SCOPE OF GST AUDIT

GOVERNMENT’S THOUGHT PROCESS

The Indian economy
has progressively evolved from an appraisal system to a self-assessment system.
Business houses are required to self-assess the correct taxes due to the
Government exchequer and report the same in statutory returns on a periodical
basis. The parallel to this liberalisation was the requirement of maintenance
of comprehensive, robust and reliable records for verification and examination
by the tax administration at a later stage. The Government(s) approached
independent statutory bodies having professional expertise on the subject
matter to assist them in verification of the accounting records of the
taxpayers. It is this thought process that lead to the emergence of statutorily
prescribed audits with specific reporting requirements giving the Government
assurance over the accounting records for them to effectively discharge their
administrative duties.

AUDIT VS. CERTIFICATION

While audit report
and certificates are part of attest functions of an auditor, there is a
conceptual difference between an ‘audit’ and ‘a certificate’. As per ‘Guidance
Note on Audit Report and Certificates for special purposes’ issued by ICAI, the
difference between a certificate and report has been provided as under:

The reader of a
certificate believes that the document gives him/ her reasonable assurance over
the accuracy of specific facts stated therein. A certificate is normally
expected to entail a higher level of assurance compared to an opinion or report
– a true and correct view. An audit report is more generic and gives an overall
opinion that the reported statements are true and fair (in some cases true
and correct). It must be noted that due to inherent limitation of audit
procedures, an absolute assurance is impossible to provide and in spite of the
words report and certificates being used interchangeably, a professional should
clarify to the users of his services that only a reasonable assurance or
limited assurance can be provided by him.

RECORD MAINTENANCE UNDER GST LAW

Section 35 places a
requirement of maintaining accounts, documents and records. The law places an
obligation on every registered person to maintain separate accounts for each
registration despite the person maintaining accounts at an India level. At
every registration level, the tax payer should maintain a true and correct
account of specified particulars such as production or manufacture of goods;
inward and outward supply of goods or services or both; stock of goods; input
tax credit availed; output tax payable and paid; and other additional documents
mentioned in the rules. Rule 56(1) prescribes maintenance of goods imported/
exported, supplies attracting reverse charge liability and other statutory
documents (such as tax invoices, bill of supply, delivery challans, credit
notes, debit notes, receipt vouchers, payment vouchers and refund vouchers).
Succeeding clauses place requirements on the taxpayer (including service
providers) to maintain inventory records at a quantitative level; account of
advances received, paid and adjustments made thereto; output/ input tax,
details of suppliers and registered and/or large unregistered customers, etc.

Strictly
speaking, section 35 does not require the assessee to maintain independent
state level accounting ledgers/ GLs. The section
limits its scope only to maintenance of specified records (which need not be an
accounting ledger) giving the required details enlisted therein at the
registration level in electronic or in physical form. The taxpayer should be in
a position to provide the details as envisioned in section 35 and its
sub-ordinate rule. This could be understood by a simple example of a company
maintaining a bank ledger for pan India operations. Section 35 does not expect
the taxpayer to maintain a separate bank ledger for each registration, but it
certainly expects that the taxpayer to be in a position to derive the state
level advances/ vendor payments from this consolidated bank ledger when
required. Section 35 is not a prescription of list of ledgers for each registered
person, but a specific list of records relevant for the law. 

GST REPORTING REQUIREMENTS

Section 35(5) read
with section 44(2) of the CGST Act and the corresponding Rule 80(3) of the CGST
Rules relates to audit. Section 35(5) places three reporting requirements:

Section 44(2)
requires the taxpayer to submit an annual return (in Form 9), audited annual
accounts and a reconciliation statement. Rule 80(3) prescribes the turnover
threshold (currently 2 crore) beyond which tax payers are required to get their
accounts audited in terms of section 35(5) and furnish a copy thereof along
with a reconciliation statement ‘duly certified’.

An important link
between section 35(1) and 35(5) to be noted here is that though section 35(5)
prescribes audit of the accounts of the assessee, section 35(1) does not specify
the accounting parameters under which this exercise is to be conducted. As
stated in the earlier paragraph, section 35 does not provide for maintaining
accounting ledgers at the state level and hence consciously refrained from
providing the accounting parameters (unlike the Income tax law). The law has
limited itself to specific details for its information requirement. Thus, audit
under any governing statute, or in its absence, an audit based on generally
accepted accounting principles, is considered acceptable under the said
section. The law has thus prescribed mere filing of copy of audited annual
accounts as a requirement u/s. 35(5).

Section 35(5) and
44(2) give rise to two scenarios – first being cases where accounts are not
audited under any other law in which case an audit is required to be conducted
under GAAP; and second being cases where accounts are audited under other
statutes and such accounts would be acceptable under GST. A separate obligation
of maintaining GST specific books of accounts has not been prescribed. In both
scenarios, the audited accounts should be accompanied with the reconciliation
statement duly certified u/s. 44(2).

APPLICABILITY OF GST AUDIT AND ANNUAL RETURN

Annual Return: Every registered person irrespective of the turnover threshold
would be required to file an annual return. The said return in Form 9
consolidates the category wise turnovers, tax liabilities and input tax credit
availment/ reversal as reported in the relevant GST returns. It also captures
transactions/amendments, which spill across financial years. A recent document
issued by GSTN convey that Form 9 would be pre-filled by GSTN in an editable
format. The taxpayer would have to review the data and file the same. Aggregate
of the turnover; output tax and input tax credit details as declared in the GST
returns and consolidated in Form 9 would flow into Form 9C for the purpose of
reconciliation by the auditor.

GST
Certification: Every registered person whose
turnover exceeds the prescribed limit is required to file annual audited
accounts and reconciliation statement. An entity having registration in more
than one State / UT is considered as a distinct persons in every State in terms
of section 25 of the CGST/SGST Act. Distinct persons are required to maintain
separate records and get their records audited under the GST Laws. There seems
to be no ambiguity that Form 9 and 9C need to be filed and reported at the
registration level.

However, there
exists some confusion on whether the turnover limit needs to be tested
independently at each GSTIN level or at the entity level. This confusion arises
primarily on account of the wordings adopted in section 35(5) vis-à-vis Rule
80(3). While section 35(5) uses the term ‘turnover’, Rule 80(3) uses the phrase
‘aggregate turnover’. Aggregate turnover is defined to include the PAN based
turnover and the term turnover is not defined. The closest meaning of turnover
would be expressed by the definition of ‘turnover in a state’ which restricts
itself only to the turnover at a particular GSTIN. Thus on one hand, the section
refers to turnover in a state and Rule 80(3) refers to aggregate turnover i.e.
entity level turnover. A simple resolution of this conflict would be to place
larger emphasis on Rule 80(3) as the powers of prescription have been delegated
and one would have to view the prescription only as per the delegate
legislation. Section 35(5) does not in anyway narrow down the scope of Rule
80(3) by using the phrase ‘turnover’. It merely directs one to refer to the
expression of turnover as laid down by the delegated legislation for the
purpose of deciding applicability. There are several viewpoints that affirm
this stand and it would be fairly reasonable to take the view that audit at
each location should be performed irrespective of the state level turnover as
long as the aggregate limits have been crossed.

While the above
explanation conveys that thresholds are to be tested at the entity level and
applied to all registrations under an umbrella, it would be interesting to
examine the other side of the argument for a better debate:

The author believes
that former view is a more sustainable view and the latter view is only a
possible defence plea in any penal proceeding.

SCOPE OF GST AUDIT

Section 35(5) does
not lay down the parameters of its audit requirement. Though the statute
defines ‘audit’ u/s. 2(13), it appears the definition is a misfit for 35(5).
The said definition seems relevant only for the purpose of special audits
required and directed by the Commissioner u/s. 66. The definition reads as
follows:

‘audit means
examination of records, returns and other documents maintained or furnished by
the registered person under this Act or rules made thereunder or under any
other law for the time being in force to verify the correctness of the
turnover declared, taxes paid, refund claimed and input tax credit availed, and
to assess his compliance with the provisions of this Act or rules made
thereunder’

The above
underlined portion of the definition places a stringent task over the auditor
to verify correctness of all declarations of the taxpayer and make a
comprehensive assessment of compliance of the GST law. The requirement is so
elaborate that the auditor would be required to apply all provisions (including
rules, notifications, etc) to every transaction of the taxpayer, take a view in
areas of ambiguity and provide a report on the compliance/ non-compliance of
the provisions of the Act. Section 35(5) seems to be on a different footing
altogether. It refers to performance of audit of accounts (NOT records, returns
or statutory documents) and submission of the copy of the same, which is
completely different from the definition u/s. 2(13). It therefore seems that
the said definition has limited relevance. It applies to cases where a special
audit is directed by the Commissioner on the ground that the books of accounts
and records warrant an examination by a professional.

If one also reads
9C (discussed in detail later), it does not incorporate any section level
report or overall compliance of provisions of the Act. In fact there is a clear
absence of a section reference or the term ‘compliance’ in the entire form.
This leads to the only inference that audit should be understood in general
parlance and not in terms of section 2(13). As a consequence, one can conclude
that the scope of the audit is undefined and respective governing statutes
would be the basis of any audit of accounts u/s. 35(5). This seems logical
since section 35(1) itself stays away from prescribing maintenance of general
books of accounts. In cases where audit is not governed under any statute,
section 35(5) merely directs conduct of audit of accounts as per generally
accepted accounting principles and standards on auditing. An auditor should
apply the procedures given in the Standards on Auditing, specifically obtaining
representation and clarify the terms of engagement in writing with the auditee.

SCOPE OF GST RECONCILIATION STATEMENT

The scope of
reconciliation statement and its certification are not very well defined under
the GST law. Section 44(2) does give some limited indication on the scope of
the reconciliation statement, which reads as under:

‘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 prescribed’

The above extract
of section 44(2) conveys that the reconciliation statement is a number
crunching document aimed to bridge the gap between the accounts and returns.
Revenue figures as per accounts are present on one end (‘accounting end’) and
the GST return figures are present on the other (‘return end’). The statement
requires the assessee to provide an explanation to timing/ permanent variances
between these two ends. The framework of Form 9C also echoes of it being a
reconciliation and not an ‘opinion statement’ of the auditor and depends on the
reliance upon the data provided by the client that forms the basis of such
reconciliation. 

Let’s reverse
engineer Form 9C to affirm this understanding !!!. Form 9C contains two parts:
Part A contains details of reconciliation between accounting figures with the
Annual return figures. Part B provides the format and content of the
certificate to be obtained by assessee.

The salient
features of Part A of 9C can be categorised under four broad heads as follows
(clause wise analysis may be discussed in a separate article):

Table 5 – 8 –
Outward Supply (Turnover Reconciliation): The
net of taxation of GST extends beyond the operating income of a taxpayer. The
objective of this section is to reconcile the operating revenue as reported in
the profit and loss account with the total turnover leviable to GST and
reported in GST returns. The said section then provides a drill down of this
total turnover to the taxable turnover. Any unreconciled difference arising due
to inability to reconcile or other reasons would be reported here.

Table 9 &
11 Output Tax Liability (Tax Reconciliation):
Output tax liability of a taxpayer is calculated on the taxable turnover of the
assesse. However, there could be inconsistencies between the tax payable and
the tax reported in accounts due to either excess collection or otherwise. This
section requires reporting of differences between Tax GLs in accounts vs. the
numbers reported in the electronic liability ledger. The instructions do not
place an obligation on the auditor to verify legality of the rates applied.

Table 12–16
Net Input Tax Credit (Credit Reconciliation): This
section reconciles net ITC availed as per accounts with that reported in
GSTR-3B. ITC under GST is permitted to spill over FYs and the reconciliation
table bridges this timing gap between accounts and GST returns. There could be
certain unreconciled differences such as:- ITC availed in A/C but not availed
in GST returns, lapsed credits, ineligible credits in A/C but claimed in GSTR 9
etc. The table expects the auditor to report the flow of numbers starting from
the accounts to the GST returns. This part also contains an expense head wise
classification based on accounting heads for statistical and analytical
purposes by the tax administration.

Auditors
Recommendation Of Liability Due To Non-Reconciliation

This section
provides the auditors recommendations of tax liability due to
non-reconciliation. The recommendation is limited only to items arising out of
“non” reconciliation and not on account of legal view points. The auditor can
rely on the tax positions taken by the assessee and need not report the same if
the auditee has a contrary view to the same. Difference in view points would
not be points of qualification in the Auditor’s concluding statement.

Part-A seems to limit itself to a reconciliation exercise at various
levels with the audited accounts. There is no provision which requires the
auditor to provide his/her opinion on the compliance with the sections of the
laws (e.g job work, time or place of supply, etc).

Part B of Form
9C is the Certification statement which has been
divided into two parts:-

(I) Where reconciliation
statement is certified by the person who has audited the accounts- As the title suggests, auditors takes twin responsibilities of
statutory audit (either under the Income tax law, sector specific laws or the
GST law¹) and GST reconciliation statement and would furnish its
report in Part-I. In this report, the auditor reports on three aspects:

(a) that statutory
records under GST Act are maintained;

(b) that financial
statements are in agreement with accounts maintained; and

(c) that particulars
mentioned in 9C are true and correct.

It must be noted
that Part I is not an audit report even-though it is issued by the same
auditor. The auditor performing the audit would still have to issue a separate
audit report as per relevant professional guidelines certifying that the
financial statements/ accounts are in accordance with GAAP and giving a true
and fair view. In this part, the auditor reaffirms that audit has been
conducted by him and the audit provides assurance that the audited books of accounts
agree with the financial statements.

In cases where the
Mr A (Partner of ABC firm) audits under the Companies Act, 2013, Mr X (Partner
of the same firm) performs audit under the Income tax Act, 1961), and Mr Z
(Partner of the same firm) performs certification under the GST law, Mr A may
have to follow Part-I of the certification statement as it is part of the firm
which conducted the statutory audit.

(II) Where
accounts are already audited under any law (Such as Companies Act 2013, Income
Tax Act 1961, Banking Regulation Act 1949, Insurance Act 1938, Electricity Act
2003). This part applies in cases where a
person places reliance on the work of another auditor who has conducted audit
under another statute. The professional believes that statutory audit conducted
under the respective statutes gives him/ her reasonable assurance that the
figures reported in the financial statements are correct. Therefore, the
auditor only reports on two aspects

(a) that statutory
records under GST Act are maintained;

(b) that
particulars mentioned in 9C are true and correct.

_____________________________________________

1   For eg. An individual earning commercial
rental in excess of 2 crore and reporting the same under ‘income from house
property’ would not be subject to maintenance of books of accounts / tax audit
under the income tax.  Such individual
would have to get his accounts audited in view of section 35(5) and then
proceed to obtaining the certification over the reconciliation statement.

It appears that
Part B of Form 9C has used audited accounts as the starting point and sought a
certification from the auditor on the particulars mentioned in the
reconciliation statement to reach the numbers at the return end. When the
starting point is unaudited, section 35(5) places an onus on the assessee to
get the accounts audited (based on generally accepted accounting principles)
and perform the reconciliation pursuant to the audit exercise. The audit
process has limited significance only to give assurance to the user of the
reconciliation statement that the accounting end of the reconciliation
statement is also reliable.

To reiterate, the
pressing conclusion is that the focus of Form 9C is to certify the particulars
required to bridge the mathematical gap between accounting revenue vs. GST
outward turnover, input credit as per accounts vs. input credit as per GST
returns and tax liability as per accounts vs. tax liability as reported in GST
returns. This objective becomes effective only when:

a)  The accounts are reliable and are consolidated
into the financial statements.

b)  This accounting number is bridged with the GST
number in the return.

The first objective
is fulfilled by placing reliance on the audit report issued by the statutory
auditor that financial statements are a true and fair representation of the
books of accounts maintained by the assessee. The second objective is met by a
reporting certain particulars in Part I of 9C. To summarise 9C Part II is a
limited purpose certificate reporting the correctness of the particulars
contained in 9C only.

COMPARATIVE WITH INCOME TAX REQUIREMENTS

Audit reports/
certificates are not germane to tax laws. Income tax has also traditionally
required an income tax audit u/s. 44AB and also chartered accountant
certificates under various sections (such as 115JB, 88HHE, etc). Section 44AB
permitted assessee to have its accounts audited under the Income tax law or any
other law applicable to the assessee and in addition furnish a report in the
prescribed form (in Form 3CD) verifying the particulars mentioned therein. The
audit report in Form 3CD presently contains 44 clauses placing onus on the
auditor to verify compliance of specific sections and reporting particulars
relevant to each section under the respective clause. Each clause requires the
auditor to apply legal provisions/ tax positions, circulars, etc and give an
accurate report of the eligibility and quantum of deduction claimed by the tax
payer (such as whether assessee has claimed any capital expenditure, compliance
of TDS compliance, claim of specific deductions, etc). Yet, it is also settled
that the auditor’s view on a particular section is not binding on the tax payer
and the tax payer was free to take a contrary stand in its income tax return.
One the other hand, section 115JB required a certificate from the chartered
accountant reporting compliance of computation of book profits under the said
section in terms of the list of clauses u/s. 115JB (in Form 29B).

It appears that
Form 9C is not an audit activity rather a certification of accuracy of
particulars. If a comparative is drawn with Form 3CB/3CD and certification
exercise u/s. 115JB, Form 9C appears to be number oriented certification
exercise rather than compliance oriented exercise such as Form 3CD/29B.
Therefore it would be incorrect to term Form 9C as an ‘audit’ exercise and
rather appropriate to term it as a ‘certification’.