It has been a full one year from the implementation of the new Goods and Services Tax (GST) regime. As the new tax regulation enters its second year, businesses now need to shift their focus from the nuances and technicalities of return filing system to the audits under GST.
First, what the regulation says?
Audit under GST is defined in section 2(13) of the CGST Act. “Audit means the examination of records, returns and other documents maintained by a registered person.” The purpose is to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed and to assess the compliance with the provisions of GST laws, it says.
There are three kinds of audits that the Act talks about; audit by a chartered or a cost accountant, regular audit by the commissioner or any officer authorised by him and special audit by the GST authorities.
The first kind of audit is the one which is mandatory. Section 35(5) of the CGST says every registered person with aggregate turnover exceeding Rs. 2 crore during a financial year should get his accounts audited by a chartered or a cost accountant.
The audit is to be performed for the nine months starting from July last year, the time when the GST was rolled out; till March 2018. And the audit report is to be furnished in form GSTR-9C along with audited annual accounts, GST annual return and reconciliation statement in form GSTR-9D on or before 31st December.
Interestingly, the Government is yet to prescribe the format and contents of the audit report and annexures.
Challenges for business
The new indirect tax was applicable only for nine months of the financial year 2017-18. The first quarter (April – June 2017) was still under the erstwhile sales tax or VAT or service tax regime.
“This can create challenges in reconciliation of accounts which are prepared for entire financial year,” says Mayank Agarwal, Partner at Gurugram-based KrayMan Consultants LLP.
As mentioned earlier, the format and contents of the GST audit report and annexures haven’t been notified as yet. Considering that the GST Council meets next on July 21, the wait may well be a bit longer.
Considering that this was a truncated first year of compliance for a tax law which is quite complex, experts fear that businesses, especially small and mid-sized ones won’t have it easy. “It is a monumental task,” worries a partner, indirect tax at a reputed consulting firm who did not wish to be identified.
Further, as the GST audit report is required to be filed for every GST registered branch in the respective state separately, this could worsen the compliance burden for taxpayers. “Businesses having pan-India operations will have tough times,” points the same tax expert.
For Abhishek Rastogi, partner at Khaitan & Co, problems could come on two counts. First, finance executives may not be ready with a full detailed documentation that may be needed at the time of auditing.
“Basically, the cost accountant or chartered accountant when preparing the audit report will ask for many documents and (look for) reconciliation between the books of accounts and the actual invoices,” says Rastogi. Hence, companies will have to provide a lot of information in hard copy or soft copy formats.
Second stress point, according to Rastogi, could be that the corporate tax positions on specific transactions come under the scanner. “The issue may be around interpretation regards, say tax liabilities or valuation etc. Companies may have followed a different mechanism, but the auditor may not agree with classification or the point of taxation so on and so forth.” In such cases, the auditor may well highlight these discrepancies.
How to ready yourself?
By the time the GST audit comes around, businesses need to be sure about their input and output tax liabilities and the tax positions that they have taken plus the reasoning that backs those positions.
Also while the due date of filing of GST audit report is December 31, 2018, its contents, experts say, should be in sync with audited accounts and income-tax filings.
“It is advisable to have the reconciliation in place at the time of finalization of accounts and income tax filings,” says KrayMan Consultants’ Agarwal.
This effectively means the reconciliation statement for the nine-month period should be ready by as early as September 30, which is the deadline for filing income tax returns for Indian companies.
The road ahead
Since this is going to be the first audit under GST, the report assumes more significance as it will be useful for references down the line.
Experts feel businesses, which are already in the process of finalizing their annual accounts, should fasten their eyes on the audits under GST right away, if they haven’t done so by now.
Also going ahead, the taxpayers should watch out for the notification of GST audit report in Form GSTR-9C along with reconciliation statement in Form GSTR-9D to be notified by the Government, says Krayman’s Agarwal.
And certainly, as the track record of GST implementation shows, there is no point is sitting back and just waiting for the audit formats. Line up your ducks in a row as early as possible for a smooth compliance experience.
No surprise then that GST has become a boardroom agenda item.
Sources: ET CFO