again in time of GST audit, only requirement would be the
examination and checking up the books and records in the view point of GST law
(Books and records prescribed u/s 35(1), read with Rule 56) keeping the meaning
of audit u/s 2(13) in his brain and certify the correctness of reconciliation
data of GSTR 9C. The word “Certify” indicates Absolute level of assurance
provided on that subject. In GSTR 9C, auditor have to certify by using “True
and Correct” term though various observations are subject matter. We all
know GST act do not provide guideline in audit procedure so sampling based
audit also acceptable where a lots of audit/checking matters are involved
within a limited time period so from that point of view various standards of
auditing can give some focus on this regards. When an auditor doing both GAAP purpose
books’ audit / statutory audit / tax audit in Income Tax as well as GST
audit, then in time of certifying GSTR 9C (Reconciliation statement), he/she
has to fill first option of Part-B in certification sector of GSTR 9C. When
GAAP purpose books’ audit / statutory audit/ tax audit in Income Tax and GST
audit done by different auditor then GST purpose auditor have to choose second
option of Part-B in certification sector of GSTR 9C. In both cases auditor have
to certify true and correctness of reconciliation statement, after considering
the explanation given to them by the auditee subject to observations and
qualifications from view point of GST law by the them (auditor). So
auditor’s valuable observation and qualification will help the auditee in
decisions making for future also.
Which elements are treated as Accounts and Other Records in GST
law and how to maintain those Accounts and Records in GST regime: As per section
35(1), every registered person shall keep and maintain (For more than one
declared business place, declared in registration certificate, have to keep and
maintained separately business place wise) at his business place mentioned in
the Registration Certificate, a true and correct account of (a)
production or manufacture of goods; (b) inward and outward supply of goods or
services or both; (c) stock of goods; (d) input tax credit availed; (e) output
tax payable and paid; and (f) such other particulars as may be prescribed: Rule
56(1) provide, every registered person shall keep and maintain, in
addition to the particulars mentioned in sub-section (1) of section 35,
a true and correct account of the goods or services imported or exported
or of supplies attracting payment of tax on reverse charge along with the
relevant documents, including invoices, bills of supply, delivery
challans, credit notes, debit notes, receipt vouchers, payment vouchers
and refund vouchers. Rule 56(3) says, every registered person shall keep and maintain
a separate account of advances received, paid and adjustments made
thereto. Rule 56(4), provide every registered person, other than a person
paying tax under section 10, shall keep and maintain an account,
containing the details of tax payable (including tax payable in accordance
with the provisions of sub-section (3) and sub-section (4) of section 9),
tax collected and paid, input tax, input tax credit claimed, together with
a register of tax invoice, credit notes, debit notes, delivery challan
issued or received during any tax period. Rule 56(5) says, every registered
person have to maintain details of recipients and suppliers and the complete
address of the premises where goods are stored by him, including goods
stored during transit along with the particulars of the stock stored therein.
Other sub rules of rule 56 are also considerable for keeping and maintaining of
records
As per Section 35(2), every owner or operator of warehouse
or godown or any other place used for storage of goods and every transporter,
irrespective of whether he is a registered person or not, shall maintain
records of the consigner, consignee and other relevant details of the goods in
such manner as may be prescribed. Rule 58 produce us the details system of
maintaining books and records by owner or operator of warehouse or godown.
Need sufficient Knowledge of Computerized software used by
auditee: At present era of Tax and Accounts, computerized system is a
very essential factor, various ERP based software are there for help us. When a
entity has lots of different types of transactions with different branches then
we have to choose software according to need of reports of the business from
various points of view like accounting point of view, budgetary control’s point
of view, taxation’s point of view, management’s point of view etc. When a
software generate GST required results along with financials results after
entering regular data, auditor must have to know regarding the process (I mean
Accounting process) of preparing automatically processed data, returns etc
after entailing primary data into that software. Auditors have to know the process and
system of implementations of GST law through that computerized software
otherwise it is going to be a very tough task. Also auditor have to know the
audit conduct features and system of that software for auditing. At present
era, audit systems are implemented through software after considering the hard
copy of bills and vouchers and documents. So auditing futures of that software
by which auditee maintain books is very important for auditors.
Books of Accounts, Records and Financial Statements for
Accounting purpose :Generally books and records are maintained and financial
statements are prepared as per Generally Acceptable Accounting Principals of
India (GAAP) and Accounting Standards (AS) by using various computerized
accounting software or own developed accounting and tax software and for
final accounts preparation for Companies (Some cases it depends on the law on
which the entity getting themselves registered) we have to follow Schedule III
of Company Act 2013, and final accounts preparation for other than companies,
general concept of accounting take a major roll.
My view regarding maintenance of Books and Records under GAAP
system covering data and records of GST law: When a GST
Registered Pan (Entity) has more than one distinct person (GSTIN) and every
distinct person have one place of business, the entity may maintain general
purpose books of accounts as a whole for the entity level, but he has to
maintain GST purpose books and records separately for each GSTIN (as per
company regulations and law, the company have to maintain books of accounts in
its registered office but taking approval from ROC, they can maintain from
another offices). Some entity maintain general purpose books for various
branches by useing branch accounting for every branches by using control
ledgers in books. Also they can go for cost centre basis accounting of various
units and main unit of the entity for mainly allocate expenses and others among
the branches. Maintenance of separate books of financials (for the entity
having more than one distinct person) separately for GSTIN wise (When every
GSTIN have one business place) is very helpful for maintenance purpose and also
at the same time a consulate single accounting results can generate for the
entity level (PAN) in regular basis is highly recommended though present various
software have the facility to consulate the every GSTIN level accounts into a
combine entity level (PAN) accounts. Commonly we watch common Ledgers and
other records between GST law and GAAP purpose are maintained in one set of
books of accounts (Following the principal of accounting entry) and the extra
data and records, required for GST purpose are maintained in a separate sets of
record sheets (Not by the way of accounting entry method but its depend on the
need of results). In that point of view, accounting software have to take a
major roll. At present various ERP systems developed themselves regarding GST
matters also. Accounting software preparation companies are doing a good job,
they develop themselves in a good way by using good skill. Passing one
entry can fulfill GAAP requirement and also GST law related requirement by
using those software. Some time some GST transactions cannot fit for the GAAP
transactions directly. Some time where transaction value of GAAP is not
considerable for value of supply prescribed in section 15 of CGST act and
various valuation rule like Rule 28 giving effect for calculating value of
supply and after calculation of tax amount by applying valuation rules, the
Transaction of GAAP transacted in accounting way with taking that tax amount
(calculated by using Valuation rules) in books of account data. Sometime a
transaction in GAAP for a financial year is a not a part of that GST matters of
that month, it may hit the GST books of previous financial year by doing some adjustments
in GAAP books. For example, GST Credit Notes of section 34 for sales return
against any tax invoice of previous financial year can issue in current
financial year (within prescribed time). So maintenance of books by
auditee in proper way through a proper softwere is taking a main part in time
of audit process.
More than 95% items of Trial balance should reflect in GSTR 3B,
I mean 5% data of trial balance may not reflect in GSTR 3B (for schedule III
matters and others purposes though some different opinions of some experts are
there for added schedule III items in GSTR 3B). Not only the above matter, we
can see in some cases, where trial balance may not consider some GST data (as
GAAP not accept those transactions as financial transactions) but GSTR 3B may
consider them as GST data. Over all, I just give a example, suppose a sale transaction having sale
value Rs. 100 and tax is 5% and it is a valuation rule effected transaction and
assume value is determined for gst purpose is Rs. 150/- so Tax is Rs. 7.5/-. So
Transaction Value is Rs.100/- + 7.5/- = Rs. 107.5/- So in financials, sale
figure is Rs.100/-, and tax figure is Rs.- 7.5/- but in GSTR 3B, and supply
register, supply is reflected as Rs. 150/- (Output Tax figure in GSTR 3B and
Output Tax Register is Rs. 7.5/-). Also for audit applicability determination,
we have to consider Rs. 150/- in place of Rs. 100/-.
So in time of GST audit, auditors have to see those matters by the view point
of GST law. We already watch, in GSTR 9, “No supply” shall added with “Non-GST
supply table” (No 5F) but in time of GSTR 3B filing, we cannot put schedule III
outward cases with Non-GST supply (my point of view is that, as “non gst
supply” is not defined in GST law, we have to take those items’ supply as
non gst supply on which supply provisions covered in GST at present but
tax cannot levied before notification by Govt. as per section 9(2) i.e.
declared petroleum products. So GSTR 3B has that option so we put those items
as Non GST Supply. On the other hand scheadule III items are neither a
supply of serves nor a supply of goods so it is “No supply” and 3B has no
option for “No supply” so we cannot put outward cases of Scheadule III items in
GSTR 3B) so in time of GSTR 9, we have to add those non declared Scheadule
III data from our books of accounts. And in time of audit, auditors should
understand the wideness GST and its implementation through financial accounts,
GSTR 3B and GSTR 9.
Some important points for GST Auditors:
1) GST Audit of any Financial Year dependent on next / previous
Financial year’s transactions also: As we all know some
sections of gst talk about the dates of next financial year for acceptability
GST provisions of any financial year. Section 34(2) is a example, I mean Credit
note for GST purpose. If any person issue valid GST Credit note within the
prescribed time (assume credit note issuance date is a date for next financial
year), the outward supply for which the credit note is issued is reduced on the
day on which the actual supply was taken place (though recipients credit
reducing also is subject matter in some cases). So auditors have to check
the next financial year’s some GAAP data for establishing that kind of GST
issues, related to the year for which audit is going on. Also this effect make
difference between GST Data and GAAP purpose books data. And for establishing
the GST provisions, we have to pass some financial entries adjustment entries
in books. Section 15(3)(b), read with section 34 is the area where Sale
made/Service rendered in the form of supply, transacted in a financial Year but
pre-determined discount may transacted in next financial year also. So after
establishment of the clause “pre determine”, the supply of the previous period
and tax is reduced for that previous period and a financial transaction can
established the effect of gst law. So from my point of view, auditors should
watch these areas very closely.
2) Preparation of Data for Reconciliation Statement and
verification where the entity having more than one GSTIN:
a) Many big entities have many GSTIN and statutory auditor’s
annual audited financial statements for the entity (PAN) level are not enough
for a GSTIN level GST auditor to trace the transactions and GST matters for
that particular GSTIN before watching the details of statutory audit in GSTIN
wise segregation. So
from my point of view “Trail Balance” of entity level have to divide as GSTIN
level Trial Balances. So every GST auditor of every GSTIN can watch the total
sheet where summation of every GSTIN level trial’s Ledger balance match with
the figure of entity level trail balance. I think if the statutory auditor does
not certify that type of sheet then auditor should take certified financials
reports (that type of sheets) from the management of the company and it should
match with audited statements financials. Now the question is whether the
simple trial balance is enough for matching GST books data with GAAP purpose
books data or not. From my point of view simple net figure reflected trial
Balance cannot fulfill the requirements of GST auditor. Ask for trial balances
reflecting triple column wise, I mean, opening figure, financial year’s debit
and credit Figure and Closing Figure. A credit side figure
of yearly transactions of any expenditure/Capital Assets may attract outward
supply provisions when fulfill the inclusive definition of supply defined in
Section 7 of CGST act in some cases. So if the auditee did not declare those
kind of (applicable cases only ) maters in returns, then auditor have to make a
observation on that point. When the matter is regarding audit of FY 17-18, only
the trials of FY 17-18 is not enough, You have to take trials for FY 18-19
also. Now the question is trial of 18-19 may not be audited as on present date,
so definitely management’s certified trial balance of FY 18-19 for those types
of cases has to be taken by GST auditor from auditee. I also prefer that when
books of accounts are maintained for GAAP purpose in GSTIN wise separately,
then stock transfer between one GSTIN to another are established as purchase
and sales for the relevant two GSTIN by the auditee (In time of audit of books,
GST auditors have to watch whether tax is charged after considering relevant
valuation rule or not) so if that kind of purchase and sales are considered in
books with general purchase and sales then auditors task become little tough
but if that kind of (distinct persons transactions) sales and purchase are
treated in separate sales and purchase ledger by auditee then it will become
little easy for auditors. Those
types of cases where we take separate ledger wise data for those kind of
schedule I transactions for GSTIN level, then in time of matching with Entity
level Trial Balance, total purchase of all GSTIN of those type (Distinct
persons case) matched with total sales of all GSTIN of those type (Distinct
persons case). So when comparing Trial Balances with the totals of All GSTIN
level with entity (PAN) level, both side entries (purchase and sales) of GSTIN
levels trial balances are not included in entity (PAN) level trial balance. For
example, purchase and sales of entity level (PAN) do not include those purchase
and Sales figure of GSTIN level. And as the total purchase of those type is
equal to total sale of those type, we can say it is a case just like contra for
entity level.
b) Now if the entity (PAN) maintains Branch accounting process
for every GSTIN for maintain Books for GAAP purpose then need details of
control ledger of each branch (For which type of debit, respective branch is
credited and for which type of credit, respective branch is debited) maintain
with another branch and finally prepaid the sheet where the entity level
financial record’s each Ledger balance matched with total of each ledger
balance for summation of all branches. But for GST data and records, every
GSTIN shall maintain data separately for its each declared business place.
3) Auditing have to start from Registration Certificate
checking:
From my point of view, audit should start from checking of
registration certificate. As according to section 35(1), maintenance of
GST books and records needed for every GSTIN separately and when any GSTIN have
more than one business place (as per registration certificate) books and
records have to maintain separately for each place of business. So if the
auditee do not maintain GST books and records for every business place
separately then auditors have to give this observation in certification part of
GSTR 9C.
4) Some important maters auditors have to watch very closely:
Supply is the main subject for established every matter related
to turnover (Aggregate Turn over, Turn over in State/Union Territory). In this
area I discus some matters which have to watch very closely by GST auditor.
Taxable Event in GST: Taxable event in GST is “supply” but the
term “supply” is not clearly defined in the GST law. According to Section 7 of
CGST act we can take some examples and activates related to supply. Section
7(1) says “Supply includes……..”, so the word supply is used without defining it.
So it is a inclusive definition given in gst law. Section 7(1)(a) says, all
forms of supply of goods or services or both such as sale, transfer, barter,
exchange, licence, rental, lease or disposal made or agreed to be made for a
consideration by a person in the course or furtherance of business. If we watch
the above definition very closely, we can see “by a person” is used but “to
another person” is not used. It means if a person transfer goods to himself
then also it is possible to fall in the ambit of supply. Just like stock
transfer from a branch to another branch of a entity. Now in some cases
where without consideration, supply can happen and it is described in Scheadule
I of CGST act. Now if we go through the Scheadule I of Cgst act, we can see,
four types of transactions are placed here. First one: Permanent
transfer or disposal of business assets where input tax credit has been availed
on such assets. Goods transfer as free gift may attract that provision. Second one: Supply of
goods or services or both between related persons or between distinct persons
as specified in section 25, when made in the course or furtherance of business,
Provided that gifts not exceeding fifty thousand rupees in value in a financial
year by an employer to an employee (employer and employee are related persons)
treated as No Supply., Third
one: Supply of Goods, by a principal to his agent where the
agent undertakes to supply such goods on behalf of the principal; or by an
agent to his principal where the agent undertakes to receive such goods on
behalf of the principal. Forth
one: Import of services by a person from a related person or
from any of his other establishments outside India, in the course or
furtherance of business. Now in the case of import of services for a consideration
is establish as supply even it is not in the course or furtherance of business.
Events specified in Schedule III of CGST Act are neither a
supply of service nor a supply of goods even the conditions of section 7 are
fulfilled.
For knowing which events are supply of service and which are
supply of goods, we have to follow schedule II of CGST act.
a) Classification and establishing supply as supply of goods or
supply of services in some cases: Classification of goods and services for
charging GST is a area where GST auditor have to do a very close look. I mean
whether auditee’s charging of tax percentage is correct or not, whether
auditee’s declared HSN/SAC is properly matched with the goods and services
supplied originally or not. Whether those declared HSN/SAC is matched with rate
of those HSN/SAC or not. So for this maters, Auditors have to study very
closely the Rate notifications for goods, services etc. Sometime transfer of
property of goods transfer to recipients but as per GST law, that supply is
treated as supply of services and time of supply of services, location of
supplier of services (Though location of supplier of goods is not defined in
GST law) are applicable in that cases. For example, Work Contract defined u/s
2(119) is the situation where the above mater is established. It’s a composite
supply according to section 8(a), read with section 2(30) and always treating
that it is a supply of services according to Schedule II , point no.
6(a). Now the main matter is the meaning of “Work Contract” in GST era. In
simple word in pre GST era, work contract is a kind of contractual work where
goods and services are provided in a mixed system for a work order provided by
the recipient. It is just like repairing of car, making of roads etc. But in
GST era, the meaning of “Work Contract” is changed, section 2(119) says, a
contract for building, construction, fabrication, completion, erection,
installation, fitting out, improvement, modification, repair, maintenance,
renovation, alteration or commissioning of any immovable property wherein
transfer of property in goods (whether as goods or in some other form) is
involved in the execution of such contract. So we say that if there is no
attachment of immovable property then that supply is not going to Work Contract
provision. Repairing of car may be tracked in Composite supply (according to
case study) but not going to Work Contract as no immovable property is
subject matter. From
my point of view, auditors have to watch those kind of transactions very
closely and watch whether the auditee show those kind of transactions according
to the gst law regarding time of supply, classifications of those supply
etc. or not.
b) Watch those transactions of outward supply very closely where
more than one items are provided in a combo pack system:
We all know that Mixed supply is a subject of GST also.
Section 2(74), read with section 8(b) give us the idea of mixed supply.
Auditors have to watch in time of more than one taxable goods or services in a
combo pack system where the items (goods or services) are made in conjunction
with each other for a single price and where such supply does not constitute a
composite supply (when the group is not naturally bundled) auditee charge the
highest rate tax (highest rate applicable among the goods or services) for the
combo group, or not. If not charge, then give the proper recommendation from
auditor and payment of tax by auditee, can save the auditee from future
litigation.
Value of supply is determined after adding some elements: According to section 15 of
CGST act, value of supply is the transaction value of that supply. Most
important part is value of supply includes all taxes and duties excluding CGST,
SGST, UTGST, IGST and Compensation Cess but include Incidental expenses
including commission, packaging charged by the supplier to the recipient of a
supply and any amount charged for anything done by the supplier in respect of
the supply of goods or services or both at the time of, or before delivery of goods
or supply of services. Value of supply also includes interest or late fee
or penalty for delayed payment of any consideration for any supply. So in time
of audit, auditor have to see, whether the all required eliments are added with
respective value of supply (when value of supply depends on section 15) or not
for computing the taxable amount.
Supplier’s liability discharge by recipient, added with value of
supply: Some contractual work is executed with a contract but for
some reason some items are provided by recipient and after deducting the
amount, the payment matter is settled. For those kind of transactions, auditors
have to find out from the contract agreements, whether the items provided by
the recipient is the liability of supplier or not. If it is liability of
supplier, but provided by recipient, auditor should consider the value of that
supply according to law provision, and compared by the value of supply declared
by the auditee for tax purpose. As per Section 15(2)(b), if the liability is for
supplier but items provided by the recipients, then for value of supply for tax
computation purpose, should include value of that items.
Sale of Scrap is a supply: The term “Scrap” is
not defined in GST act. So in general way if the goods are lost their economic
value then the goods are treated as scrap. And we know HSN code for various
types of scrap are there in GST law. And according to rate scheadule the scrap
items are attract various rates of GST also. so sale for a consideration of
scrap items are covered as supply. Auditors have to watch those transactions.
c) Properly segregation of nature of supply as Interstate supply
or interstate supply:
In General cases, to establish and check correct chargeability
of levy by auditee in time of output supply in CGST act according to section 9
of CGST act and establish levy of respective SGST act and UTGST act,
(CGST+SGST) and correct chargeability of levy by auditee in time of output
supply in IGST act according to section 5 of IGST act (IGST), auditors have to
know what is location of supplier and what is place of supply. Location of
supplier of services are defined in IGST Act, section 2(14) but location of
supplier of goods is not defined then for goods case if supplier having more
than one registration then the place from where goods are removed (having GSTIN
for that place) is the location of supplier. For place of supply determination
has to consider section 10,11,12,13, and 14 of IGST act. It is very important
from my point of view, according to section 12, sometime services are rendered
in relation to immovable property and services provided like lodging
accommodation by a hotel, inn, guest house etc cases, place of supply is the
place where the immovable property is situated. The place of supply of restaurant
and catering services, personal grooming, fitness, beauty treatment, health
service including cosmetic and plastic surgery shall be the location where the
services are actually performed. Now after establish the “Place of Supply” and
”Location of supplier” auditors have to watch following provisions for General
cases (NON IMPORT and NON EXPORT CASES) for approve a supply as interstate or
intrastate. In general cases according to section 7(1) of IGST act, where the
location of the supplier and the place of supply for supply of goods (within
india) are in– two different States; two different Union territories; or a
State and a Union territory, the supply of goods is treated as supply of goods
in the course of inter-State trade or commerce and IGST levied. In general
cases according to section 7(3) of IGST act, where the location of the supplier
and the place of supply for services cases are in- two different States; two
different Union territories; or a State and a Union territory, shall be treated
as a supply of services in the course of inter-State trade or commerce and IGST
levied. According to section 8(1) of IGST act, supply of goods where the
location of the supplier and the place of supply of goods are in the same State
or same Union territory shall be treated as intra-State supply subject to
following three exceptions, (i) supply of goods to or by a Special Economic
Zone developer or a Special Economic Zone unit; (ii) goods imported into the
territory of India till they cross the customs frontiers of India; or(iii)
supplies made to a tourist referred to in section 15 of IGST act (this three
cases supply of goods not treated as intra-State supply). According to section
8(2) of IGST act, supply of services where the location of the supplier and the
place of supply of services are in the same State or same Union territory shall
be treated as intra-State supply (subject to the intra-State supply of services
shall not include supply of services to or by a Special Economic Zone developer
or a Special Economic Zone unit) So CGST and SGST levid. So auditors have to
watch that whether auditee determines the nature of supply properly and charge
CGST+SGST/ IGST properly or not.
According to section 10, when Bill to Ship to model for goods
transfer and billing was implemented by the auditee, auditor have to do a very
close look on those transactions also.
d) Discount in time of Supply and Post supply Discount cases:
According to Section 15(3)(a) of CGST act, When discount is
determine before or in time of supply then the discount is not a part of value
of supply though in that case discount is allowed when it recorded in the
invoices. So from my point of view it is a simple trade discount case which
deducted directly from invoice level stage and value of supply is reduced in
invoice level also. But Auditors have to watch the post supply discount cases
claimed by supplier according to section 15(3)(a) of CGST act very closely.
Provision says if such discount is established in terms of an agreement entered
into at or before the time of such supply and specifically linked to relevant
invoices then the discount is not a part of value of supply though discount
practically given to recipients after issuing invoices subject to input tax
credit reduction by recipient. So supply of previous date and output tax
reduced by supplier by issuing GST Credit note to the receipent according to
terms and conditions of section 34(1) of CGST act. Now auditors have to watch
whether that kind of transaction allowable for issuing GST Credit Note by
establishing terms and conditions and agreement for that discount were executed
in time of supply or before supply. If there is no that kind discount
establishment in time of supply or before supply with a supporting agreement
document, then supplier only raise a Financial Credit Notes to receipent for
adjustment of party ledger amount and no gst reduction are permeable. Auditors
have to watch these areas very closely.
e) Time of Supply provisions are very important part: Time of supply is
point of taxation in GST, I mean on which date (Tax period) tax charging
liability getting hit in the hands of supplier. section 12 of CGST act governed
time of supply of goods and for, According to section 12(2) time of supply
(forrowad charges cases) is the earliest of (a) the date of issue of
invoice by the supplier or the last date on which he is required,
under section 31, to issue the invoice with respect to the supply; or (b)
the date on which the supplier receives the payment with respect to the supply:
Provided that where the supplier of taxable goods receives an amount up to one
thousand rupees in excess of the amount indicated in the tax invoice, the time
of supply to the extent of such excess amount shall, at the option of the said
supplier, be the date of issue of invoice in respect of such excess amount. and
section 13, governed the time of supply of services. By using section 13(2),
The time of supply of services (forrowad charges cases) shall be the earliest
of the following dates, namely:— (a) the date of issue of invoice by the
supplier, if the invoice is issued within the period prescribed under section
31 or the date of receipt of payment, whichever is earlier; or (b) the date of
provision of service, if the invoice is not issued within the period prescribed
under section 31 or the date of receipt of payment, whichever is earlier; or
(c) the date on which the recipient shows the receipt of services in his books
of account, in a case where the provisions of clause (a) or clause (b) do not
apply:
As per above provisions we clearly see that if advance
consideration received for any future supply, Point of taxation is the time
when received the advance consideration. We all know that by implementing more
than one notifications in more than one time, government give criteria based
relaxations from that part of point of taxation (tax on advance consideration
received). so considering all those notifications, auditor also have to check
the time of supply for all supplies or selected supplies. Advance consideration
received is a case (applicable cases after considering notifications on that
date) of mismatch between financial turnover and GST supply. For applicable
cases, advance received is a supply in GST records and also have to pay the gst
to the government by the supplier, but in financials it is only a liability
generation transaction and after revenue reorganization, the figure will go to
financier’s turnover by reducing that advance.
So auditors have to watch those areas where Time of supply
according to GST law as per section 12 and 13 giving separate point of view
than the AS 9, AS 7 (some cases), in financial records.
Cases where time of supply is not governed by section 12 &
section 13: Tax rate on goods and services were changed in various times by
the government. So that matter give a effect for point of taxation and charge
the appropriate rate on that day of time of supply. When process of transfer of
goods and services including invoicing and payment received (in applicable) are
effected between two tax rates (according to new applicable rate cases), then
time of supply is depend on provisions of section 14 of CGST act. In those
cases section 12 and 13 are not considerable and tax rate also applicable as
the same tax rate of the goods or services on that day of time of supply as
according to section 14 of CGST act.
Some cases where contradiction may arise between establish of
credit reversal and declare a outward supply for maintaining the supply chain:
Section 17(5)(h) of ineligible credit provisions is the area
where the auditor has to give a lots of close look. The provision say, credit
is not allowable, if goods lost, stolen, destroyed, written off or disposed of
by way of gift or free samples. We all know the term “Gift” is not defined in
GST law.. In general concept and other law and in some case laws, gift is
established as transfer of rights or rendering of services without taking any
consideration. So in
some cases, business men provide some goods (Transfer the rights of the goods)
after fulfilling some criteria by the recipients (Like getting One item and
take another item in free of cost). So if free of cost goods is given after
fulfilling any condition then we can argue that it is basically not a free. The
free goods (free by term which we use in time of talking) is given after
fulfilling the prescribed criteria. So it is not a item which was given in
free. So in some cases it is not a case of credit ineligibility matters. It may
hit as mixed supply (when the two items are sold with a combine package style
and the items are not naturally bundled consideration also received/receivable
as common consideration for those items) and attract higher rate of tax (higher
rate of tax applicable among the items of that combo) and credit blockage for that
so called free items are not applicable. Auditors have to
watch those kind of transactions very closely.
Employer and Employee Transactions:
Employer and employee are related person according to section
15. Firstly we have to see, when employee render service towards employer in
the form of employment service (In general term we called it salary/wages
received against employment service provided to employee) and according to
point 1 of schedule III, it is neither a supply of goods nor a supply of services
when the services provided by the employee in the course of or in relation to
his employment. So two most important parameters of point 1 of schedule III are
i) services should rendered by employee to employer and ii) It should made in
the course of or in relation to his employment.
Presently employers give various facilities/perquisites to their
employees. When, goods or services or both are provided to employer by employee
in the terms or relation of the employment contract, then we can clearly say
that the value of goods or services or both are given to employee by employer
as consideration of employment service so attract Schedule III. No GST
applicable. For example, yearly gift, facility of driver’s salary, free fooding
etc. (should mentioned in employment contract).
When the above facilities are not a part of employment contract,
it may constitutes a case where employer render service or transfer property of
goods towards employee. Now for constitute that transaction as supply, we have
to see, whether that event attract “in the course or furtherance of business”
or not. The above described event also is falling under the definition of
“business” in GST law. . According to section 2(17), every activities, even
ancillary transactions of trade, commerce of a person (employer) is covered
under business. So we can say that the above situations are covered under the
ambit of business. Now the next element for proving the event as supply is
“consideration”. As per section 15 of CGST act, employer and employee are
related persons. So according to Schedule I, “consideration” is not a
factor for treating as an event as supply. So if there is no consideration then
also attract supply and if there is consideration, then no question of think
other than supply, though for tax charging purpose, valuation rules are
considerable. Now, in above situation for without consideration cases,
provision say, gift upto Rs. 50,000/- p.a. per employee is a case of No Supply.
So Gift exceeding (service or goods without consideration) Rs. 50,000/- per
employee per year attract supply and if the supply is taxable supply, tax has
to paid by employer after considering valuation rule for value of supply and if
the gift item is “goods”, then in time of purchase, credit is blocked according
to section 17(5)(h) of CGST act. Cash gift is not attract supply as cash is out
of ambit of goods and services.
We know that recovery of fooding expenses from the employees for
canteen services will also attract GST according to AAAR judgment. so auditors
have to watch those transactions very closely for certify the transactions.
Capital Assets and sale of old capital Assets:
As per section 2(19) of GST act, Capital Goods means, goods, the
value of which is capitalized in the books of account of the person claiming
the input tax credit and which are used or intended to be used in the course or
furtherance of business. So Capital goods is a “goods”. and according to
section 2(52), “goods” means, every kind of movable property other than money and
securities but includes actionable claim, growing crops, grass and things
attached to or forming part of the land which are agreed to be severed before
supply or under a contract of supply. If we compare between the concept of “capital goods” of
section 2(19) of CGST act and AS 10 of GAAP (the process of accounting of some
fixed assets in financials) we can find, financials may give permission to add
some expenses with that assets (so the expenses become treated as capital
expenses in place of revenue expenses) so we have to pass accounting entries in
financial books as per AS 10. And in GST, the expenses may be treated as inward
supply of services so not permutable for treating that inward supply amount as
capital goods in GST. So in financials the value of that fixed assets is
getting higher than the value of that fixed assets (capital goods) in GST
records (though “value of capital goods” as per GST is not defined in GST law
and not to be certified anywhere in GST reports). As per GST
law, capital goods have life span of 60 months. So in time of purchase credit
have to be (time limit for take credit upto tile limit of sub section 4 of
section 16) claimed but if
the used capital goods is sold after claiming the ITC but before completing 60
months, then credit allowbility is respected for the number of months for which
the capital goods was a business assets of the supplier. And the remaining
periods’ credit is not permutable and for determination of output tax in time
of sale of the used capital goods, we have to compare the amount of tax on
transaction value and the tax calculated for unused life. Then the maximum
amount between the two is to be taken as tax amount according to Section 18(6),
read with rule 44(6). We have to declare those kind of transactions as supply
Supply of some kind of services between distinct persons: Generally stock
transfer between one branch (GSTIN) to another branch (GSTIN) of an entity
(PAN) is normal transaction and when those transactions are taken place, no
consideration is subject matter for establishing those transactions as supply.
so even non present of considerations, that is going to be a supply according
to schedule I of CGST act and for value of supply have to consider the
valuation Rule 28, or 30 or 31. And Tax invoice must be issued according to
section 31 by the supplier GSTIN and also credit is subject matter according to
applicability of credit related provisions in the hands of recipients GSTIN.
Auditors have to cross examine those transactions from e waybill (applicable
case) portal, Tax invoices, relevant data and documents, stock register and
returns. But the tough work for auditors is to find the transactions between
distinct persons related to some kind of specific services. I mean when entire
accounts team, HR team (doing the works according to employment contract with
the entity) and others team or single employee operate the total work of the
entity (PAN) from a office of a GSTIN of the entity. Then finding out the
volume of their services towards another GSTIN is a very tough work and also it
is very tough for a GSTIN level auditor to certify that volume. Though services
by employee to the employer in the course of or in relation to his employment
is no supply as per scheadule III, that kind of services are treated as supply
from one GSTIN to another as the supplier GSTIN and the recipient GSTIN are not
employer and employee type. When the HR/Accounts teams, other employees are
established as employee for that GSTIN where they do sitting, supply is
applicable between two GSTIN of the entity after considering the provisions of
section 7 and Schedule I of CGST act. A very important AAR decisions of Karnataka in the case
of M/S. Colombia Hospitals Pvt. Ltd is give clear view for those
kind of transactions. And for valuation of supply, for tax
purpose have to apply valuation Rule as the supply is transacted between
distinct persons. Auditors have to examine those kind of transactions
very closely.
Have to do close look on those kind of re-embossment received
transactions where auditee claim those re embossment as not a part of value of
supply:Some time, in some applicable cases, registered person do some
work/ paid some expenses on behalf of others and take re imbursement. In time
of audit, auditors have to do a close look on that. I think auditors and tax
personals are aware on those transactions as they also take many
reimbursement from clients for paying various taxes on behalf of them. And when
they raise bills to their clients, the re imbursement claim amount put
separately in bill and the amount is not a part of income establishment of
them. From GST prospective, we can discuss that matter. Firstly we have
to take knowledge of Pure Agent. Pure
agent can take the facility of Rule 33. When pure agent
(supplier) doing invoicing for his own supply provide to the recipient, Firstly
have to fulfill three conditions for act as a pure agent, first condition is
need contractual agreement between the pure agent (supplier) and recipient of
supply to incur expenditure or costs in the course of supply of goods or
services or both. Second condition is neither intends to hold nor holds
any title to the goods or services or both so procured or supplied as pure
agent of the recipient of supply, third condition is he does not use the goods
or services for his own interest such goods or services so procured and the
forth condition is receives only the actual amount incurred to procure such
goods or services in addition to the amount received for supply he
provides on his own account. Now have to follow three matters for excluded the
reimbursement from the value of supply. First one, he supplier acts as a pure
agent of the recipient of the supply when he makes the payment to the
third party on authorization by such recipient, second one, the payment made by
the pure agent on behalf of the recipient of supply has been separately
indicated in the invoice issued by the pure agent to the recipient
of service and third one, the supplies procured by the pure agent
from the third party as a pure agent of the recipient of supply are in
addition to the services he supplies on his own account. So these areas of
valuation rules are very important and auditors have to do a close look on
those areas.
Reverse Charge Liability: That is the area
where auditors have to do a close look. This is the concept, taken from service
tax. In service tax era, various percentile basis Reverse charges were
applicable in some cases but in GST, 100% liability is given to the recipients.
According to section 2(98) of CGST act, “Reverse Charge” means, the liability
to pay tax by the recipient of supply of goods or services or both instead of
the supplier of such goods or services or both under sub-section (3) or
sub-section (4) of section 9, or under sub-section (3) or sub-section (4)
of section 5 of the Integrated Goods and Services Tax Act. So
there are two types of Reverse Charges First one is for notified goods and
services covered u/s 9(3) of CGST act and 5(3) of IGST act. In that kind of RCM,
registered supplier cannot collect tax from recipient, It is a recipient’s
liability to pay the tax and after payment, he can take the credit. We
have to follow respective notifications for the the goods or services. So
recipients of those goods and services have to generate liability of tax and
have to pay by cash ledger. And after payment of tax, recipients can take that
credit of tax payment. The most important matters is GTA services for these
kind of RCM. We all know the term “GTA” is defined in Notification
No.-12/2017-CTR,Cluase No.(ze), I mean if Road transporter issue Consignment
Note (Bilty) then becomes GTA. All transporters are not covered under GTA (GTA
have some special provisions and after fulfilling some criteria, they can enjoy
non taking of GSTIN facility also). So if the road transporter is not covered
under GTA then the matter is under the coverage of exemption notification
(Exempted supply according to 12/2017 CTR). As after getting Registered, GTA
has two option as per some criteria basis, Charging GST from recipient and pay
as furrowed charge basis or they can transfer the tax liability to recipient in
RCM subject to differential calculations of ITC on the hands supplier (GTA). In
the matter of recipients, after payment of liability, ITC allowable. Similar
factor arise in the hands of recipients when GTA is non Registered, I mean pay
Tax at RCM and after payment, ITC allowable (Now the matter of section 9(4) of
CGST act or 5(4) of IGST act, we know, so many ambiguities were subject matter
on that type of RCM. We all saw that in amendment act, the provision of 9(4) of
CGST act and 5(4) of IGST act are changed and after changing, the provisions
are applicable for some notified classes of persons in respect of some
specified categories of goods or services or both received from an
unregistered supplier. But as we are discussing about audit of FY 17-18, we
have to know the previous provisions. Previously, before amendment (up to
effected period according to notifications), that provisions are applicable
when any taxable goods and services or both are receipts from a un registered
person. I mean registered recipients have pay tax on Reverse charge basis. As
per notification 8/2017- CRT and corresponding others notifications, those kind
of transactions (aggregating all this kind of transactions) per day up to
Rs.5,000/- were going to exempted from tax but crossing Rs.5,000/-, its
reflecting its effect from Re. 1. From 13 th of October, 2017, we got
relief from that provisions of section 9(4) of CGST act and 5(4) of Igst act as
govt deferred those provisions.
Now for considering time of supply under Reverse Charge,
auditors have watch whether auditee follow section 12(3) for goods and section
13(3) for services or not.
INPUT TAX CREDIT: Input tax credit is a
another very very important part of GST. From the view point of Accounting and
also from the view point of auditing. For understanding “Input Tax Credit”, we
have to understand “Input Tax”. According to Section 2(62) of CGST act, eans
the central tax, State tax, integrated tax or Union territory tax charged on
any supply of goods or services or both made to him and it includes, IGST
charged on imports of goods, Tax payable under Reverse Charge but it dose not
include the tax paid under composition levy. According to section 2(63), Input
Tax Credit means, the Credit of Input Tax. It means when the Input tax getting
eligibility to take credit, then the amount transferred from Input Tax to Input
Tax Credit.
When Input Tax [define in section 2(62)] getting power to give
its credit, then we may transfer the balance of input tax to “Input Tax Credit
[define in section 2(63)]. According to section 16(1), subject to such
conditions and restrictions as may be prescribed and in the manner specified in
section 49, every registered person can take credit on input tax charged on any
supply of goods or services or both to him which are used or intended to be
used in the course or furtherance of his business. Then the most vital part of
credit chapter is related with section 16(2) which has to be fulfilled by the
recipients for claiming the tax of “input tax” as “input tax credit”. Four
conditions are given by gst law to the recipients for taking credit. First one is need
Tax Invoice or debit note issued by a supplier registered under this Act, or
such other tax paying documents as may be prescribed in the hands of
Recipients. Second
one is need
receipts of goods and services by recipient. Basically if the goods receipts
register is not maintained then, have to take certification regarding goods
received form the management. Third
one is Supplier should pay the tax to government of the
respective invoice. This condition is really a challenging factors for auditors
to certify those kind of clauses. We know according to section 49 of CGST act,
tax payment means discharge of output liability by using of Electronic credit
or GST Cash (utilization of credit sequence is subject mater for payment made
by Credit). If late payment made then Interest u/s 50(1) have to pay and for
payment of any output liability needed (in general way) filing of GSTR 3B
(though voluntary payment also done by GST DRC 3) and it is applicable as
monthly basis. So Recipient, can see whether the supplier file his GSTR 3B for
that month (In time of supply is a advance applicable case, then recipient have
to know in which month’s 3B, supplier paid the tax and after receiving invoice
from supplier, and after confirming of tax payment by supplier, recipient may
take credit) or not from gst portal but whether the tax on that particular
invoice was paid or not by that GSTR 3B determination is impossible. So safe
way for certify the credit for that clause is supplier’s written confirmation.
If confirmation from suplier regarding payment is not possible for any reason
then atleast certificate from management needed for auditor from the point of
view of audit. Now the Forth
one is Supplier should filed his return u/s 39. Now the
question is at present GSTR 3B fulfil the criteria of section 39 or not. We
know that according to the actual mechanism of monthly Return of section 39
govern by Rule 61 and the actual prescribed form is GSTR 3 where Part A is
generated with the data of GSTR 1 and GSTR 2. Sub Rule 5 of Rule 61 says where
time of GSTR 1 and GSTR 2 (Comply in section 37 and 38 respectively) get
intention, and the circumstances so warrant, the Commissioner may, by
notification, specify the manner and conditions subject to which the return
shall be furnished in FORM GSTR-3B electronically through the common portal,
either directly or through a Facilitation Centre notified by the Commissioner.
And according to sub rule 6 of Rule 5, when GSTR 3B has been furnished after
the due date of furnishing GSTR 2, Part A of GSTR is 3 generated according to
GSTR 1 and 2, and based on other liabilities of preceding tax periods and
PART B of the said return shall be electronically generated on the basis
of the return in FORM GSTR-3B furnished in respect of the tax period and
if discrimination found between GSTR 3B and GSTR 3, regd. person shall modify B
and if extra liability appears, has to discharge the liability and if Credit of
GSTR 3 exceeds the credit of GSTR 3B, then the credit will transfer to
electronic credit ledger of the register person. Now Firstly the main point is
GSTR-2 is not in Force. Also we cannot comply with section 39(9) for
rectification though as per notification, we can do correction in 3B data by
putting nett figure (after calculating of balance amount appears for
correction) in subsequent month’s GSTR 3B’s data. Also non acceptable of
negative figure in GSTR 3B creates lots of trouble. So GSTR 3B do not prove
invoice wise payment of output tax. I think govt. extend the time limit of
section 16(4) for financial year 17-18 upto March 2019 mainly for that kinds of
above reasons as sec 16(4) depends on comply with section 39. My view is as
there are so many litigated points, auditors can watch that before claiming
credit on any invoice, supplier of that invoice, filed his GSTR-3B for
that month (the month of invoice) or not. If it is found that the supplier did
not filed GSTR 3B on of before the claiming credit, auditor may take a
certification from management for the policy taken by the company regarding the
point of view of Forth provision of section 16(2) and also give the observation
in time of 9C certification.
We also have to know that, according to section 17(1), if the
goods or service on which input tax stands is partly used for business (please
consider business according to gst law) and partly for other purpose then
credit acceptable for goods or services which are used for business purpose.
And according to section 17(2), where the goods or services or both are used by
the registered person partly for effecting taxable supplies including zero-rated
supplies under this Act or under the Integrated Goods and Services Tax Act and
partly for effecting exempt supplies under the said Acts, the amount of credit
shall be restricted to so much of the input tax as is attributable to the said
taxable supplies including zero-rated supplies. Now for calculate value of
exempt supply for section 17(2), we have to include, shall include supplies on
which the recipient is liable to pay tax on reverse charge basis, transactions
in securities, sale of land and, subject to clause (b) of paragraph 5 of
Schedule II, sale of building. For block credit, we have to watch
the provision of section 17(5), I mean if the acceptable credit in 16(1) falls
u/s 17(5) in credit taking point, then the Input tax is not considerable for
transfer in Input tax credit ledger and the figure of input tax goes to
respective revenue expenses/ respective capital goods (as per required revenue
expenses or required capital goods). Though according to 16(1), every
registered person shall, subject to such conditions and restrictions as may be
prescribed and in the manner specified in section 49, be entitled to take
credit of input tax charged on any supply of goods or services or both to him
which are used or intended to be used in the course or furtherance of his
business and the said amount shall be credited to the electronic credit ledger
of such person, but the starting language of section 17(5) is very important,
it says, “Notwithstanding anything contained in sub-section (1) of section 16……….”
It means when the respective input tax falling in ineligible clauses u/s 17(5),
then the languages of section 16(1) is not considerable. I mean the credit is
blocked. As provisions of section 17(5) are very popular for all tax
professionals, so I am not discussing 17(5) clause wise. Apportion of credit is
also a huge factor for finding the credit allow ability in some cases (when
taxable and exempted supply both are provided by auditee) We have to watch,
whether the revenue expenses (in the form of inputs and input services) and
capital goods for which the input tax is subject matter, are used for
organizing tax applicable outward supply including zero rated supply or use for
providing exempted supply or No Supply (Schedule III). And when any revenue expenses
or capital goods, used partly for effecting taxable supplies including
zero-rated supplies, and partly for effecting exempt supplies, credit
allowbility is acceptable for effecting taxable supplies including zero-rated
supply only according to section 17(2) and we have to calculate the common
credit which was used commonly for providing taxable (including zero rated) and
exempted supply and after transfer the common credit to electronic credit
ledger, we have to reversed the proportionate credit (for determination use the
turnover based formula prescribed in rule) for exempted supply made (rule 42 is
for inputs and input services and for the matter of capital goods the rule is
43) and in financial part, the reversed amount transfer to respected expenses or
respected capital goods ledger. If the auditee is a banking company or a
financial institution, they can use the provision of section 17(2) or go
for 50% of eligible credit as per provision of section 17(4), read with Rule
38. So auditors have to watch that areas of books of the auditee very closely
because excess credit taken and use for paying liability can be a reason of
revenue loss of government and under calculation of credit can make
a cause of un necessary tax burden of auditee.
Concept
of GSTR 2A and Order Number 2/2018-Central Tax and my point of view, GSTR
2A is auto generated report on the basis of submission of GSTR 1 by supplier,
GSTR 6 by ISD unit,. Submission of GSTR 1 is not depend on their comply and
submission of GSTR 3B and payment of tax. Also GSTR-2A reports do not depend on
practically receipts of goods and services by the recipients. So very simply we
can say when we try to match our credit with GSTR 2A for any tax period
(month), it may
happen that GSTR 2A can show a invoices but that result (viewing in GSTR 2A)
may not fulfill the condition of second, third and forth (all or any one or any
two) provisions of section 16(2) for taking credit in that tax period (month). Input
tax credit generated by IGST paid in time of import (according proper
reflection in to Bill of Entry) and input tax credit generated after payment of
RCM liability are not reflected in GSTR 2A. Only for matching concept can be
established by GSTR 2A, though as per law section 42, 43 talks about matching,
reversal of credit and reclaim of credit and reclaim of reduction in
output tax liability but as GSTR 2, not in force, so as per prescribed manner
and proper way, that is not possible. Without GSTR 2, I mean without comply of
section 38, we can not prove voluntarily our credit in GSTR 3B invoice wise.
Now the audit is subject matter for the FY 17-18, for credit we have to
consider order number 2/2018-CT, where Time limit of section 16(4) was
increased up to due date of furnishing of GSTR 3B of March 19 and a clause also
added, that is supplier also have to submit GSTR 1 according to section 37(1)
within the due date of submission of gstr 1 of March 19 and date of
rectification of the GSTR 1 data of FY 17-18 according to section 37(3) also
increase upto due date of submission of gstr 1 of March 19. After giving a
close look on that order, we can say, GSTR 2A of recipient up to March 19 is
important for credit allow ability for FY 17-18’s claim through GSTR 3B and
also important for the invoices of FY 17-18 for which the ITC claimed (balance
transfer to electronic credit ledger) by GSTR 3B in FY 18-19. In simple word,
for FY 17-18’s Credit, we have to consider the presence of invoices of FY 17-18
within 2A of March 19 along with four conditions of section 16(2). It is very
contradictory mater I think, as GSTR 2 is not in force, so matching and actions
systems are not properly in force according to section 42 and 43. Without any
communication by GST dept with supplier and recipients, how can a claimable and
proper credit of recipients depends on supplier’s GSTR 1….. So auditors have to
watch those factors for certifying the credits for FY 17-18.
Credit eligibility for pre registration period’s invoices: Suppose person
falling in sec 22(1) or section 24 and make application for regd. according to
section 25(1) within 30 days from when he become liable for regd. Now if on the
day immediately preceding the date from which he becomes liable to pay tax, he
have some inputs (goods other than capital goods) for which he pay GST in time
of purchase of those inputs (goods other than capital goods), he is allowable
to take credit on those input tax according to section 18(1)(a) read with Rule
40. He has to file
GST ITC 01 within a period of thirty days from the date of
becoming eligible to avail the input tax credit as per law (thirty days may
extended by notification power of Commissioner).
We can take credit for Capital goods also. If registration is taken
in voluntary basis then also allowed to take credit according to various provisions
of section 18 read with Rule 40. Only have to follow the mater in Capital goods
that the capital goods have 60 months life period so leave credit for used
months. If the claim of tax in every situation in this regard, discussed
above, exceeding Rs. 2 lac(CGST+SGST/UTGST+IGST) need a certification
from practicing CA/CMA. In time of audit u/s 35(5), auditor have to watch those
certificate very closely (if claim not exceeding Rs. 2 Lac, then auditor also
have to watch those claim with law point of view very very carefully).
In those kind of transactions, Books entries in Financials are
very important also. So I think in the case where the GST auditors and
Financial Auditor are not same, GST auditors need some clarification from
Financial Accounts, At least those areas of books entries have to certify by
management as those parts are not seperatedly highlighted by Financials
auditors. An example:
Before Registration, as the tax paid or payable in time of
purchase are not recoverable from Govt., it goes to added with stock as per
AS-2 because it is element of cost. So the financial effects are- the total
amount appear as purchase, creditor created / cash reduced and stock also
valued with the total amount. Now when getting registered, he got the power of
taking credit of that tax, it mean he can use the amount for paying the tax
liability [but the regd. person have stock (inputs) with his hand for transfer
that amount from Dr. side of Trading /Profit & Loss A/C to Assets Side of
Balance sheet and making reduction of value of that stock]. Applicability of
AS-2 in his books of accounts is now changed. I mean tax paid in time of
purchase now recoverable/setting with tax liability so as per AS-2, this tax is
not permutable as a part of cost of the goods. Books needed Proper
adjustment journals. I mean now purchase have to reduced by that tax figure and
have to transfer it in Input Tax Credit ledger (current assets) also the Stock
value is reduced by that amount. So from my point of view auditor have to check those Book
entries with data of GST ITC 01.
Input Tax Credit depends on Income Tax maters of auditee also: GST auditors have to
watch Audiitee’s Tax Audit Report u/s 44AB or Income Tax computation (Have to
check auditee’s comply with section 32 of IT act) also for establishing the
provision of section 16(3). If any amount of Input Tax added with the value of
that capital goods and depreciation claim in income tax file after considering
the amount as the value of that capital goods then in GST, No input tax credit of tax component
(that input tax) shall allowed.
Credit received from ISD: According to section
2(61), “Input Service Distributor” means an office of the supplier of goods or
services or both which receives tax invoices issued under section
31 towards the receipt of input services and issues a prescribed document
for the purposes of distributing the credit of central tax, State tax,
integrated tax or Union territory tax paid on the said services to a supplier
of taxable goods or services or both having the same Permanent Account Number
as that of the said office. Now as GST auditor of recipient, have to watch the
provisions also by which the ISD unit’s credit distribution is governed.
Section 20 talks about the guideline of credit distribution by ISD unit of the
entity. Some cases Recipient have to reversed the credit according to rule 39
which was taken earlier from ISD unit
Credit enjoyed by principal even goods sent to Job Worker: According to section
2(68), “job work” means any treatment or process undertaken by a person on
goods belonging to another registered person and the expression “job worker”
shall be construed accordingly. Section 143 describe the entire process of Job
Work. Some Manufacturer/Principal do not do all work from first step to finish
goods production. They send goods to some job worker for process of some work.
And after processing, job worker send the goods to principal/Manufacturer and
for rendering his service, claim consideration from principal/Manufacturer. We
all know that Goods (Inputs/Capital Goods, are being transfer to the job
worker by the principal but not permanently. After a time period, the inputs
and Capital Goods are returned back to the principal/Manufacturer from the job
worker. So to avail the credit on the goods which are not stored in place of
principal/Manufacturer, he has to file ITC 04. Though according to sub section
3 and 4 of Section 143, if inputs and capital goods respectively are not
received back within one year from the dispatch then deemed supply attract in
the hands of principal on the date of dispatch.
So for claiming credit, ITC 04 is the main factor. Auditors have
to watch those very closely with respective e- waybills (applicable cases).
Revarsal of Credit in failure to provide the consideration to
supplier: Rule 37, talks about that provision. Where consideration
is not given to the supplier against any inward supply, by the receipents
within 180 days from tax invoice date, then credit which was taken by
recipient, has to be reversed with interest. As per provisions of Rule 37, it
must be complied by recipient in his GSTR 2 and it will increase the output
liability of recipient with creation of interest liability u/s 50(1) and after
repayment, the tax amount (Not the Interest amount) can eligible for reclaim of
credit and time limit of section 16(4) is not applicable on those reclaim of
credit. Presently GSTR 2 is not in force so when mechanism is not ready then
its not mandatory to comply but in GSTR 3B’s credit reversal portion, “other”
option may used for that case for the interest of revenue of govt. According to
credit Reversal sector, it decrease the balance of input tax credit /electronic
credit . So as per law, it should increase the Tax liability but as per
mechanism of GSTR 3B it is a case of reduction of Input tax credit balance.
This reversal is not needed when goods or services or both are supplied between
the related persons as no consideration is subject matter for establishing
supply between related parties. Auditors have to watch those transaction very
closely.
Now if the “recipient” of previous case supply some goods or
services or both to the “supplier” of previous case then books adjustment
method for adjust receivable or payable figure between parties may imposed for
accounting purpose, then the first question is whether the book adjustment
method fulfill the term “consideration” of GST or not. According to section
2(31) of cgst act, it fulfill the condition of “consideration”. In support of
that, the WB AAR judgment in the case of Senco Gold Ltd is very effective.
Destroy of un necessary goods on which ITC is availed may be a
case of Credit Reversal: According to section 17(5)(h), goods lost, stolen,
destroyed, written off or disposed of by way of gift or free samples are treated
as block credit cases. Now when Supplier destroy some goods (Like medicine
expiry cases) on which ITC was availed previously by him, reverse the ITC.
section 17(5), deals with ineligible credit, I mean generally before taking of
credit, input tax on inward supply transfer to debit side on P/L account with
respective expenses or added with respective capital goods and its effect
reflects in B/S for cases of ineligible ITC matters but when the above matter
is a case on which provision of 17(5) is imposed on the date of destroy and
credit was already taken before the date of destroy, it is a case of credit
reversal as per GAAP books but as per GST provision it is Block credit matter
and sec 17(5)(h) applicable on that part. Auditors have to look the matter very
carefully.
Refund: According to section 54, generally refund is allowable
from GST Electronic Cash Ledger, The balance of Electronic Credit ledger is not
permitable for refund unless it falls sudden clause as per u/s 54(3). One
reason is Zero Rated supplies (Export most of the cases) made without payment
of tax and another reason is credit has accumulated on account of rate of tax
on inputs being higher than the rate of tax on output supplies (other than nil
rated or fully exempt supplies). Refund system is governed by Rule 89, in some
export oriented Refund of ITC cases, Credit for the purpose of capital goods
are not permitable. GST auditor has to watch those refund whether the refund
taken or claim by the auditee is lawfully or not.
Reconciliation Statement in Form of GSTR 9C:
I discuss regarding 9C in very short way in that writeup. In my
next write-up I will discuss regarding GSTR 9C clause by clause with examples
From the view point of GSTR 9C, auditor have to certify the
reconciliation statement. In Part A, First factor is turnover sector, firstly
have to start with turnover of financials of that GSTIN then reconcile the
Turnover with GST purpose annual turnover by various reasons declared in GSTR
9C, then after finding the originally GST purpose annual turnover, have to
compare that with declared turnover in GSTR 9. Also have to reconcile the
Taxable turnover by starting with actual Gst purpose annual turnover (find
earlier) and deducting Exempted, Nil rated, Zero Rated and supplies for which
his recipient have to pay tax in RCM, etc. and find actual Taxable Turnover.
Now has to compare with GSTR 9 data. Then have to reconcile Tax payment maters
by comparing actual tax payable rate wise with tax paid in GSTR 9. Then have to
give data for additional tax if the additional tax appears for unmatched data
(un reconciled) in any sector. After that, Input tax credit have to reconcile
by starting from Financial book’s data to finishing in actual GST books data
and have to compare that figure with data of GSTR 9. Expenses/Capital goods
wise ITC data have to put and compare with gstr 9. If Tax have to pay for any
un-reconcile factor of ITC, have to put in proper table. Now the main factor is
Auditor’s recommendation for additional tax for un-reconciled portions.
Auditors have to put recommendations for tax payments percentage wise.
Now in the Part B sector, if the GST auditor is the person who
did the Financial Audit, choose option-I, and pass observations and comments
and if the GST auditor is other than a auditor who conduct the financial audit,
choose option-II and pass observations and comments.
Though the 3rd July 2019’s press release give some light on auditor’s
role on GSTR 9C’s certification but as per my point of view, considering
professional angel and angel from meaning of audit u/s 2(13) of CGST act,
auditor have to take much more responsibility in conducting GST audit u/s 35(5)
of CGST act. And various standards of auditing can help the auditor in various
matters in that GST audit.
It is not a professional advice. It is just an write-up
considering my personal views on GST audit u/s 35(5). In time of conduct audit
and other GST maters do every mater according to proper GST provisions. My
write-up is not liable for any litigation.
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