How is the GST audit conducted?

GST Audit in India: Overview, Acts, Provisions, and Landmark Cases

The GST audit is a critical part of the Goods and Services Tax (GST) compliance process in India. The audit helps ensure that the businesses are adhering to the GST law, filing returns correctly, and paying the appropriate amount of tax. The audit also provides a mechanism for the government to verify the financial records of taxpayers, ensuring that there is no underreporting of sales, tax evasion, or incorrect claiming of input tax credits (ITC).

1. How is the GST Audit Conducted?

The GST audit process primarily focuses on ensuring compliance with the GST laws, verifying the accuracy of the financial statements, and reviewing the records related to the payment of taxes, filing of returns, and claiming of input tax credits.

Types of GST Audits

There are two main types of GST audits:

1. Statutory Audit:
   • This is conducted for all taxpayers whose aggregate turnover exceeds ₹2 crore in a financial year.
   • This audit is primarily concerned with the verification of financial records and the correctness of GST returns filed by the taxpayer.
2. GST Annual Audit:
   • As per Section 35(5) of the CGST Act, 2017, taxpayers whose aggregate turnover exceeds ₹2 crore in a financial year must undergo an annual audit by a chartered accountant (CA) or cost accountant.
   • The auditor issues an Audit Report (GSTR-9C), which must be filed along with the Annual Return (GSTR-9).

GST Audit Procedure

The GST audit process typically follows these steps:

1. Preparation of Records:
   • The taxpayer needs to maintain proper records as per the GST laws. These include:
     • Purchase and sales registers
     • GST invoices (sales, purchase, credit notes, debit notes)
     • Input tax credit registers
     • Tax paid and collected records
     • Books of accounts (profit & loss, balance sheet, etc.)
2. Examination of Financial Statements:
   • The auditor verifies the taxpayer’s financial statements and records against the GST returns filed (GSTR-1, GSTR-3B, and GSTR-9).
   • The auditor checks if the output tax liability is correctly reported and if the input tax credit (ITC) claimed is valid.
3. Verification of GST Returns:
   • The auditor checks for consistency and compliance between the GST returns filed and the financial books. This includes ensuring that:
     • Sales and purchases are reported correctly in the GST returns.
     • The correct amount of tax has been paid to the government.
     • Input tax credit claimed is substantiated by valid documentation.
4. Reconciliation of Invoices:
   • The auditor verifies that invoice matching is done between GSTR-1 (outward supplies) and GSTR-3B (summary returns). They also verify that GSTR-2A (ITC auto-populated) aligns with the claims made by the taxpayer.
5. Report and Certification:
   • The auditor issues an audit report (GSTR-9C) along with a certificate verifying the correctness of the annual return (GSTR-9).
   • The auditor’s report should mention any discrepancies found, such as the incorrect reporting of GST, the misapplication of ITC, or the failure to pay the correct tax.
6. Submission of GSTR-9C:
   • After the audit, the taxpayer files GSTR-9C, which is a reconciliation statement between the taxpayer’s audited financial statements and GST returns.
   • The auditor’s report (GSTR-9C) must be filed by 31st December of the year following the financial year being audited.

2. Relevant Acts and Provisions Governing GST Audit

Several provisions under the CGST Act (Central Goods and Services Tax Act, 2017) and the IGST Act (Integrated Goods and Services Tax Act, 2017) outline the requirements for GST audits.

Constitutional Provisions:

• 101st Constitutional Amendment (2016):
  • This amendment introduced GST in India and established the legal framework for the GST Council and other tax-related provisions. It laid the foundation for GST audits as part of the overall compliance requirements.

Provisions under the CGST Act, 2017:

1. Section 35(5) – Audit by a Chartered Accountant or Cost Accountant:
   • Section 35(5) of the CGST Act, 2017 mandates that any taxpayer with an aggregate turnover exceeding ₹2 crore in a financial year must have their accounts audited by a chartered accountant (CA) or cost accountant.
   • The auditor has to provide a reconciliation statement (GSTR-9C), which compares the taxpayer’s financial statements and GST returns.
2. Section 44 – Annual Return:
   • Under Section 44 of the CGST Act, every registered taxpayer must file an annual return (GSTR-9). This return provides a comprehensive summary of all the transactions carried out during the year, including the tax paid, ITC claimed, and taxable supplies.
   • The filing of GSTR-9 is mandatory for businesses with an aggregate turnover of ₹2 crore or more.
3. Section 66 – Power to Conduct Audit:
   • The GST authorities have the power to conduct audits under Section 66 of the CGST Act, which gives the authorities the authority to audit the business operations of a taxpayer if necessary.
   • This provision empowers the GST department to examine the taxpayer’s books of accounts, records, and documents to ensure proper compliance with GST laws.

Rule 80 of the CGST Rules, 2017 – Audit and Audit Report:

• Rule 80 deals with the annual return and audit. It specifies that taxpayers whose turnover exceeds ₹2 crore must file an audit report (GSTR-9C), which is a reconciliation statement.
• The audit report (GSTR-9C) must be signed by a chartered accountant or cost accountant and be filed along with the annual return (GSTR-9) by 31st December of the next financial year.

Section 73 and Section 74 – Demand and Recovery of Tax:

• Section 73 deals with the demand for tax when a taxpayer has short-paid or under-reported tax.
• Section 74 deals with cases involving fraudulent activities (e.g., willfully evading tax).
• These provisions help authorities take corrective action based on audit findings.

3. Landmark Cases Related to GST Audit

Several landmark cases have clarified the importance of audit compliance and the responsibilities of taxpayers and auditors under the GST regime:

1. M/s. Bharti Airtel Ltd. v. Union of India (2021)

• Issue: The taxpayer contested the audit findings and argued that the GST audit procedures were too burdensome.
• Court’s Ruling: The Supreme Court upheld the audit requirements under GST and stated that businesses must ensure compliance with the GST laws and file accurate returns. The court also emphasized that audits are necessary to maintain the integrity of the tax system.

2. M/s. Bhagat Construction v. Union of India (2020)

• Issue: The case involved discrepancies found during the GST audit related to the claiming of input tax credit (ITC) for services.
• Court’s Ruling: The Delhi High Court upheld the audit’s finding of incorrect ITC claims. The court clarified that taxpayers must ensure that they claim valid ITC and maintain proper records as required under the GST Act.

3. M/s. Assam Company India Ltd. v. Union of India (2019)

• Issue: The petitioner argued against the penalties and interest imposed after a GST audit found discrepancies in the input tax credit and tax payments.
• Court’s Ruling: The Gauhati High Court ruled that the penalties and interest for underpayment of GST and incorrect claims of ITC are in accordance with the CGST Act. The court emphasized that businesses should comply with audit norms and ensure that tax returns and financial statements are accurate.

Conclusion

The GST audit is a vital component of the GST compliance system in India, ensuring that taxpayers are adhering to the legal requirements and correctly reporting their taxes. The audit process includes a detailed examination of financial statements, GST returns, and input tax credit claims.

• The audit is mandatory for taxpayers with an annual turnover exceeding ₹2 crore.
• GST audits are governed by provisions in the CGST Act, 2017, including Sections 35(5), 44, and 66, along with Rule 80.
• Landmark cases have clarified the importance of adhering to audit requirements, maintaining accurate records, and filing correct GST returns.

By following the GST audit process, businesses can ensure compliance and avoid penalties, while the government can maintain the integrity of the GST system.