GST is aimed at transparency, effective compliance, uniformity in the tax regime across the country, and checking tax evasion. The structure of GST is built mainly on self-assessment and self-compliance by the taxpayers. A strong compliance verification mechanism is required for the success of a new indirect tax regime of such magnitude. Therefore, to ensure proper functioning of the system and to avoid loss of revenue, the CGST Act empowered officers to investigate, conduct audits, and hold inquiries of taxpayers registered under GST. An audit in GST is aimed at a thorough scrutiny of the transactions of the taxpayer to ascertain the accuracy of the taxpayer’s tax liability and their adherence to the rules and procedures specified in the act.
What is meant by GST audit?
Audit means a detailed examination of records, returns, and other documents to verify the accuracy of turnover, taxes paid, refund claimed, input tax credits claimed, etc., and to ensure compliance with the provisions of the GST Act. Section 65 of the CGST Act specifies the audit process in GST. The important points to note regarding the audit, as per the section, are as follows:
- The Commissioner or an authorized officer can audit any registered person based on a general or specific order, following prescribed rules regarding the time, frequency, and method of the audit.
- This audit can be conducted at the place of business of the registered person or in their office.
- The whole audit process is completed within 3 months from the date of commencement of the audit. The audit can be extended for a further period of six months with valid reasons that must be communicated in writing.
- During the audit, the taxpayer must provide the necessary facilities, books of account, and other documents as may be required. They must furnish information and assistance to the tax officials as may be required.
- On completion of the audit, the concerned officer must inform the taxpayer whose records are audited about the findings, reasons for the findings, and the taxpayer’s rights and obligations.
- If in the audit the tax officials detect non-payment, short payment of tax, input tax credit wrongly availed or utilized, or erroneous refunds claimed, then the proper officer can initiate action under Sections 73 and 74 of the CGST Act.
Compliance with audit decisions
The tax officer first issues a notice outlining the reasons for the demand and specifying the amount of tax, interest, and penalty due. A taxpayer can rectify the errors and omissions detected in the audit by paying the liabilities along with interest. If the amount indicated by the auditor is not paid within the specified time indicated by the authorities, recovery actions will be initiated against the taxpayer as per the law.
Documents, records and returns required during audit
The documents and records to be furnished by the taxpayer during the audit are:
- Inward and outward supplies of goods and services, or both,
- Input tax credit availed.
- Output tax payable and paid
- Stock of goods
- Transportation of goods
- Other documents, as may be prescribed
Audit under GSTR-10
An audit under GSTR-10 is the examination of records, returns, and other documents of a taxpayer who has opted for cancellation of his GST registration voluntarily or is required to surrender his registration by order of the tax authorities. It is conducted to verify the accuracy of the computation of input tax credit and tax liability on the stock of inputs, capital goods, plant and machinery on the day preceding the date of cancellation of the taxpayer’s registration.
GSTR 10 is a final return that must be filed by taxpayers whose registration under GST has been cancelled. It does not include input service distributors, nonresident taxable persons, taxpayers registered under the composition scheme, and taxpayers collecting TDS, TCS. Form GSTR-10 must be filed electronically in the common portal. It can be filed either directly or through a facilitation center authorized under GST. The purpose of the final return is to ensure that the taxpayer has cleared all his tax liabilities prior to his exit from the GST regime. The liabilities include input tax credit related to the stock of inputs, semi-finished goods, plant, and machinery at the time of the cancellation registration or output tax payable on such goods, whichever is higher. The return must be filed within 3 months from the date of cancellation or the date of the order of cancellation, whichever is later.
The details of stock in inputs, semi-finished goods, finished goods, capital and plant, and machinery, and the input tax credit related to this stock, is required to be reported while filing Form GSTR-10. In the absence of invoices for the stock remaining at the time of cancellation of registration, the valuation is done as per the prevalent market rate of the goods. This must be certified by a chartered or cost accountant, and the certificate is required to be uploaded while filing the final return in Form GSTR-10.
Recent ruling regarding audit after cancellation of GST registration
An important ruling about auditing after the cancellation of GST registration significantly affects businesses who opt for an exit from the GST regime.
According to Section 65 of the CGST Act, the GST authorities can carry out an audit at any time of any registered person for such period at such frequency and in such manner as may be prescribed in a general or specific order. It also lays down the procedure for conducting the audit proceedings. Section 67 of the Act empowers the tax authorities to inspect any place of business of a taxable person and also carry out searches, seizures, inspections, and investigations leading to notices and other legal actions against the taxpayers.
This causes a great burden on the businesses, as considerable time, effort, and money will need to be spent by the taxpayers on replying to the notices and complying with other legal matters. There have been instances where a taxable person has received notices from many departments of GST for the same period. The facts of the case pertaining to the ruling passed by the Madras High Court are as follows:
In a recent ruling by the Madras High Court, it was stated that a GST audit under Section 65 cannot be conducted after the approval for cancellation of registration under GST is passed. Section 65 of CGST applies to registered businesses, and hence audit cannot be performed after the closure of the business.
The specified ruling relates to a case pertaining to M/s Raja Stores, a partnership firm that was registered under GST. The petitioners had been regular in the monthly payment of taxes and filing of returns. As the partners intended to close the business, they applied for cancellation of GST registration, which was approved. They were granted the cancellation order by the authorities, effective March 31, 2023.
The petitioner, M/s Raja Stores, had not paid certain taxes they had collected. So the respondent in this case, the tax authorities, issued a show cause notice to conduct an audit of the petitioners. M/s Raja Stores initially requested some time, but later filed a writ petition challenging the show cause notice in the high court. The petitioners’ argument was based on Section 65 of the CGST Act, which allows the GST authorities to audit registered businesses.
Since the petitioner’s business had already cancelled the GST registration, the respondents had no authority to audit the firm. But the respondents countered that the audit pertained to the years 2017–18 and 2021–22, during which the firm was registered, and so they had the authority to audit the firm.
The bench reiterated that when the section provides for periodic audits, the respondent cannot suddenly decide to conduct the audit after not performing the same for so many years. But it does not prevent the respondent from initiating assessment proceedings under sections 73 and 74 for the concerned period. Subsequently, the disputed order was nullified, and it was concluded that the respondent could initiate assessment proceedings under sections 73 and 74 of the act against the petitioners.
It is crucial for businesses to be aware of the legal framework pertaining to GST audits. Staying informed about their rights and responsibilities is important. Maintaining accurate records and timely submissions, and when the need arises for closure of the business, they must follow the procedures for cancellation of GST registration within the specified time so as to avoid notices and other legal consequences.
Frequently asked questions
What do sections 73 and 74 of the CGST Act pertain to?
Answer: Section 73 pertains to the determination of tax paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud, willful misstatement, or suppression of facts.
Section 74 deals with the determination of taxes and adjudication of demands by the proper officer. The section states the provisions for serving notice, determining the tax and interest payable, issuing demand notice, and the timeline to respond and pay the tax along with interest. It also gives the proper officer the authority to initiate recovery proceedings against the taxpayer if he fails to pay the amount that is demanded.
When is a special audit under GST initiated?
Answer: The assistant commissioner can initiate a special audit if at any stage of scrutiny, inquiry, or investigation, the values have not been correctly reported or credit has been obtained erroneously. A special audit can be initiated even for a business that has been previously audited.