Knowledge Webinar series -Hiregange Academy_Assessment

Session-1

GST Audit Issues

April 2020

Day 1, Session 3

GST Impacting Aspects

• Basis of information not in alignment:– Accounts based on ‘accrual’ and ‘matching’ concept

– GST incidence based on ‘time of supply’ concept

– Identify inherent differences based on industry / sector

• Expansion of GST into ‘new’ areas:– Taxable and non-taxable turnover to be reported

– No-supply transactions also affects credit-reporting

– Accounts permits ‘credit in expense’ account and amounts retained in ‘current liability’ in balance sheet

‘Turnover’ Validation

• Treatment in earlier laws is no estoppel in GST– Barter was not liable to VAT and immovable properties

were not liable to ST; GST travelled far beyond earlier laws

• Classification, valuation, time-place of supply to be reviewed afresh and reported– Classification now HSN-based, leasing of goods is a service

and valuation is based on comparison with OMV

– GST gives ‘new’ treatment to ‘old’ transactions

‘Turnover’ Responsibility

• Taxpayer is ‘author’ of Annual Return– Responsibility for correcting first to taxpayer; complete all

corrections in Annual Return to show voluntary compliance

• Auditor is ‘author’ of Reconciliation Statement– Auditor to only explain ‘if’ there are differences with

audited financials due to accounting treatment differences

• Non-disclosure of information is ‘suppression’– When ‘two’ views possible, disclose view subscribed; free-

supplies, gifts and samples, any blocked credits taken, etc.

• Notes and disclosures very resourceful

‘Turnover’ Inclusion

• Report ‘all’ turnover, including exempt, non-GST and no-supply transactions– GST authorities may access or call for entire information; be

sure of these categories and disclose even if not taxed

• Turnover may be accounted as:– Credits in expenditure accounts like incentives credited to

purchases, notice pay credited to salaries, etc.

– Advance in current liability accounts like reimbursements for pure agent payments, direct credit of grants or subsidies

‘Turnover’ Expansion

• Turnover includes supplies for consideration in ‘non-monetary’ form– Books limited to ‘money measurement’, look for stocks

given as barter-exchange in promotional schemes

– Gift articles given to customer for no ‘extra’ consideration would be ‘mixed supply’ and not ‘no supply’

• No transaction entitled to be kept out of AR– Securities and other capital flows or sales outside taxable

territory liable to valuation review or credit reversal; no transaction to be kept out of reporting

‘Turnover’ Reversal

• Reversal of accounting entry not readily permitted in GST by credit note– Reversal of accounting entry permitted by accounting rules

– But reversal ‘restricted’ by section 34 to following cases:• Invoice for higher value than applicable (as per PO/Contract)

• Invoice with higher rate of tax than applicable

• Deficiency of quality of goods or services

• Return of goods (and not of services)

• Tax paid on original invoice value not to be reduced on subsequent reduction of price

‘Turnover’ Reversal

• Discounts to be tested for compliance– Discounts that are ‘in-bill’ can reduce taxable value

– Discounts that are ‘off-bill’, can reduce only if conditions in section 15(3)(b) satisfied

– Discount reduces cost of purchase; but incentive is income

• Mirroring of accounting treatment of discount– Discount reduces cost of purchase of Recipient

– Discount given to reduce turnover of Supplier

– Divergent treatment by both parties raises questions

– Discount non-compliant with 15(3)(b) not admissible

‘Turnover’ Doubling

• Turnover hidden in ‘exchange’ schemes– Old TV surrendered for reduced price of new TV:

• Inward supply of old TV from URD

• Outward supply of new TV

– GST payable on ‘full price’ of new TV and not ‘net price’

• Additional turnover accounted as expense– Cashback given is ‘in return’ for customer loyalty (a supply)

– Scrap sold by service center ‘not’ supply of goods (but service) as replaced parts not owned by service center

– Car gifted by Builder is ‘mixed supply’ to Customer

Double-benefits

• Input tax credit ‘not’ part of asset value– GST portion not to be added to cost of asset

– Double benefit of depreciation and credit not allowed

– Treatment of inputs and input services

• Payment of tax under self-assessment– Self-adjustment of excess ‘not’ permissible as section 59

does not override section 54

– Short-payment of tax (in any tax period) cannot utilize credit of future months; use credit earned in tax period

– Pay right tax again, if wrong tax paid (IGST for CGST-SGST)

Timeliness of Tax-payment

• Liability belongs to month when supplies made– Delay in reporting sales attracts interest; tax to be paid

within ‘tax period’ (month) or else pay interest on gross

• Omission to file invoice does not defer liability– Delay in filing GSTR 1 does not save from interest liability;

pay tax out of current month credit and not future credits

• Liability to be settled with credit taken or cash– Liability discovered to be paid by cash even if credit balance

available; instructions from Government very clear

Timeliness of Tax-payment

• Credit ‘not yet’ taken cannot be utilized in AR– Credit taken in 18-19 cannot be used to pay dues of 17-18;

check month-wise statement of credit ‘taken v. utilized’

• Every ‘month’ is tax period in GST– Annualized GST payments not enough; should be correctly

paid month-on-month

• Liability ‘discovered’ to be paid in cash

• AR is ‘information return’ and not tax return– No new credit taken now; clean up all reporting errors

GST ‘AR’ Objectives

• Monthly returns is basis for tax collection– GSTR 1 for outward supplies

– GSTR 3B for claim of credit and payment of net tax

• Errors in returns may be rectified (cir.26/2017)– Data for 9 months of 2017-18 to be reported

– But filed in returns of 21 months from Jul 2017 to Mar 2019 (Removal of Difficulty Order 2)

• Annual Return to consolidate data for 2017-18

– Circular 124 states AR cannot be filed after ‘due date’; no scope to file belated returns, it’s ‘now or never’

GST Audit Objectives

• Self-assessment does not permit roving inquiry

• GST allows ‘inquiry by exception’– No cash payment implies ‘high’ input credit or ‘low’ margin

– Inquire credit accumulation, it implies inventory build-up

– Non-taxable turnover attracts inquiry into classification

– Exempt turnover requires verification of eligibility

– Goods as services or vice versa attracts tax again

– Review effective date of rate-change effected by taxpayer

– Non-collection of tax is taxpayer’s choice

– Forfeiture of tax collected on non-taxable transactions

‘Credit’ is Right or Benefit

• Vested right after s.16(2) conditions satisfied– Practicalities aside, taxpayer answerable for satisfying

‘credit conditions’; rules are only to assist taxpayer

• Eligible credit is not available until taken in 3B– Amended r.61(5) makes 3B a ‘return’ for s.16(2)(d); credit

not taken in 3B is lost forever; equitable relief only in Court

• Credit taken is provisional and liable to review of vesting conditions (s.155)– Onus on taxpayer to prove credit eligibility (not automatic)

‘Credit’ Eligibility

• Credit appearing in 2A is not ‘final’– 2A is only a record, not proof of tax payment by supplier

• Impossible conditions also to be fulfilled– GST imposes ‘impossible’ conditions but, GST officer NOT

empowered to allow relief based on equity or fairness

• Credit ‘not’ taken by Mar 2019 lost forever– RODO 2 extended time to Mar 2019; if time-limit lapsed,

then credit lost even if otherwise eligible

‘Credit’ Ineligibility

• Ineligible credits clearly listed in s.17(5)– Credit blocked even though inward supplies used in

‘business’; credit taken liable to reversal with interest

• Ineligible credits taken attracts 24% interest– Amendment to levy interest on ‘net tax’ is not yet notified;

trade misinformed that amendment already effective

• Proportionate reversals to be done monthly– Challenge is to identify ‘common credits’ and direct credits

are either ‘in or out’; data-based bifurcation to be done

Provisional ‘Credit’

• Correlation of credit and end-use important– Credit taken is provisionally taken; credit answerable to

compliance with all conditions after final end-use of goods

• End-use deviation attracts credit reversal– ‘Intended to be used’ liable to reversal if finally ‘not used’

• Clues to inter-branch supplies found in 2A– Inward supplies appearing in 2A reveals taxable outward

supplies using these inward supplies like gift articles, etc.

• Maintain detailed information of credits taken

Year of ‘Credit’ Claim

• Credit belongs to ‘month’ in which it is taken– Delay in taking credits does not shift credit back in time to

month in which supplies were received; use credit as taken

• Invoice of PY taken in CY will remain in CY– Date of Supplier’s invoice does not decide date of credit

eligibility; credit linked to conditions in Recipient’s hands

• Credit taken in CY cannot be utilized in PY– Credit taken in 18-19 to be utilized in 18-19 and not 17-18

• Bar on suo moto adjustment of excess tax paid– Excess taxes paid to be claimed by filing refund under s.54

‘Credit’ Correction

• Shortfall in tax payments, ‘in cash’ only– Credit cannot be used to pay output tax via DRC 3 even

though DRC 3 allows appropriation out of credit ledger

• Interest on ‘net tax’ is still not notified– Credit reversal liable to interest even if lying unused

• No credit if RCM dues paid in ‘17-18 challan’– RCM liability paid in 19-20 not eligible for credit if 17-18

challan used; trade misled to claim credit on challan date

• RCM dues paid in ‘19-20 challan’ creditable

Rectification of Errors

• Not everything should reconcile

• Unreconciled items are desirable and inherent due to variance in accounting v. GST treatment

• GSTR9 is window into business of taxpayer

• GSTR9C checks if everything is explained

• Understanding the newness in this law is key to taxpayer’s contribution in Nation Building!

Background

• GST is ‘self-assessment’ tax regime

• No ‘regular’ assessment in GST

• Intervention by exception only

• Jurisdiction of Proper Officer under section 5

• Scope of action specified in each provision

• No provision for ‘spot recovery’

• Specific provisions to protect revenue loss

‘Scrutiny’ of Returns

• Identify ‘Proper Officer’ for section 61

• ‘Returns’ taken-up for scrutiny

– GSTR 1, GSTR 3B and GSTR 9

– GSTR 9C is not ‘return’

• ‘Discrepancy’ in returns

– Identify nature of ‘discrepancy’ in specific returns

– Discrepancy is not ‘suspicion’ of data in returns

• Spot recovery ‘not’ permissible in law

‘Scrutiny’ of Returns

• Proceeding under section 61

– Not yearly proceeding but carefully selected

– Specific ‘discrepancy’ in specific returns

• Tax payment only if discrepancy accepted

• Discrepancy rejected by taxpayer leads to:

– Reference for audit under section 65

– Commission special audit under section 66

– Pre-notice statement under rule 142(1A)

– Show cause notice under section 73 or 74

Assessment of ‘Non-Filers’

• Proceeding under section 62

– Pre-notice under section 46 to allow 15 days

– Valid returns includes ‘nil’ returns

• Non-filing of returns is serious non-compliance

• Non-compliance with notice attracts ‘next step’

• Standard Procedure notified (cir.129)

– Issue notice to comply within 15 days

– Proceed to determine ‘tax liability’

Assessment of ‘Non-Filers’

• Best judgement assessment of non-filers

– Collect outward supply information from GSTR 1

– Allow deduction of credit from GSTR 2A

– Arrive at ‘net tax’ liability on best judgement basis

• Aggressive assessment of liability not admitted

• Order auto-vacated if returns filed in 30 days

• Order remains if returns filed after 30 days

• Order must be appealed under section 107

Assessment of ‘URDs’

• Unregistered persons attract section 63

– One who ‘fails’ to obtain registration

– One whose registration is ‘cancelled’

• No notice required to be issued

• No show cause notice also required

• Direct assessment of ‘tax liability’

• Reliable basis for assessment of URD necessary

• Evidence of actual ‘liability to tax’ necessary

Assessment of ‘URDs’

• Arbitrariness in assessment to be avoided

• Proper Officer is investigating officer

• Proper Officer has two options:

– Grant registration under section 25(8) and then assess so that credit allowable under section 18(1)

– Assess directly without allowing input tax credit

• Order must be appealed under section 107

• Limitation of 5 years applicable here

Summary Assessment

• Not another best judgement assessment route

• Registered and unregistered persons covered

• Ingredients in section 64 summary assessment

– Evidence showing tax liability in possession

– Prior approval of ADC/JC to undertake proceedings

• No requirement to issue show cause notice

• If person available to issue show cause notice, summary proceedings not to be initiated

Summary Assessment

• Summary assessment gives emergency powers

– If taxpayer applies within 30 days to ADC/JC

– ADC/JC empowered to withdraw Order passed

– Direct that notice under section 73/74 be issued

• Orders must be appealed under section 107

• Delayed appeal is final and tax recoverable

Departmental Audit

• Risk-based selection of taxpayer’s for audit

• Audit under section 65 not ‘routine’ procedure

• Proper Officer under section 61 may refer but not ‘conduct’ audit under section 65

• Procedure for audit requires

– ‘Preliminary’ collection of information

– ‘Desk review’ based on preliminary information

– ‘Audit on-premises’ only if justified by desk review

– Complete audit in 3 + 3 months and issue report

Departmental Audit

• Audit report contains observations

– Detailed observations and estimate of tax due

– Taxpayer accepts and pays dues

– Taxpayer rejects observations

• No spot recovery, without show cause notice

• Proceedings ends with show cause notice or audit completion report

Special Audit

• Nature and Complexity of case attracts special audit under section 66

• Proper Officer may get CA to audit taxpayer

– Value not correctly declared

– Credit availed is not within normal limits

• Prior approval of Commissioner necessary

• CA to issue audit report to AC in 90 + 90 days

• AC to discuss observations with taxpayer

Special Audit

• Special audit not substitute for annual audit

• Commissioner to approve fee to CA

• No spot recovery, without show cause notice

• Proceedings ends with show cause notice or audit completion report

GST v. VAT

• Proposition notice in VAT based on intelligence

– Reassessment permitted even after completion of assessment

– Specific intelligence permit another reassessment

• Suspicion of non-payment of tax or credit inadmissibility not sufficient to issue notice

• GST requires specific ‘grounds’ for notice

– Pre-notice statement mandatory in DRC 1A

– Scope of section 73 / 74 must be satisfied

GST v. VAT

• Notice issued without pre-notice statement cancelled by Del. HC (Amadeus India)

• Investigation cannot continue after notice

– Investigation must be concluded before notice

– Taxpayer not obliged to establish innocence

– Notice to establish specific ‘grounds’ for demand

– Omission to specify tax, interest or penalty fatal

– Notice cannot be issued after time specified

– Penalty specified is upper limit and not automatic

GST v. VAT

• Spot recovery without DRC 1A illegal

• Taxpayer enjoys 0% penalty if DRC 1A accepted

• Taxpayer free to reject DRC 1A

• Rejection of DRC 1A must to issue notice

• Note differences in process in GST and VAT

– Refer to past experience to see these differences

– Tax demand lost if process not followed in GST

• Special ingredients for notice section 73 v. 74

Thank You