A Guide On Annual Returns & GST Audit- Requirements, Audit Process, Audit Tool

A Guide On Annual Returns & GST Audit- Requirements, Audit Process, Audit Tool

GST is one of the biggest reform in the tax regime, is considered as the most volatile tax law which is yet to see stability in terms of user friendly. It is often addressed as data-hungry compliance as it requires line item details o be provided by the taxpayer unlike legacy laws in India. This lead to numerous changes in the GST Audit form and timelines from time to time. The first GST Audit which was due to be filed by 31st December 2018 got extended till 31st Jan 2020 vide multiple notifications issued by the government. The GST Audit for FY 2018-19 ideally due to be filed by 31st December 2019 stands extended to 30th September 2020 vide Notification No 41/2020 – Central Tax, dated 5th May 2020. However, the fact that the government has eased out the compliance in terms of data requirements cannot be ruled out but at the same time, the information could be required at the time of scrutiny as well as Auditors would be comfortable to certify if all the details are made available. For instance, the requirement of a split between ITC availed on inputs, input services, and capital goods is not required as per the revised form but the auditor will require such split to validate the accuracy of ITC claimed.

Whilst the responsibility of preparation rests with the taxpayer, considering the complexities involved, the task of preparation is often passed on majorly to Chartered Accountants. This bypasses the requirement of maker and chequer being different. Moreover, the law does not provide a mechanism for amending the annual return once filed, and hence there is no recourse to any error in the returns filed. 
The above can be managed by having a curated Audit tool in place that can prepare the returns and then auditors can certify the same. 
In this article, we have covered the below-mentioned areas in detail

Requirements Of Audit In Legacy Laws

Audit and annual return as a concept are not new in GST and has been carried forward from earlier tax laws. The requirements of audit under service tax and Excise have been outlined below

  • Service Tax –

As per Rule 7 of Service Tax Rules, 1994, taxpayers were required to file an annual return for the financial year by 30th November of the succeeding financial year. The frequency of Audit by the department was as per turnover limits mentioned below:-

  • Taxpayers with Service Tax payment above Rs.3 crores (Cash + CENVAT) (MANDATORY UNITS) to be audited every year;
  • Taxpayers with Service Tax payment between Rs.1 crore and Rs.3 crores (Cash + CENVAT) to be audited once every two years;
  • Taxpayers with Service Tax payment between Rs.25 lakhs and Rs.1 crore (Cash + CENVAT) to be audited once every five years;
  • Taxpayers with Service Tax payment up to Rs.25 lakhs (Cash + CENVAT) – 2% of taxpayers to be audited every year;
  • No audit if turnover less than Rs 60 lakhs per annum.

Additionally, Section 72A of Finance Act 1994 provided for special audit by practicing CA / CWA that could be ordered by Commissioner if he had reasons to believe that any person has failed to declare or determine the value of supply correctly or has incorrectly availed credit of duty or tax paid.

  • Central Excise –

Excise and Service tax both being Central duties and under Central Board of Excise and Customs had similar provisions relating to the audit. The limits as defined for Service tax are provided under Sec 14A and Sec 14AA of Central Excise Act, 1944.
As per Rule 9A of Cenvat Credit Rules, 2004, the taxpayer was required to submit an annual return to the Superintendent of Central Excise by 30th November of the succeeding financial year.

Annual Return & Audit Requirement Under GST

Annual Return and Audit go hand in hand under GST as the forms are interrelated and set the maker checker responsibility. However, GST Audit is not required if the turnover is below INR Two Crores. GST being a self-assessment tax regime triggers the need for Audit, whereby detailed examination of records, returns, and books of accounts becomes a necessity. It requires verification of correctness of turnover declared, taxes paid, refund claimed, ITC claimed and utilized a must. As per Rule 80 of CGST Rules 2017, below are the different types of Returns under GSTR 9 Form:
  • GSTR 9: Mandatory for taxpayers filing GSTR 1 and GSTR 3B.
  • GSTR 9A: Mandatory for taxpayers opting for Composition Scheme.
  • GSTR 9B: Mandatory for Electronic Commerce Operator
  • GSTR 9C: To be filed by Person who is required to get their accounts audited under Sec 35 of CGST Act
Annual Return and Audit Requirement under GST Sec 35(5) of the CGST Act, 2017 requires that taxpayers whose turnover limit exceeds Rs. 2 crores by CA/CMA and shall submit a copy of the audited financial statement, the reconciliation statement, and other such documents as may be prescribed. However, taxpayers having the turnover less than 5 crores are exempted from filing GSTR 9C for the FY 2018-19 on the basis of Press Release of 39th Council Meeting held on 14th March 2020 and Notification No 16/2020 – Central Tax, dated 23rd March 2020. The above is summarized in the below table:-

Sales

GSTR 9

GSTR 9C

Up to 2 Cr

Optional N/A

More than 2Cr. – 5 Cr

Mandatory

Optional (basis NN 16/2020 – Central Tax)

More than 5Cr

Mandatory

Mandatory

It is pertinent to note that as per Section 44 of CGST Act, the following persons are not required to file an annual return:-
  • Input Service Distributor
  • Tax Deductor under Section 51
  • Tax Collector under Section 52
  • Casual Taxable Person
  • Non-resident Taxable person
As stated above, annual return and Audit, both are dependent on the turnover. The term ‘turnover’ shall include all taxable supplies, exempt supplies, and exports, zero-rated supplies. Exclusions from the term ‘turnover’ are supplies attracting RCM and activities specified in Schedule III of the CGST Act.

Major Inputs For GST Audit

  • Filing of Annual Return – Annual return is to be filled by all registered taxpayers under GST regardless of the turnover of a business. It comprises of extensive reconciliation whilst the audit is a reconciliation between the annual return and the audited financial statements. Although the two are due on the same, the annual return needs to be filed first for the GST audit. Hence, businesses are required to submit annual return before the deadline, for smooth compliance with the GST audit. Also, the taxpayers need to ensure that the annual returns have accurate declarations without any error.
  • Branch-wise Breakdown of Financial Statements – Reconciliations of turnover or input tax credits is requested in Form GSTR-9C at the GSTIN level. This means taxpayers need to maintain audited financial statements by branching it out at the GSTIN level. It could be challenging for companies that do not maintain branch-wise financial statements.
  • Several Types of ITC Bifurcation and Reconciliation – While preparing an annual return and the reconciliation part of an audit, businesses will require to prepare multiple types of reconciliations of their input tax credit. For example, the annual return calls for a reconciliation of ITC availed in monthly returns in relation to ITC available as per the auto-generated Form GSTR-2A. Furthermore, it also requires a three-way split of claimed ITC into inputs, input services, and capital goods credits. These new requirements could be arduous for businesses and might require proper planning to make sure that appropriate data is provided to the auditors.
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Brief Analysis Of Tables Of GSTR 9 & GSTR 9C

  • GSTR 9 (Annual Return) – The GSTR-9 return form consists of 19 tables grouped into 6 parts. the 6 parts can be broken down as follows:
  • Part 1: It covers the basic details such as financial year, GSTIN, legal name, and trade name (if any).
    Part 2: In this section, you need to provide consolidated details of all your outward supplies and advances received on which tax is applicable during the financial year for which the return is filed. You also need to fill details of outward supplies on which tax is not applicable as mentioned in the returns filed during the respective financial year.
    Part 3: The tables under Part 3 deal with the Input Tax Credit (ITC) details, which is divided further into 3 subsections as follows:
  • 1st Sub – Section: In the first sub-section, you have to mention the details of ITC availed as declared in returns filed during the financial year. The mentioned details can be obtained from FORM GSTR-3B.
  • 2nd Sub – Section: In the second sub-section, you have to provide details of ITC reversed and ineligible ITC as declared in return filed during the financial year.
  • 3rd Sub – Section: The third sub-section asks for details of other ITC details, which is auto-populated.

– Part 4: It covers details of actual tax paid during the financial year.

GSTR 9C (Reconciliation Statement) – The reconciliation statement is required to be prepared in two parts:-

  • Part A is the reconciliation statement
  • Part B is the certification by the chartered accountant or the cost accountant.

The above parts are explained in detail as under:

Part A – Reconciliation Statement
This part is further subdivided into 5 parts as discussed below:

  • Part-I Basic details – It seeks the basic details about the registered person i.e. FY, GSTIN, legal name, trade name. In addition, it also requires mentioning as to whether the registered person is liable to be audited under any other Act, and if yes, the reference to that Act has to be specified.
  • Part II – This part requires the reconciliation of turnover declared in an audited financial statement with the turnover declared in Annual Return (GSTR 9).
    – Table 5 – Need to provide a reconciliation between Gross turnover and need to mention un-reconciled turnover
    – Table 6 – Auditor need to explain the reason for un-reconciled gross turnover
    – Table 7 – Need to provide a reconciliation between taxable turnover and need to mention un-reconciled turnover as declared in the audited annual financial statement with the GSTR-9 taxable turnover. The difference between Table 5 and Table 7 is that in the case of Table 5, the reconciliation is between gross turnover (which includes taxable as well as non-taxable turnover) whereas Table 7 provides for reconciliation between taxable turnover.
    – Table 8 – Need to explain the reason for un-reconciled taxable turnover
  • Part III – This part deals with the reconciliation of taxes paid

– Table 9 – Need to provide a reconciliation of rate wise liability and the amount payable thereon. The turnover in the audited annual financial statement may be liable to tax at different rates. There is a need to provide details of taxable value and tax payable for goods or services supplied at various rates. This amount is required to be compared with the total turnover and tax liability declared in the Annual Return.
– Table 10 – The auditor need to explain the reasons for the un-reconciled payment of the amount.
– Table 11 – This table is a summary of the additional amount payable. The tax declared under this table has to be paid in cash.

  • Part IV – This part deals with the reconciliation of Input Tax Credits as per books of account and ITC as declared in the Annual Return.

– Table 12 – Need to provide a reconciliation of net input tax credits as per audited annual financial statements for the GSTIN and Input Tax Credit availed in the GSTR-9 suitably adjusted for the credits pertaining to the one financial year availed in a different financial year. The difference between the two is the un-reconciled ITC.
– Table 13 – Need to provide reasons for un-reconciled ITC has to be declared
– Table 14 – This table requires submission of details as to the credits availed on various categories of expenses as per audited annual financial statements or books of account. This detail has to be reconciled with the credits availed in the GSTR-9
– Table 15 – Need to provide a reason for the difference in credits that arrived under Table 14 have to be reported under this table.
– Table 16 – The auditor needs to comment upon the tax payable on un-reconciled differences in ITC which has arisen in table 13 and Table 15.

  • Part V – The auditor needs to recommend additional liability arising due to non-reconciliation. The additional liability has been mentioned separately under various categories of rates of tax, input tax credits, interest, late fees, penalty, any other amount not included in the GSSTR-9, erroneous refund to be paid back, and outstanding demands to be settled.

Part B: Auditor Certification
This part provides the format of certification by the auditor. Format-I is applicable when the certification is done either by the chartered accountant/cost accountant who had conducted the audit whereas Format-II is applicable where the reconciliation statement (FORM GSTR-9C) is drawn up by a person other than the person who had conducted the audit of the accounts.

For the FY 2017-18 and FY 2018-19, The Government simplified the filing of GSTR 9 and 9C by making several tables as optional for the taxpayer and the auditor to certify vide Notification No 56/2019- Central Tax, dated 14th November 2019. The summary of these relaxations are as under:-

  • Part II Table 4 and 5:-
    – Outward supplies to be declared net of credit notes, debit notes, and amendments;
    – No bifurcation between exempt supplies, NIL rated supplies, and Non-GST supplies.
  • Part III Table 6, 7 and 8:-
    – No bifurcation of ITC claimed between inputs, input services, and capital goods;
    – No split between inward supplies attracting RCM between registered and unregistered vendors;
    – Reversals done by the taxpayer can be reported as a clubbed amount. However, reversals on account of Tran I and Tran II continue to be disclosed separately;
    – Reconciliation with GSTR 2A which was the most burning issue was also made optional and the taxpayers were given an option to upload PDF file of reconciliation without the certification from CA.
  • Part V Table 12 and 13:-
    – The option of not disclosing ITC availed for the previous financial year;
    – The option of not disclosing the Reversal of ITC availed during the previous financial year.
  • Part VI Table 15, 16, 17 and 18:-
    The option of not giving details in reference to –
    – Demands and refunds;
    – Goods received from composition taxpayers;
    – Goods sent on approval basis;
    – Goods sent on job work basis;
    – HSN Summary of outward and inward supplies

Similar changes were made in regards to Form GSTR 9C as well. The same are summarized as below:-

  • The requirement of uploading the cashflow statement made optional;
  • Any adjustment in turnover could be clubbed and shown as others;
  • The option of not submitting information in relation to ITC booked in earlier financial years and claimed in the current financial year;
  • The option of not submitting information in relation to ITC booked in current financial years and to be claimed in subsequent financial years;
  • Split on the basis of expenses stated in financial statements and reconciliation of ITC claimed as declared in GSTR 9.

GSTR-9C is a statement of reconciliation between the Annual Returns in GSTR-9 filed for an FY and the figures as per the audited annual Financial Statements of the taxpayer. It can be considered to be similar to that of a tax audit report furnished under the Income-tax act. It will consist of gross and taxable turnover as per the Books reconciled with the respective figures as per the consolidation of all the GST returns for an FY. Hence, any differences arising from this reconciliation exercise will be reported here along with the reasons for the same.
As earlier said, GSTR 9C is a Reconciliation statement in itself and hence requires Reconciliation between audited financial statements of the taxpayer and Annual Return filed by the taxpayer.
Let’s briefly understand the table-wise must have reconciliations for the purpose of form GSTR 9C-

  • Part-II: Reconciliation of turnover declared in the Audited Annual Financial Statement with turnover declared in Annual Return (GSTR-9):
    This involves reporting the gross and taxable turnover declared in the Annual return with the Audited Financial Statements. One must note that most often, the Audited Financial statements are at a PAN level. This might require the break-up of the audited financial statements at the GSTIN level for reporting in GSTR-9C.
  • Part-III: Reconciliation of tax paid:
    This section requires GST rate-wise reporting of the tax liability that arose as per the accounts and paid as reported in the GSTR-9 respectively with the differences thereof. Further, it requires the taxpayers to state the additional liability due to unreconciled differences noticed upon reconciliation.
  • Part-IV: Reconciliation of Input Tax Credit (ITC):
    This part consists of the reconciliation of input tax credit availed and utilized by taxpayers as reported in GSTR-9 and as reported in the Audited Financial Statement. Further, it needs a reporting of Expenses booked as per the Audited Accounts, with a breakup of eligible and ineligible ITC and reconciliation of the eligible ITC with that amount claimed as per GSTR-9. This declaration will be after considering the reversals of ITC claimed, if any.
    Following are the reconciliations which will aid the taxpayers for preparation of GSTR 9 and will also help the auditors to analyze the books in an effective manner –
  1. Sales GL Vs Sales Register: It will facilitate Auditors to Compare GL data with Sales Register and find discrepancy and work upon the same with much more accuracy
  2. Purchase GL Vs Purchase Register: It facilitates Auditors to Compare GL data with Purchase Register and find discrepancy
  3. Sales Register VS GSTR 1: Reconcile Sales register bookings with GSTR 1. This will help the taxpayer to identify overbooking and underbooking of records
  4. Purchase Register Vs GSTR 2A: Reconciles Purchase register booking with GSTR 2A. This will assist in analyzing the ITC available in 2A and the ITC which is availed and claimed by the taxpayer

GST Audit has been mandated by the government for the following major reasons:

  • To find out the data gaps between the data filed throughout the year on the GSTN portal and that recorded in the books of accounts
  • To reveal any tax leaks and evasions that the taxpayer may have made by reporting erroneous data
  • To make sure that all the data mismatches are adequately explained by the taxpayer through separate reconciliation statements and are filled through GSTR 9C Reconciliation Statemen
  • To ensure that all the tax credits and ITC claims are proper and backed by proper data and records that are duly audited by an independent party.
  • The documents that need to be checked in GST Audit are Sales Register, Stock Register, Purchase Register and Expenses ledgers, Input tax credit availed and utilized, Output tax payable and paid, E-way bills generated during the period, Any documents of communications with the GST department

All these documents that form a part of the books of accounts are compared with the records filed on the GST Returns on the GSTN portal. The records that a taxpayer needs to produce in a GST Audit are Audited financial statements (which is PAN-based), Annual return in form GSTR-9 (for every GSTIN), Certified reconciliation statement in Form GSTR-9C, reflecting reconciled values of supplies and tax amounts declared in GSTR-9 compared to audited financials in Part-A, along with the Audit report in Part-B.

Hence, to compare and analyze 100% of these records for an entire year you require an automated solution considering that the volume of records will be high for a turnover of 2 Cr plus. In such a situation it becomes necessary to have an automated solutions to ease the audit process. However, having an Automated Solution requires certain good features.

Here are a few factors that must be present in an audit tool software that automates the comparison between the books of accounts and GSTN records:

  • A software that is capable of integration with your existing system of accounting so that user can upload data in the format that is compliant or data can be extracted from the existing systems
  • Software that compares and prepares various reconciliation statements that are required to be uploaded/filled in the GSTR 9C Form on the portal, such reconciliation of –
  • Turnover as per Audited Books and Annual Return Filed
  • Taxes Paid
  • ITC claimed and availed
  • Registers V/s General Ledgers
  • GSTR 1 V/s Books to identify missing invoices
  • GSTR 3B v/s GSTR 2A for ITC Comparison purpose
  • GSTR 3B v/s GSTR 1 for Tax Comparison Purpose
  • RCM as per audited books and GSTR 3B
  • Software that can prepare dummy GSTR 1, GSTR 3B and GSTR 9 based on the books of accounts for comparison with the ones on the GSTN portal to reveal mismatches
  • Software that compares sales and purchase registers and general ledger records with GSTN data to reveal any gaps and mismatches
  • Software that can prepare reports like GST liability, missing invoices, ITC report for ITC availed and unveiled, etc, tax trend analysis reverse charge mechanism report and more such reports
  • A software that is fully automated to save time, enables full audit of data, provides an audit trail, acts as an internal check tool, and provides for e-filing and storage of data for reference later.

Taxpayers having Automated Tool, satisfying the above-mentioned features will be a step ahead in complying with the Audit Provisions as the various manual tasks will be already done by the tool such as reconciliation of Various data which help to populated Tables of GSTR 9 and GSTR 9C.

  • GSTR-3B Vs GSTR-1 (Tax Comparison)/GSTR-3B Vs GSTR-2A – This will help to identify whether the payment made in GSTR 3B is in alignment with GSTR 1 also the ITC claimed in GSTR 3B are in agreement of that available in GSTR 2A. In case of any discrepancies the same could arise due to invoices which are reported in GSTR 1 but taxes for the same is not paid in GSTR 3B or vice-versa. Such invoices can be identified at the invoice level by comparing filed GSTR 1 and Sales Register as per books, ultimately facilitating the necessary changes to be made in GSTR 9. Invoice wise/ Vendor wise reconciliation reports will support the difference of ITC available in 2A and that claimed, this will further facilitate with table 8 of GSTR 9 and table 12 of GSTR 9C
  • Incorrect Unavailed Input Tax – Invoice wise/ Vendor wise reconciliation reports will support the difference of ITC available in 2A and that claimed, this will further facilitate with table 8 of GSTR 9 and table 12 of GSTR 9C
  • Turnover Reconciliation – This particular reconciliation will help you to analyze the turnover as per books and turnover as per the GSTR 1 filed during the financial on a monthly basis. In order to have an Invoice based reconciliation, reports such as Filed Vs Pseudo can be used. This will also aid the taxpayer to find the missing invoices.
  • Sales GL Vs Sales Register/Purchase GL Vs Purchase Register – It aids with providing documents available and matching in both GL and Register and also documents which are missing in either of two or are not matching in terms of value. This will help to arrange an extensive check on such invoices.

There are many other reports available in the tool which make arrangements in facilitating audit such as Missing Invoice, Erroneous Credit Notes Report, RCM As Per Books VS GSTR 3B, Inter-Company Transactions, etc.

It is crucial to ensure the data disclosed in the returns is accurate as there is no option to amend the same. Whilst the focus is on reconciliation between data from various sources, the authenticity of the data is of utmost importance. Hence it is important to run a pre-defined set of validations on the entire data set to ensure accuracy. Some of the examples of such validations are as under:-

  • RCM Transactions should be appearing with the current rate of tax. For instance, RCM on director sitting fees cannot be at 5% and has to be at 18%, and similarly, freight-related transactions with GTA should be at 5% and not 18%.
  • Transactions that are ineligible as per Section 17(5) should not be claimed by the company.
  • Transactions are reported in the correct head. For instance, a transaction with SEZ customer should not be reported in B2B transactions with 0%.

Whilst the above are the indicative list of validations, there needs to be an exhaustive list of validations that cannot be done manually, and hence a requirement of comprehensive audit tool, continues to be the need of the hour.

It is pertinent to note that the outcome of the GST Audit may require a few internal adjustments or coordination with customers/vendors in relation to slight changes in the data but at the same time may indicate a potential benefit or loss from the exercise of GST audit. The essence of matters to be reported to the management is losing the essence due to multiple reconciliation reports being generated and numerous data being disclosed.

This highlights an additional area which the company should seek while benchmarking any automated tool in reference to GST Audit. Few points that could be a part of the dashboard are as under:-

  • Location wise exposure – Areas where ITC needs to be reduced or taxes needs to be paid on undisclosed transactions;
  • Categories of transactions where reversals were required but were not made;
  • Months where their difference between GSTR 1 and GSTR 3B or with the annual return;
  • Transactions where interest or penalties were levied;
  • Summary of notices received by the company and the replies provided by the company

The above is just an indicative list of points that may vary depending upon the management. Hence any audit tool which the company may prefer should have a feature of customization basis size and nature of operations of the company.

The above points clearly indicate the requirement of an audit tool to ensure the accuracy and authenticity of the data being disclosed. Below are the few benefits which the company may derive immediately on shifting to a comprehensive audit tool:-

  • Saving in terms of manpower deployed in preparation and summarization;
  • Sample size not being a constraint;
  • Trail of transactions which may occur as a red flag during scrutiny by the departments in the future;
  • Savings in terms of professional fees to the Auditor as their job will now be restricted to reviewing the reviewed data;
  • User-friendly reconciliation reports clearly calling out action points;
  • Easy monitoring through multiple dashboards

The above ensures that the company leverages the technologies available in the market, reduce manual efforts through deploying robotic process automation, and enhanced reconciliations through artificial intelligence.

About Cygnet ACE

Cygnet offers Cygnet ACE, An Audit compliance solution that reconciles your sales and purchases data before the external audit. The solution imports data reconciles with the returns filed on GSTN & generates comprehensive reports. The solution notifies mismatches during the reconciliation between GL & register; as well as GL and GSTN. Cygnet ACE brings more transparency and keeps the organization audit-ready anytime. You can get in touch with our team for a free consultation or write to us at hello@cygnetgsp.in.

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