INTRODUCTION
In the last article we dealt with the
interplay between the process of statutory audit and the GST domain from the perspective
of planning the entire audit and understanding the processes applied from the
perspective of GST. In this article, we shall cover aspects related to review
from the perspective of financial statements and the various checks and
assertions which would be required during the audit process.
REVENUE
UNDER STATEMENT OF PROFIT & LOSS
Revenue is generally earned when a company
makes outward supply of goods or services, or both, and recovers the
consideration from its customers. However, it’s not necessary that the entire
consideration is accounted for as revenue in the books. In some cases, the
amounts recovered from customers are accounted in credit / liability ledgers,
especially in cases where there is recovery of expenses. The auditor should
therefore ensure that all such expenses are identified and that wherever there
are credit entries on account of outward supply, the corresponding tax is being
discharged.
Once the
auditor obtains assurance that all invoices are accounted in the calculation of
the revenue from operations, the first thing that needs to be checked is
whether or not the tax rate charged on the invoice is correct. For this, the
auditor needs to identify different kinds of transactions, i.e., outward
supplies made by the company and for each class of transactions determine if
there are different rates applied / any exemptions claimed and wherever there
are such variations, identify the reasons for the same. Similarly, wherever
there are conflicts in tax rates, especially in the case of goods due to
classification, the auditor should review the basis for the classification used
by the company to arrive at his conclusion.
It is not only the tax rate but the
determination of location of supplier in case of a multi-locational entity,
place of supply mentioned in the invoice, time of supply, value of supply,
etc., which also become important. For example, in a particular contract the
client has issued an order to a certain branch which executes and delivers the
entire contract. However, while raising the invoice, inadvertently the company
bills the client from a different branch. This may result in a challenge since
there is a possibility that the branch which has executed and delivered the
contract might face a demand in future from the tax authorities to pay tax on
the supplies made (although the same might have been paid at another branch).
In other words, the synchronisation between delivery location and contracting
location is one aspect which the auditor should check, especially in case of
service contracts.
Similarly, whether or not the time of supply
provisions are complied with also needs to be reviewed. In case of goods, the
auditor should check if invoices have been issued in all cases before the
outward movement of goods takes place. This is because for goods the time of
supply takes place before or at the time of the supply of goods. However, it
gets trickier in the case of services since the invoice can be issued even
after completion of service. The auditor should check cases where revenue has
been recognised under the accrual concept, but invoicing is yet to be done. In
such cases, the auditors should obtain reasonable assurance that the service
provision is incomplete. If it is determined that the service provision has
been completed but invoicing is not done for some reasons, there may be a
non-compliance with the time of supply provisions which might trigger a
contingent interest liability.
The next point that the auditor should
review is the value of supply for the purpose of GST. Whether the value on
which GST has been charged is as determinable u/s 15 of the CGST Act, 2017 or
not? In case of contracts, if there are instances of some materials being
supplied by the recipient, the auditor should also analyse if the value of such
material is includible in the value of supply. The auditor might want to
consider the applicability of a decision of the Supreme Court in the case of CST
vs. Bhayana Builders Private Limited [2018 (10) GSTL 118 (SC)].
Similarly, if the company is claiming non-inclusion of certain amounts on
account of reimbursement, the auditor should also check whether or not the
condition for pure agents prescribed u/r 33 of the CGST Rules, 2017 are
satisfied. Similarly, in case of related party transactions, the auditor should
check whether the same are at arm’s length or not.
DEEMED
SUPPLIES
Entry 3 of Schedule I of the CGST Act, 2017
deems supply of goods or services between distinct persons / related persons as
supply even if made without a consideration. Further, once a supply is made to
a related person, section 15 kicks in which requires valuation as per the
prescribed method under the CGST Rules, 2017 (Rules 28-32).
The controversy, however, revolves around
the first part of the entry, i.e., supply of goods or services between distinct
persons. This entry has resulted in a lot of confusion and caused
interpretation issues, especially from the service perspective on multiple
fronts, such as what constitutes supply between distinct persons, on what value
is it to be applied, what time of supply provisions apply, etc. The confusion
has further increased in view of the AAAR in the case of Columbia Asia
Hospitals Private Limited [2019 (20) GSTL 763 (AAAR-GST)].
The primary checkpoints while dealing with
supplies under Entry 3 of Schedule I are:
(i) Identifying supplies getting covered under
Entry 3,
(ii) Ensuring compliance with valuation provisions,
(iii) Ensuring that such supplies are properly
accounted in the books of accounts, i.e., outward supply reported by one branch
should be reported as input tax credit in the corresponding branch and there is
no loss of the input tax credit.
It may be important to note that there are
serious legal interpretation issues relating to branch transfer of services. In
such scenarios it may be in order for the auditor to ensure that the company
has adopted a suitable policy in due consultation with legal experts and that
the policy is actually implemented.
BARTER
TRANSACTIONS
Let us try to understand the concept of
barter in the context of a real estate project where the company has entered
into an area-sharing Joint Development Agreement with the landowner. In such a
transaction, what usually happens is that the company gets the right to
construct on the land while the landowner, instead of getting monetary
consideration, is allotted certain constructed area in the new building which
he can self-use or sell. The company is liable to pay GST on the constructed
area to be allotted to the landowner. However, there is no consideration for
this which is determined by a prescribed method and there is no record of such
consideration in the books of the company. In such a case, though there is no
revenue received by the company, it ends up paying GST on a value which is
disclosed as an outward supply. This results in a gap between the books of
accounts and the GST returns.
In such a scenario, the auditor should look
into the applicability of Accounting Standards relating to revenue recognition
and accrual – whether the company is required to accrue the expenditure for the
supply made by the landowner or recognise revenue for constructed area allotted
to the landowner. It is imperative to note that there is no exchange of
monetary consideration and even the value adopted for the transaction under
different statutes may not be the same. While analysing this point, apart from
GST the auditor should also consider the probable implications under Income Tax
since if the transaction is treated as sale and purchase of constructed area /
land, respectively, there might be probable TDS implications.
EXPENDITURE
UNDER STATEMENT OF PROFIT & LOSS
GST works on the concept of value-added
taxation, i.e., a company ideally pays tax only on the value addition by it in
the transaction chain. This is achieved by the concept of input tax credit
(ITC), which is at the heart of GST and accrues to a company when it incurs an
expenditure, whether revenue or capital in nature. But the important point that
one needs to note is that this credit is not always available and the same is
subject to conditions. There are various facets to be noted when taking ITC
which can be as under:
1. Input tax credit can be claimed only
if goods or services are received for use in the course or furtherance of
business
One of the primary conditions for claiming
ITC is that the goods or services received by a company should be used in the
course or furtherance of business. What constitutes ‘business’ has been defined
under GST. However, this condition has created quite a controversy. For
example, CSR expenses, which certain classes of companies are mandatorily
required to incur under the Companies Act, 2013 are not treated as expenses
incurred for the purpose of business / profession u/s 37 of the Income Tax Act,
1961. It would therefore be important to evaluate this controversy, especially
during the pandemic times where various companies have incurred more CSR
expenditure than what they are mandatorily required to incur under the Companies
Act, 2013.
2. Conditions for claiming input tax
credit should be satisfied
Apart from the primary condition that the
goods or services should be used in the course or furtherance of business,
section 16(2) also lists other conditions which are required to be satisfied
for claiming input tax credit:
* The company should be in possession of
a prescribed document issued by the supplier
A condition procedural in nature, there must
be reasonable assurance that the company should be in possession of documents
based on which it is claiming ITC. One of the primary aspects to be checked is
whether the documents based on which the credit has been claimed contains the
standard list of disclosures mandated under the CGST Rules, 2017 and has the
other disclosures as well or not. It should further be checked if the company
claims credit based on the supporting invoice or even when it books provisional
expenses.
* The goods or service should have been
received
This is an important condition the
satisfaction of which would be the key to supplement the claim of ITC. The
condition relating to receipt of goods would be easily satisfied owing to the
tangible characteristic of goods. However, the receipt of goods should be
correlated with corresponding documents evidencing the same, such as E-way
bill, lorry receipts, etc.
However, in the context of service,
demonstration of receipt of service would be crucial. This can be done by
relying on documentary evidence, including agreements, work certifications,
etc. For example, in the case of construction services received, a surveyor’s
certificate certifying the extent of work based on which the invoice has been
issued can be a proof for receipt of service. Even an internal certification by
an authorised person can be the basis for demonstration of receipt of service.
A similar method should be followed for other services as well.
One important aspect to be noted by the
auditor is to deal with a situation where the tax authorities allege
non-receipt of goods or services. There are various cases where the tax
authorities allege that certain transactions of inward supplies are fictitious
and that the ITC claimed by the company is not eligible. There can be instances
where the company might have contested the allegation, though the credit might
have been reversed under protest due to coercion from tax authorities.
The auditor should carefully analyse this
level of transaction since it points at probable fraud, mismanagement and
misstatement of financial statements and requires specific disclosure in the
auditor’s report, including the statement on internal financial controls. The
decision on this would be critical, especially in cases where the dispute is
not concluded, i.e., the company continues to litigate the allegations. While
many such instances have been reported in the judiciary, the auditor should
take a call based on the facts of the specific case since in each case the
facts may be different.
* The supplier should have paid the tax
and the recipient should have filed the return u/s 39
This would be a check which should be maintained
in the monthly return filing process. The company should ensure that the
supplier should have filed not only his GSTR1, but also his GSTR3B.
* The payment to supplier should have
been made within 180 days from the date of invoice
This condition has already been discussed in
the earlier part of this article [refer discussion on 2nd proviso
to section 16(2) r.w. Rule 37].
* The ITC should be taken within the
prescribed time limit, i.e., before the due date of filing return for the month
of September of the succeeding financial year
An important aspect, this is one more
condition which should be a part of the monthly return filing process of each
company. From the auditor’s perspective, the auditor should also check if all
the returns are filed on time and in case of delay, whether there is any impact
on eligibility to claim input tax credit and what position the company has
taken on this?
One specific issue which needs to be noted
is that the tax authorities have been challenging the claim of ITC in cases
where returns for a tax period are filed after the due date for filing the
return of September of the succeeding financial year. The tax authorities have
challenged the eligibility to claim ITC u/s 16(4). The auditors should review
if there are such instances and should also analyse the legal position taken by
the company.
3. Application of section 17
Section 17 deals with two aspects, one being
apportionment of ITC and the second being blocked credits. The first part,
i.e., apportionment of ITC, comes into the picture when inward supplies are
used for making outward supplies which are used for making taxable supplies as
well as exempt supplies. In such cases, compliance with provisions of Rules 42
and 43 (already discussed in the earlier part of this article) should be
analysed. The auditor should specifically check if the compliance is done on a
monthly basis, whether the true-up as mandated u/r 42 and 43 is done within the
prescribed time limit and, lastly, the accounting for the apportionment u/r 42
and 43 – whether the amount of reversals / re-credit is booked to specific
expense or a general expense? The auditor should also analyse the method of
reporting the true-up effect of Rules 42 and 43 in the subsequent financial
year – whether as prior period expense or regular expense?
The above would be more relevant in case of
timing difference in booking of expenses used for making exempt supplies. Let
us take an example of a supplier engaged in making exempt supplies who had
contracted to receive certain expenses during a F.Y. Based on the contract, the
auditors had advised the company to accrue the said expense in its books in one
F.Y. The issue that would remain is whether the auditor should recommend
provision of only the basic expense or expense including GST, considering the
fact that in the subsequent period when the expense will actually be booked,
the corresponding GST will not be allowable for ITC and, therefore, the issue
of whether the GST component may be treated as prior period expense arises.
The second part, i.e., blocked credits, is
trickier. There has been a lot of controversy on this subject, be it inputs or
capital goods. While reviewing the ITC claim from the viewpoint of eligibility,
the auditor should specifically check on the following key aspects:
(a)
Determining what is covered u/s 17(5)(c) and 17(5)(d) relating to receipt of
goods or services for construction of immovable property other than plant and
machinery, subject to the condition that the cost is capitalised in the books
of accounts
The key issue which the auditor needs to
look at is the applicability of the decision of the Orissa High Court in the
case of Safari Retreats Private Limited vs. CC of GST [2019 (25) GSTL 341
(Ori.)] which held that the provision of section 17(5)(d) was ultra
vires the provisions of the object of the Act and held that ITC should be
allowed on receipt of goods or services used in the construction of an
immovable property which is used for providing an output service.
Another aspect which needs to be looked at
is the distinction between depreciation and amortisation. Depreciation
generally applies to expenses capitalised whereas amortisation applies in cases
where expenses are incurred upfront, but their recognition is spread over
years. The former applies in cases involving ownership, while the latter
applies in cases where no ownership exists, for example, in the case of leased
premises, costs incurred under BOT projects, etc.
(b)
Determining what constitutes personal consumption for disallowance u/s 17(5)(g)
This provision states that credit of goods
or services used for personal consumption would not be eligible. But the
question remains, what constitutes ‘use for personal consumption’, especially
in case of companies where all personnel working for the company are either
employees / consultants? Therefore, the question of personal consumption should
not have arisen. While analysing this provision, the auditor should also check
whether there is alignment with the position taken under the ITA, 1961 which
requires reporting of personal expenses in Form 3CD.
(c) Determining the scope of section 17(5)(h) –
where goods are lost, stolen, destroyed, written off or disposed of by way of
gift or free samples
The issue of
when eligibility of ITC is to be checked is a settled position in view of the
decision of the Tribunal in the case of Spenta International Limited vs.
CCE, Thane [2007 (216) ELT 133 (Tri – LB)] where the court held that
credit eligibility should be checked at the time of receipt of goods. The
applicability of this decision to GST is important to be reviewed, since there
is no other provision under the statute which deals with this aspect under GST.
Similarly, what constitutes gift is also
important. A business undertakes sales promotion activity by virtue of which
the company would give ‘freebies’ to its customers. While no specific
consideration is received for such freebies, a business would not give any
freebies if the cost is not recovered from customers indirectly. A reference to
CBIC Circular 92/11/2019 – GST dated 7th March, 2019 would be
important while dealing with eligibility to claim ITC.
ROLE OF
GSTR2A IN AUDIT PROCESS
Apart from the above, there is one other
factor which should also be looked at in the context of ITC, which is the role
of GSTR2A. GSTR2A is the document which is made available on the GST portal
based on the details uploaded by a supplier and help the company in matching
the compliances of its vendors. There are different factors which need to be
looked at here:
(A) Rule 36(4) of the CGST Rules, 2017
provide that for any tax period the ITC claim should not be more than 110% of
the amount appearing in GSTR2A. The auditor should not only check whether this
provision is complied with or not, but also the accounting treatment in case
there is a need to defer the credit in view of Rule 36(4).
(B) The auditor should also review the net
amount of ITC which remains unmatched and analyse the implication it might have
on such credit claims in future.
LIABILITIES
UNDER BALANCE SHEET
The GST collected by the company gets
credited to the GST payable account, which gets covered under the head
‘Liabilities’ in the Balance Sheet. The auditor should obtain a reasonable
assurance that the liabilities on account of GST reported in the Balance Sheet
give a true and fair view and is specifically required to give a report of this
in the CARO statement as to:
(I) Whether the company has been regular
in depositing undisputed statutory dues as applicable with the appropriate authorities?
The answer to the first question can be
obtained by collating a compliance table under GST which would assist the
auditor in determining whether the company has been regular in depositing
statutory dues with the authorities concerned. One might also need to determine
whether mere filing of return in time would be the correct basis to arrive at a
conclusion, or whether the auditor needs to check if all the information has
been correctly mentioned in the returns, or there is a delay. For example, supplies
made in April may be reported in the returns of June. Therefore, while in
totality all the applicable statutory dues would have been paid, but whether
this can be treated as ‘regular deposition of undisputed statutory dues’ or not
would depend on the professional judgement of the auditor.
(II) Whether any undisputed statutory
dues are pending for a period of more than six months as on the balance sheet
date?
This is an important part of the audit
process as it requires the auditor to check the workings of the client on a
monthly basis to ensure that all the monthly liabilities are paid in time.
Generally, the best way to look at this would be by comparing the liability as
on the balance sheet date with the liability as per the returns for the last tax
period ending on the balance sheet date. If both the figures reconcile, this
would mean that there are no statutory dues pending for a period of more than
six months as on the balance sheet date. However, in case there is a mismatch,
the auditor would be required to check and identify the month in which there is
a mismatch in liability as per the books vs. liability as reported in the
returns, and determine if the same is pending for a period of more than six
months which would require reporting in CARO. Of course, the auditor will need
to ensure whether the outstanding dues are disputed or undisputed and only if
they are undisputed would such dues be required to be reported. On the basis of
this reporting, even the tax auditor might need to look at the impact on his
reporting for section 43B compliances in Form 3CD.
Apart from the liability to pay tax under
forward charge, i.e., on supplies made by a company, the next area to be
discussed is the accounting and discharge of reverse charge liability. While dealing
with RCM liability, there are various aspects which an auditor should look
into, such as method of accounting of reverse charge considering the varied
time of supply provisions, claim of corresponding ITC, reconciliation (expense vis-à-vis
returns), etc. Let us look into each of these aspects.
(III) Accounting & discharge of RCM
liability
In case of reverse charge, the point of
taxation generally depends on two factors, namely, date of payment to the
supplier, or 60 days from the date of invoice, whichever is earlier. This would
mean that under legal parlance the accounting of invoice, which also earmarks
the date of acknowledgement of liability towards the supplier and the due date
at which the applicable GST is required to be paid, are not linked to each
other, which is in contrast to the position when compared with outward
supplies.
The general practice followed by companies
is that as and when they account for an invoice on which tax is liable to be
paid under reverse charge, they also book the corresponding liability and
credit (if eligible) or expense out the tax amount and, in a majority of the
cases, it is observed that the tax is also paid based on the same for the sake
of convenience on various aspects, the most important being the ease of
reconciliation of liability. However, there are instances wherein companies,
although they account the liability as well as the corresponding credit on
accrual basis, may discharge the same and claim credit under GST only when the
liability becomes due. In such instances, there will always be a mismatch in
the liability as per the books vs. the liability reported in the GST returns,
which would need reconciliation as the same would be the basis for reporting
under CARO as well as 3CD.
Furthermore, while dealing with related
party transactions, the auditor should also ensure that in case of provisions
made for expenditure payable to foreign associated enterprises, the liability
should have been discharged on accrual basis, i.e., the general rule does not
apply to such transactions. The auditor should check on whether any provision
for payments to be made to foreign associated enterprises are open for a period
of more than six months on the balance sheet date and, if yes, whether the
applicable GST is discharged therein or not, as the same might necessitate
reporting under CARO.
(IV) Impact of credit notes &
reconciliation issues
Generally, it is observed that a company
recognises its reverse charge liability when it accounts for an expense wherein
reverse charge is applicable. At that point of time, it might also be claiming
corresponding credits as and when available.
However, there are cases wherein once the
above is done, against the said invoice, the recipient receives a credit note,
meaning there is a reversal of the expense / the amount of expense. For such
cases, the logical practice to be followed would be that when such credit notes
are booked, corresponding tax liabilities as well as credits claimed, if any,
should be reduced. This would be more important in cases where credits are not
available and the tax paid under reverse charge is expensed out as this would
help in reducing the expense of the company. This will also ensure proper
reconciliation of expenses as per books vs. returns filed.
However, in cases where credits are
available, the general practice is that the tax effect of the credit notes is
ignored since this would be a cash neutral exercise as the tax paid upfront was
not a cost. However, this might need an adjustment when preparing the
reconciliation of expenses as per books vs. returns filed. Further, under
CENVAT regime this practice was also questioned by the Department which had in
a particular case sought reversal of credit without appreciating the fact that
the assessee had not reversed corresponding tax liability under reverse charge
emanating from a credit note. This demand was set aside by the Tribunal in the
case of Hindustan Petroleum Corporation Limited vs. Commissioner of
Central Tax, Visakhapatnam [2019-VIL-295-CESTAT-HYD].
COMPLIANCE
OF 2ND PROVISO TO SECTION 16(2) OF CGST ACT, 2017 R.W. RULE 37 OF
CGST RULES, 2017
One more area to look into is the trade
payables which are outstanding for more than 180 days. The second proviso
to section 16(2) provides that in case where payment to the supplier is not
made within a period of 180 days, corresponding ITC should be added to the
output tax liability of the company to the extent that there is a failure to
pay to such vendor. Since this is an amount which is liable to be added to the
output tax liability, as a prudent exercise an auditor should undertake the
verification of whether or not the company has complied with these provisions.
However, while dealing with this, the auditor needs to consider two important
points, namely:
i) Input Tax Credit under GST should have
been claimed against the invoices which are outstanding
ii) There should have been a failure to pay
to the supplier. What constitutes ‘failure to pay’ has been a subject matter of
litigation and one should refer to the decision in the case under CENVAT
regime; the Tribunal in Commissioner vs. Hindustan Zinc Limited [2014
(34) STR 440 (Tri.–Del.)] held that where the amounts are not paid due
to contractual terms and the entire tax amount is paid to the vendor /
supplier, the need to reverse Rule 4(7) should not apply. While reviewing this
compliance, the auditor should also analyse whether the position taken by the
company is in line with this decision and accordingly determine if there is a
need for reporting under CARO for undisputed dues outstanding for more than six
months or not.
ASSETS
UNDER BALANCE SHEET
* GST & tangible / intangible assets
Under GST, all inward supplies of goods are
classified into either inputs or capital assets. What constitute capital assets
are those inward supplies of goods which are capitalised in the books of
accounts. However, if any input services are capitalised, the same do not
constitute capital goods for the purpose of GST but are treated as input
services.
When looking at tangible / intangible
assets, traditionally known as ‘fixed assets’ under GST, there are various points
which need consideration. The key point to be looked into is the operation of
the provisions of section 17(5) of the CGST Act, 2017 which lists certain
inward supplies where ITC would not be available, also known as blocked
credits. Some of the items in this category include purchase of modes of
transportation of persons, or construction of immovable property, goods used
for personal consumption, etc. The auditor should primarily review whether
there are any specific instances wherein credits have been claimed though the
same are restricted u/s 17(5).
Apart from the above, the auditor should
also ensure that in cases where any capital goods, on which ITC was claimed,
are being sold, the provisions of section 18(6) of the CGST Act, 2017 r.w. Rule
44 of the CGST Rules, 2017 have been complied with. The same provide that in
supply of capital goods, the amount of tax payable would be the higher of the
amount payable on value of supply of such capital goods, or the un-depreciated
ITC to be calculated vis-à-vis the method prescribed u/r 44 of CGST
Rules, 2017.
Similarly, the auditor should also look into
whether or not the company has complied with the provisions of Rule 43. This is
important since the amount determined u/r 43 is to be added to the output tax
liability and, therefore, if there is non-compliance, reporting under CARO
might be triggered. Further, to the extent credit is liable to be reversed u/r
43, the auditor should also check whether the amounts liable to be reversed u/r
43 are capitalised or expensed out and the correctness of the said accounting
treatment.
Apart from the above, in case of
multi-locational companies having presence in multiple states, the auditor
should also check whether the movement of goods is properly documented and the
applicable compliances under GST in view of Entry 3 of Schedule I of the CGST
Act, 2017 are undertaken or not? This is an important aspect since there would
be a liability to pay tax at the branch sending the fixed assets and
eligibility to claim credit at the receiving branch. In case of non-compliance,
the company might end up with a situation where a subsequent identification of
non-compliance might result in liability at the sending branch with no
corresponding ITC at the receiving branch, thus resulting in incremental cost
on account of the non-compliance.
* GST balances
GST balances comprise of two parts, one
being ITC balance and the second being the balance on account of payment of
tax. ITC balance is one of the most important parts of GST as it represents the
outcome of the entire process of claim of ITC undertaken by the company. The
first and foremost check to be undertaken by the auditor is whether or not the
ITC balances appearing in the books of accounts are matching with the balance
in the electronic credit ledgers available on the portal as on the balance sheet date. In an ideal scenario, the balance appearing in the
books of accounts should reconcile in all respects with the balance appearing
in the electronic credit ledger. However, there are instances where the amounts
do not reconcile, primarily in the following cases:
(a) All adjustments to ITC which are reported in
GSTR3B are not accounted for in the books of accounts. For example, even if a
company complies with the second proviso to section 16(2) requiring
reversal of ITC in case of non-payment to suppliers, a separate entry is not
passed in the books of accounts. Similarly, there are instances wherein there
is a delay in accounting of Rule 42 / 43 adjustments.
(b) Amount of refund claim filed online is reduced
from the balance in the electronic credit ledger. However, in the books,
instead of transferring it to refund receivable account, it continues to remain
in ITC account and, as and when amounts are received, reduced directly from the
ITC account.
(c) Input tax credit accounted for in the books
but not claimed in GSTR3B due to operation of Rule 36(4) of the CGST Rules,
2017 which requires that in any tax period the amount of ITC cannot be more
than 110% of the amounts appearing in GSTR2A.
(d) Offset entries for March, 2020 are passed in
April, 2020 in the books of accounts but portal balance for comparison is taken
as per electronic credit ledger after filing of returns of March, 2020, thus
resulting in a timing gap.
While the above reasons may not represent
any non-compliances / material misstatement on the part of the company, an
auditor may consider suggesting a change in practice which will ensure
appropriate reconciliation of accounts which will, in turn, help the company
not only in the future audit process but also during the assessment proceedings
wherein it would be easier to explain to the tax authorities.
Another issue with respect to balance in ITC
ledgers is with respect to accumulation of amounts in the ledger for multiple
reasons, such as company is engaged in making zero-rated supplies without
payment of tax and therefore eligible to claim refund, where there is inverted
rate structure, in case of startups where the revenue during the initial years
is low while corresponding expenditure is high, or, simply put, loss-making
companies. With respect to this, it is observed that on various occasions where
the refund is stuck for many years, the auditors require the company to
determine the scope of recoupment of the balances and make a provision for
write-off of balance to the extent there is no certainty of recoupment.
However, while doing so the auditors should keep the following aspects in mind:
1. In case of accumulation due to zero-rated
supplies / inverted rate of structure, one of the key points to be eligible to
claim refund is that the incidence of tax should not be passed on to another
person. Once the balance is written off, this principle kicks in and recouping
the balance by way of refund might become a challenge for the company.
2. In case of accumulation due to loss, the
company can explore the option of claiming the refund by relying on the
decision in the case of Union of India vs. Slovak India Trading Co.
Private Limited [2008 (10) STR 101 (Kar.)] or by entering into a scheme
of merger / business transfer arrangement whereby either the entire company or
the loss-making division can be transferred along with all assets and
liabilities, including balance in electronic credit ledger, thus encashing the
said balances. Furthermore, one should also note that writing off balance in
view of uncertainty of utilisation in future might actually be in conflict with
the basic fundamentals of the audit, that the financials are prepared on a
going concern basis since there is a reasonable certainty of profitability in
the future.
The second part when dealing with GST
balance is the balance of tax paid in the cash ledger. Generally, it is seen
that any payment of tax is directly accounted in the liability ledgers. It is,
however, always prudent that a separate account (for each tax type) be created
in the books where all payments are booked and, as and when the liability is
discharged in the returns filed, corresponding entries be passed in the books
of accounts. This is for the important reason that mere payment of amount into
cash ledger does not amount to payment of tax itself. It takes place either
when the return is filed or by making a declaration in Form DRC-03. In fact,
even if there is sufficient balance in the cash ledger, the interest is liable
to be paid from the due date till the date of return / DRC-03 which actually
marks the payment of tax under GST as this results in reduction in balance in
the electronic cash ledger. This aspect should be kept in mind, especially when
dealing with reporting under Form 3CD.
DISCLOSURE
OF BALANCES IN BALANCE SHEET
There are two sets of GST GLs which a
taxpayer should generally maintain. One set of GST GLs to deal with GST
payable, which may be either on outward supplies or inward supplies where
reverse charge mechanism applies and is accounted as liability when the company
books revenue / expenses which attract RCM in its books; and second set of GST
GLs which deal with ITC, which gets accounted as assets when they book an
expense where the vendor has charged ITC and book it as receivable in their
balance sheet.
The following points are relevant for
discussion:
(A) Manner of reporting GST GLs – whether
the liability GLs will be clubbed under the head ‘Liabilities’ and credit GLs
will be clubbed under the head ‘Assets’ or only net balance to be disclosed,
either under the head ‘liabilities’ or ‘credits’ as the case may be? This is an
important aspect since in GST while the liability becomes due once the outward
supply is made, irrespective of whether the liability has been actually booked in
the books of accounts, ITC is claimed only when the same is reported in GSTR3B.
There can be scenarios where though a credit is booked in the books of
accounts, the same may not have been reported in GSTR3B and therefore not
claimed by the company. Similarly, there might be credit balances which may not
be immediately available to the company [deferred credits in view of the second
proviso to section 16(2), rule 36(4), etc.]
In such a case, would it be correct for the
company to show such net balance in GST GLs, or should it report separately,
liability GLs under the liability head and credit GLs under the assets head?
Separate reporting under the head ’liabilities’ and ‘assets’ rather than net
reporting seems to be a more correct approach.
(B) Once an auditor takes a view that the
balances have to be reported separately, it would imply that the balance for
March or the last tax period of the financial year to be reported is to be
disclosed before the offset entry. This would entail reporting of a higher
amount as liability u/s 43B in the Form 3CD. However, no major ramifications
are expected since the liability would have been discharged in April and
therefore entail no disallowances under Income Tax.
CONCLUSION
It is often said that tax and accounting are
strangers. However, they invariably overlap since both of them are based on
underlying transactions. Since the scope of the auditor also includes ensuring
correct compliance with various laws including tax laws, in cases where the
treatments under the two domains are different, statutory auditors may be
required to do a balancing act and suitably customise their audit processes to ensure that the
auditors have reasonable confidence in the true and fair nature of the
financial statements.
A man can be himself only so
long as he is alone, and if he does not love solitude,
he will not love freedom, for it is only when he is alone that he is really
free
—
Arthur Schopenhauer
Patience is not simply the
ability to wait – it’s how we behave while we’re waiting
—
Joyce Meyer
What sunshine is to flowers,
smiles are to humanity. These are but trifles, to be sure; but scattered along
life’s pathway, the good they do is inconceivable
—
Joseph Addison
