The tax reform launched by the Indian Government in 2017 introduced GST in India. This new scheme is an efficient tax mechanism that simplifies taxation by following the approach of One Nation One Tax. Under this scheme, a GST audit is mandatory for registered taxpayers. This involves analysing and verifying all financial documents maintained and submitted to the tax authority. In India, registered taxpayers must submit the GST audit report of their annual accounts. For this, they can take the services of an accountant assigned by the Commissioner. At the same time, they must also be aware of GST audit limits and types of GST audits.
What is the GST Audit?
Section 35 (5) of the CGST Act states that registered taxpayers in India with an aggregate turnover of more than Rs. 2 crores in a fiscal year must go for a GST audit. They can get the services of the best chartered accountants in Bangalore for this purpose. The authorised accountant will verify records, returns and other important documents they maintain and submit to the tax authority.
Next, the registered taxpayer will submit a copy of the GST audit report, reconciliation statement and financial statements through Form GSTR 9C. A GST audit is mandatory for all registered taxpayers once in a fiscal year. At present, the GST audit limit is Rs. 2 crores, and as per the GST registration process, registered taxpayers under GST with an aggregate turnover of Rs. 2 crores must have a duly audited GST report to submit before the due date, which is 31st December of the preceding fiscal year.
The obligation of Audit under GST
An annual audit under GST is necessary to ensure the correctness of financial information and verify whether the taxpayers agree with the GST Act 2017. Under the GST plan launched by the Indian Government in 2017, GST is a taxation regime where taxpayers can easily access their tax liabilities, file ITR or Income Tax Returns and pay taxes. And to check whether the taxpayers have assessed everything properly, a GST audit has been made mandatory. GST audit is one way to check the correctness of annual accounts, among the other varied ways to ensure proper GST practice. For more information and help, taxpayers can get GST advisory services.
Types of GST Audit in India
There are three types of GST audits. They are:
- Turnover-Based GST Audit: A Chartered Accountant or Cost Accountant hired or appointed by the taxpayer performs this kind of GST audit. Taxpayers must get audits for their accounts and records through a turnover-based GST audit that is conducted when the turnover exceeds Rs. 2 crores.
- General or Normal GST Audit: This kind of GST is conducted by the SGST or CGST Commissioner or any other accredited officer with 15 days prior notice to the registered taxpayer.
- Special GST Audit: A Commissioner accredited Chartered Accountant or Cost Accountant conducts the special GST audit on the order of the Deputy Commissioner or Assistant Commissioner with prior approval of the Commissioner.
Objectives of GST Audit under Law
Objectives of GST audit, as per the central Goods and Services Tax's Audit definition under Section 2 (13), are as follows:
- GST audit is a close analysis of tax records, returns and other related documents.
- This analysis is done to verify Paid Amount of Taxes, Declared Turnover, Availed Input Tax Credit and Claimed Refund.
- The records, returns and other related documents are maintained or issued under GST and other laws.
- Proper inspection is done to assess the auditee's compliance with GST Act laws and rules.
The main objective of a GST audit is to ensure that claimed refunds, declared turnover, paid taxes and input tax credits are correct. GST audit also ensures that the intents of the taxpayer comply with the GST rules.
How to Prepare For the GST Audit?
So, how to prepare for a GST audit? Here are the steps:
- Filing the Annual Return Form
The GST audit form checks all discrepancies between the annual return and the audited financial documents. The annual return is the aggregate of the quarterly returns filed by a registered GST taxpayer. Therefore, taxpayers need to file the annual return before the GST audit. On that note, the due date for the GST audit and annual return is the same. But businesses should file their annual return a few weeks before the due date, so the GST audit smoothly takes place.
At the same time, registered taxpayers should disclose errors in their annual returns separately during the GST audit to mitigate all reconciliation differences. Taxpayers should also provide the reasons for their GST audit report mistakes. All annual returns without any errors and with proper disclosures are crucial for an easy GST audit.
- Preparing for Annual Return Filing and GST Audit Reporting
The taxpayer must file several reconciliation statements for divided ITC claims as per the expense and nature of ITC claims in their GST audit report and annual return filing. These are:
- Expense-wise reconciliation or three-way division of ITC availed into capital goods credits, input and input services.
- Nature-wise reconciliation of GST ITC is available according to the auto-generated GSTR-2A form.
All these documents and returns are an integral part of the electronic credit ledger, and keeping everything in sync with what is available during auditor data can pressurise businesses. The key to success in this field is pre-planning on the part of the business owners.
GSTR-9C: The GST Audit
Taxpayers need to submit Form GSTr9c for GST audit. The Central Tax Notification numbered through the notification number 49/2018 on 13th September 2018 has notified the GSTr9c form. This is a simple 10-page form consisting of two sections:
- Reconciliation Statement
- Certification from the Auditor, which is not compulsory from Financial Year 2020-21
Nevertheless, a major concern among the taxpayers about the GSTr9c form was the reconciliation procedure and compulsory auditor attestation on the GST documents and records that can increase their GST burden. On the other hand, the auditors feel the effect of increased work pressure as the notification comes into effect.
The Importance of GST Audit (Self-Reconciliation) Form
Account Audit and Reconciliation for the registered GST taxpayers is mandatory as per Section 35 (5) and 42 (2) of the Central GST Act 2017. Important points of GST audit are as follows:
- According to Section 35 (5) of the CGST Act 2017, every registered individual with a turnover exceeding the prescribed GST limit for the financial year should opt for a GST audit.
- As per Section 42 (2) of the CGST Act, every registered taxpayer should reconcile the value of all supplies declared in the returns furnished for a financial year with the audited yearly financial statement.
- Under Section 44 of the CGST Act, registered taxpayers should submit the GST audit form for a financial year by 31st December.
As with all other tax return forms, the GSTr9c forms must be filed and submitted through the official GSTN portal.
Frequently Asked Questions
When is a special GST Audit required?
A special GST audit is required in the following situations:
- Nature and complexity of the involved accounts
- Accounts volume, like if the transaction with a certain person is entered several times
- There is doubt regarding the correctness of the accounts.
- The multiplicity of the transactions in accounts
- Specialised nature of business procedures, like the assessment-deals in oil rigs
What is the time limit for a special GST Audit?
For a special GST audit, the time limit is ninety days from the date of audit commencement. If a special audit cannot be completed within this time limit, the Commissioner can extend the audit period by not more than six months. The Commissioner needs to state the reason for the extension, which is to be recorded in writing.
What are the items excluded while calculating the annual turnover?
Items excluded while calculating the annual turnover are:
- Goods supplied or received by job workers.
- All taxes and cess charged under GSTs, like SGST, CGST, IGST and compensation cess.
What are the items included while calculating the annual turnover?
Items included while calculating annual turnover are as follows:
- All supplies between separate business verticals
- All taxable supplies excluding the ones with reverse charge applicable. This will include both intra-state and interstate supplies.
- Goods supplied or received on a principal basis by the job workers.
- Supplies of agents or job workers in the name of the principal
- Values of all export or zero-rated supplies
- All exempted supplies, like ready-to-eat food products and agricultural-related items
What are 1st, 2nd and 3rd party audits?
1st party audits are those performed by the own auditing resources of an organisation. These are also called internal audits. 2nd party audits are performed by customers, suppliers or contractors against their proprietary needs. An independent entity like a registrar performs 3rd party audits against recognised standards like ISO 9001.
How do you calculate turnover for GST audits?
The aggregate turnover for GST audit includes the value of exempted goods or services, exported goods or services and inter-state supplies between individuals with the same PAN. The turnover to be calculated for the GST audit also includes the value of all the activities carried out on an all-India basis.
What is the formula for turnover?
The formula for turnover goes like this:
Aggregate turnover = the value of taxable supplies, interstate and intrastate + Goods and Services export supplies + Exempt supplies.
Is GST required below 40 lakhs turnover?
Yes, GST is required for below 40 lakhs turnover. As per Section 23 of the CGST Act, all individuals with a turnover of more than Rs. 20 lakhs should obtain GST registration. However, the threshold limit has been increased to Rs. 40 lakhs only if the supplier is in goods supply.
What happens if you fail a single audit?
Individuals who fail a single audit may have to repay grant monies and lose access to Federal funding in the future.