A GST audit involves a detailed examination of a taxpayer's financial records, returns, and compliance with Goods and Services Tax (GST) regulations. Conducted by tax authorities or designated auditors, this process checks the accuracy of GST filings, including reported sales, purchases, input tax credits, and tax payments. The primary goal is to uncover any discrepancies, errors, or potential tax evasion, ensuring transparency and adherence to the GST framework. Through a meticulous review of transactions and documentation, GST audits highlight non-compliance issues, allowing businesses to implement necessary corrections promptly. To avoid penalties and legal issues, businesses must maintain precise records and fully cooperate during these audits. This proactive engagement not only helps in rectifying errors before they become costly but also reinforces a company's commitment to fiscal responsibility and regulatory compliance.
Audit by Tax Authorities
The Commissioner of CGST/SGST (or any authorised officer) can carry out an audit of a taxpayer. The details on how often and how the audit will be done will be provided later.
A notice will be sent to the taxpayer at least 15 days before the audit starts. The audit must be finished within 3 months from the start date. The Commissioner can extend the audit by another six months if reasons are given in writing.
Obligations of the Auditee
The taxpayer must:
- Provide the necessary facilities to check the books of account and other documents as required
- Give information and assistance to complete the audit on time
Findings of Audit
Once the audit is finished, the officer will inform the taxpayer within 30 days about:
- The findings
- The reasons for these findings
- The taxpayer’s rights and duties
If the audit finds unpaid/short paid tax, incorrect refunds, or wrongly claimed input tax credits, then steps will be taken to recover these amounts.
Threshold Limit for Audit under GST by CA/CMA
Every GST-registered person with a turnover over the set limit in a financial year must be audited. Currently, the limit is above Rs. 2 Crore. These businesses must have their accounts audited by a chartered accountant or a cost accountant. The taxpayer must file the following electronically:
- An annual return using Form GSTR-9 by 31st December of the next financial year
- An audited copy of the annual accounts
- A certified reconciliation statement in Form GSTR-9C, matching the values declared in the return with the audited annual financial statement
- Any other required details
For businesses with a yearly turnover of less than Rs. 5 Crore, filing GSTR-9C for the financial years 2018-19 and 2019-20 is not required.
Types of Audits under GST
1. Departmental Audits/Audits by the Tax Department
Departmental audits, also known as audits by tax authorities, are routine checks done by tax authorities. These audits make sure taxes are correctly reported and paid, and they let tax authorities check the records kept by taxpayers. According to Section 65 of the GST Accounts Act and Rule 101(3), the Commissioner or their authorised officer can carry out audits and check the 'records' and 'books of accounts' of registered persons. These audits are done by authorised officials and the police.
After the audit is completed, the authorised Commissioner will inform the registered taxpayer of the findings, their rights and duties, and the reasons for the findings within 30 days using FORM GST ADT-02. If issues like incorrect returns or misuse of Investment Tax Credit (ITC) are found, the authorised officer may start proceedings as per the rules in Section 73 or Section 74.
2. Statutory Audit
According to Section 35(5) of the GST Audit Rules, a registered taxpayer whose total income is more than Rs. 2 Crore in a financial year must have their books of accounts and returns audited by a professional chartered accountant. These audited accounts and certified reconciliation details should be submitted using Form GSTR 9C through the common portal or the designated convenience point set by the Commissioner. However, from July 30, 2021, the government announced that the GST audit and certification by CA/CMA will no longer be required. Therefore, taxpayers must file their self-certified GSTR 9C from the financial year 2020-21 onwards.
3. Special audit under GST
A special audit under GST can be initiated under Section 66 of the GST Act when the tax authorities believe that certain aspects of the taxpayer's returns or accounts are unclear or exhibit discrepancies. These audits are not regular occurrences but are reserved for situations where there are significant complexities or doubts concerning the accuracy of the GST filings. Common triggers include discrepancies between the returns filed and the taxes paid, suspicion of tax evasion, or when the tax paid does not match with the turnover declared.
Unlike regular audits conducted by tax officials, a special audit under GST is carried out by a chartered accountant or a cost accountant specifically nominated by the Commissioner of GST. The appointment of an external expert underscores the audit's seriousness and the need for specialised financial scrutiny. The nominated auditor is required to adhere to the terms of reference specified by the Commissioner, focusing on particular areas of concern within the taxpayer’s accounts.
Once an auditor is appointed, they are given a specific timeframe, typically ninety days, to complete their examination and submit a report. This period can be extended by another ninety days, if necessary, upon the request of the auditor and approval from the Commissioner. The audit involves a thorough examination of books of account and other relevant documents to verify the accuracy of the GST returns filed. The auditor may identify under-reported or unreported transactions, incorrect deductions or credits claimed, and other anomalies that could affect the tax liability.
The findings of a special audit under GST can have significant implications for the business being audited. If the audit uncovers underpayment of tax or other violations of the GST laws, the taxpayer may be subject to additional tax demands, interest, penalties, and in severe cases, legal proceedings. However, it also provides an opportunity for businesses to correct inadvertent errors in their GST filings and compliance processes.
Businesses are advised to cooperate fully with the auditors by providing all necessary documents and clarifications. This cooperation can often lead to a more favourable consideration by the tax authorities, especially in cases where discrepancies arise from genuine mistakes or oversight rather than deliberate evasion.
4. Limited scrutiny
A limited audit is carried out when tax authorities suspect that there might be non-compliance with GST laws. The aim of this audit is to check that the taxpayer is following GST rules, including making sure the tax returns filed are correct, the tax has been paid properly, and all other rules are being followed.
5. Taxpayer-initiated Audit
The taxpayer can choose to start an audit themselves. The purpose of this self-initiated audit is to ensure they are following the GST laws correctly, including checking their tax returns, the taxes charged, and other rules.
The GST law has strict penalties for not following the rules, such as fines, penalties, and even imprisonment. Therefore, it is important for taxpayers to follow GST laws, including the rules about audits.
Taxpayers should keep accurate and complete records of their business transactions, such as invoices, receipts, and other important documents, to make sure they are complying with GST laws. They should also file their tax returns on time and pay their taxes promptly.
Importance and Benefits of Different Audits under GST
GST audits are very important for several reasons:
1. Making sure rules are followed:
GST audits check that businesses are following GST laws and rules. They ensure businesses are calculating, charging, and reporting taxes correctly.
2. Ensuring transaction accuracy:
Audits verify that businesses record transactions accurately. This helps maintain transparency and trust in financial reporting and ensures GST is paid on time.
3. Prompt GST payments:
Paying GST on time is crucial for the tax system and for the government’s income. Audits help ensure businesses are timely with their GST payments, contributing to a smooth tax system.
4. Improving profits and efficiency:
Audits help businesses find ways to improve their operations and finances. They can identify errors, optimise processes, and ensure that available tax credits are used correctly. This helps businesses increase profits and operate more efficiently.
5. Detecting and preventing fraud:
GST audits are key in finding and stopping fraud. By examining financial records and transactions, auditors can spot attempts to avoid taxes or commit fraud, protecting the government’s revenue and ensuring fair competition for honest businesses.
6. Following the Law:
GST audits make sure businesses are meeting legal requirements set by tax authorities. If businesses do not comply, they can face fines or even legal action.
When is an audit compulsory under GST?
An audit under GST becomes compulsory for certain taxpayers based on specific criteria outlined in the GST laws. Businesses meeting the prescribed turnover threshold are required to undergo mandatory audits. For instance, taxpayers with an annual aggregate turnover exceeding Rs. 2 crore (as per the GST law as of the last update) are mandated to undergo audit procedures. Additionally, if a taxpayer claims input tax credits beyond specified thresholds or if there are suspicions of tax evasion, the tax authorities may order an audit. Understanding the nuances of input tax credit (ITC) is vital for businesses subject to GST audits as it directly impacts their tax liabilities and compliance requirements.
Conclusion
In conclusion, navigating the complexities of GST compliance requires diligence and understanding. Whether it is ensuring accurate filings, managing GST exemptions, or undergoing audits, businesses must stay informed and proactive. Additionally, for financial support to fuel growth and expansion, consider exploring tailored solutions like a business loan from Bajaj Finance. With flexible terms and competitive rates, these loans offer the capital needed to seize opportunities and drive success in today's dynamic business landscape.
