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GST Audit – Some Basics

GST Audit  –  Some Basics

1. Introduction :

1.1 The concept of audit by a Chartered Accountant in the area of Indirect Taxes was confined to State Value Added Tax and Central Sales Tax laws of certain States. In Central Excise and Service tax only in case of suspicion of undervaluation or excessive credit special audits were prescribed (not much used) which continue in GST. Therefore, Chartered Accountants engaged in rendering professional services in the areas of State taxes would be familiar with those provisions. The GST law has subsumed several Indirect Tax laws – among others, it subsumed Central Excise, Service Tax, Luxury Tax, Entertainment Tax, VAT/CST, Entry tax laws etc.;certain levies under the Customs laws have also been subsumed into the GST laws.

1.2 It would be relevant to note that the skill sets acquired in the understanding of the statutes that have been subsumed into the GST laws would help in better understanding of the GST laws since several provisions of the Central and State enactments have been replicated (fully or partially) in the GST laws – say, for instance, the provisions of Place of Supply of Services, Time of Supply of Services,Valuation of Supply Rules, etc. That being said,one needs to exercise caution in reading and understanding the subtle departures or changes in the statute in comparison with the erstwhile legislations, in which case,one has to enhance the understanding of the fully taken forward provisions. He also needs to unlearn the old laws and learn the GST laws afresh for a complete understanding of the taxing statute.

1.3 In terms of Section 2(13) of the CGST Act, 2017,“audit” means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made thereunder or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of this Act or the rules made thereunder.

1.4 The following three types of audits are envisaged under the GST laws:

• The first type of audit is to be done by a chartered accountant or a cost accountant;

• Second type of audit is to be done by the commissioner or any officer authorised by him in terms of Section 65 of the CGST Act, 2017 read with Section 20 of the IGST Act, 2017 and Section 2 of UTGST Act, 2017.

• The third type of audit is called the Special Audit and is to be conducted under the mandate of Section 66 of CGST Act, 2017 read with Rule 102 of CGST Rules, 2017.

This write-up has not taken into consideration an audit in terms of Section 65 / 66 of the CGST Act, 2017.

1.5 While the GST regime emphasizes self-assessment processes,the complexities involved in the new statute make one wary. At this juncture, it is clear to tax professionals that the GST law is not presently simple enough for an assessee to compute his total and taxable turnovers and duly report the same, under the new statute.

1.6 The new statute lays substantive emphasis on e-governance. It is presumed that over a period of time, the complexities of the GSTN and the GST law would be subject to several changes / amendments to enhance ease of compliance and transparency.

1.7 Nevertheless, errors that cannot be traced by the system are bound to have been committed by registered persons while filing the returns. It is also a fact, that GST law is in the process of being properly interpreted and understood by each of us. The difficulty also arises on account of the fact that there are no precedents on each such issue. One has to overcome these intricate issues by properly understanding the nuances of the law which is still evolving.

1.8 The level of tax compliances prevailing and the complex nature of tax laws in our country makes it necessary for audit of records under various laws. Therefore, inorder to ensure tax compliance by the assessee, the GST law provides for audit by the tax department and by professionals in certain cases.

1.9 Ordinarily, the smaller assessees do not prefer to get their books of account and records audited for indirect tax compliances, when there is no mandatory requirement to do so. However, larger entities who wish to avoid any disputes opt for caution checks. Audit is perceived as a cost rather than as a tool in identifying errors or to optimize the tax incidence though it can actually be a value adder, directly and indirectly.

1.10 In the past,certain tax-compliant assessees have been known to voluntarily engage experts to conduct audits under the Excise or Service tax laws.The exercise was undertakento evaluate compliance, as also to ensure that all benefits lawfully accruing to the assessees are availed by them, in good time. The financial impact on account of indirect taxes is always substantial, and therefore, those assessees who engage tax professionals for a review from the indirect tax perspective would have witnessed a great deal of value addition.


2. Audit under GST laws – Relevant Statutory Provisions :

2.1 It is important to understand the relevant audit provisions under the GST laws – such as, whose accounts are to beaudited, who can undertake a GST audit, what are thebregulations of ICAI applicable to the GST auditor, the procedure for appointment, scope and preparations required, etc.

2.2 Class of registered persons liable for GST Audit: Every registered person whose aggregate turnover during a financial year exceeds the prescribed limit of Rs.2 Crore is liable to get his accounts audited by a Chartered Accountant or a cost accountant.The phrase ‘aggregate turnover’, as defined in Section 2(6) would mean the all- India PAN-based turnover for the financial year (inclusive of exports, inter-State supplies, exempt supplies, stock transfers, etc. but exclusive of GST and compensation cess).

Note: The appointed date for effective implementation of the provisions of the GST laws is 01.07.2017, i.e., from the second quarter of the financial year 2017-18. Therefore, the very applicability of the threshold limits for audit purposes, whether wholly (Rs.2 Crore) or in proportion, has not been explicitly provided for – Clarification from the Government is awaited.

2.3 Filings upon GST Audit: The registered person shall submit a copy of the audited annual accounts, the reconciliation statement (reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement), in FORM GSTR-9C and other documents as may be prescribed, on the GST Common Portal.

2.4 The detailed Rules / guidelines regarding the audit procedures and the Audit Report format etc. are yet to be prescribed / notified. In the absence of these, one may only prepare the audit manual / audit program, and cannot finalize scope of the audit in totality. Given that the law is evolving and further changes could be expected (over 300 Notifications + several FAQs, Orders, Circulars, clarifications, flyers, press releases & tweets), making it difficult for businessmen to comply, they would be welladvised to take a lead and commence with periodic reviews to ensure compliance and speed up the first-time audit process.


3. Assessees whose accounts are to be audited :

3.1 The threshold turnover limit of Rs. 2 crore, as referred to in Para 3.2 supra:

• Is the same for assessees in all the States and UTs. No separate threshold limit is specified for Special Category States. Since each of the State GST Acts also contain the relevant provisions relating to audit, the GST audit shall be State-wise;

• Is to determine the applicability alone, and separate audits would have to be carried out for each of the distinct registrations under the same PAN.

3.2 It would be the duty of a Chartered Accountant /auditor to inform the auditee about the requirement of GST audit,mandatory documents and other preparations required from the auditee.


4. Audit by a Chartered Accountant or a Cost Accountant:

4.1 The Chartered Accountants Act, 1949

 Section 2(1)(b)– a“Chartered Accountant” means a person who is a member of the Institute.

 Section 2(2) – a member shall be deemed to be in practice if he engages himself, for a consideration, in the specified activities, which includes interaliaaudit.

 Section 6 provides that a member cannot practice without obtaining Certificate of Practice Thus, only a member of ICAI having a Certificate of Practice (COP), or a firm of Chartered Accountants can take up the GST Audit. Additionally, a Chartered Accountant must bear in mind the following:

• Member in part time practice (including an employee having a COP) is not entitled to perform attest function. (242nd Council Meeting Resolution);

• Member having substantial interest in an assessee cannot take up its audit. (Clause 4 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (“the CA Act”) read with Appendix 9 of CA Regulations 1988);

• Member responsible for writing / maintenance of books of account of an assessee should not take up its audit (Clause (4) of Part I of the Second Schedule to the CA Act);

• Member not to accept the audit of a person to whom he is indebted for more than Rs. 10,000/- (Chapter X of ICAI Guidelines);

• Member not to charge professional fees based on a percentage of profit or which are contingent upon the finding or the result of the professional employment. (Clause 10 of part I of the First Schedule to the CA Act);

• Internal auditor of an assessee cannot be appointed as his tax auditor (281st Council Meeting Resolution).

• In case of joint audits, all the auditors will have to sign the audit report and should issue separate reports where they have different opinions. (Ref SA 299). 

4.2 The restrictions applicable for appointment of a statutory auditor where fee for other services are more than the statutory audit fee, in case of specified entities, are not applicable GST auditors (Chapter IX of ICAI Guidelines).

4.3 An assessee may have GST registrations in more than one State.In such cases, the assessee may appoint a single / multiple auditor(s) for the distinct registrations under the same PAN. It is possible that accounts and records that are kept in different States may be in the local language of that State. In such cases, it is suggested that the auditor should not accept the audit of accounts written in a language which he/his staff do not understand.


5. Audit Engagement

5.1 In case of a company, the appointment of the GST auditorshould be made through a resolution of the Board of Directors or by an officer of the company, if so authorized by the Board in this behalf. In case of a partnership firm or proprietary concern, the appointment can be made by a partner or the proprietor or a person authorized by the assessee. The acceptance of appointment should also be communicated in writing to the auditee.

5.2 Communication with the previous Auditor – Since the GST audit is applicable for the first time (for the financial year 2017-18), the requirement of communication with the previous auditor prior to accepting the engagement (based on the provisions of the CA Act) does not arise. However, as a healthy practice, the GST auditor may choose to communicate with the previous auditor (under the erstwhile provisions of State Level Laws) so as to get a better insight into the auditee’s business practices.Such communication would, however, become mandatory in the subsequent years (where the retiring auditor is a Chartered Accountant).


6. Submission of Audit Report :

6.1 Section 35(5) read with Section 44(2) of the CGST Act provides that the following documents shall be furnished electronically by the assessee upon conclusion of the audit:

a. Annual Return;

b. Copy of the audited annual accounts;

c. Reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement in FORM GSTR 9C (this FORM is expected to undergo some simplification), duly certified;

d. Such other particulars, as may be prescribed.

6.2 A format for the audit report/certificate is yet to be notified. It is not clear as to whether it will be in the nature of an audit report like the statutory audit report or tax audit report, or a certificate like in case of VAT audits. If it is in the nature of a certificate, the responsibility of the GST auditor would be substantially higher.

6.3 Certificate Vs. Report – Para 2.2 of the ‘Guidance Note on Audit Report and certificates for Special Purpose’ issued by the ICAI notes the difference between the term ‘certificate’ and ‘report’ as under;

• “A Certificate is a written confirmation of the accuracy of facts stated there in and does not involve any estimate or the opinion.”;

• “A Report, on the other hand, is a formal statement usually made after an enquiry, examination or review of specified matters under report and includes –the reporting auditor’s opinion thereon”.

6.4 Thus, where a certificate is issued, the Chartered Accountant shall be responsible for factual accuracy of what is stated therein. In case of a report, he is responsible for ensuring that the report is based on the factual data,true and fair (or in some cases true and correct) to the best of his belief, knowledge and information furnished to him.

6.5 Annual Return: Every registered person [other than an input service distributor (ISD), person required to deduct tax at source (TDS), person required to collect tax at source (TCS), casual taxable person (CTP) and nonresident taxable person] shall furnish an annual return for every financial year electronically in the FORM GSTR- 9 (composition suppliers in GSTR-9A and e-commerce operators in FORM GSTR-9B) on or before 31st December following the end of the financial year. Where a registered person is required to get his accounts audited, such annual return shall be furnished along with the audited accounts.

6.6 On a plain reading of the relevant provisions, it appears that the annual return is not merely the sum total of the periodic returns filed for the year, but a return reflecting the correct turnovers, data and details as per the provisions of the GST laws, based on the annual accounts of the assessee. Where it is required to be audited, the turnovers appearing in the annual return shall be as per the audited figures.

6.7 Reconciliation statement–Rule 80(3) provides that the reconciliation statement shall be furnished in the FORM GSTR-9C (format yet to be notified). The provisions of Section 44(2) require reconciliation of the figures declared in ‘return furnished for the financial year’ with the ‘audited financial statement’. It appears that the return furnished for the financial year refers to the annual return furnished.

6.8 During the course of the audit, any discrepancies found shall be corrected / rectified by declaring the correct turnovers in the annual returns. In this regard, it may be noted that the time limit for declaring the details of debit note/credit note and for taking the input tax credit would lapse in September of the following year, whereas the annual return can be furnished by the end of December of the following year. Where any discrepancies are noted during the course of the GST audit post September, it appears that no recourse would be available to the auditee.

6.9 There would be a challenge in the reconciliation process in case of large entities having registration in multiple States/UTs, since many transactions on which GST has an impact may not have direct visibility in the financial statements. E.g.Stock transfers, free supplies, distribution of free samples, gifts, transactions with related persons, supplies without consideration, goods sent on approval basis, supplies through agents, etc.

6.10 The auditor must note that the reconciliatio n statement can be prepared only when the audited financial statements are made available. The law, however, does not explicitly provide that the reconciliation must be prepared between the accounts audited by him and the annual return, in case of registered persons whose books of account have not been audited, say, in the case of noncompany


6.11 Such other particulars, as may be prescribed – The Government is yet to prescribe the format of audit report and annexures thereto. It is also not clear as to whether the auditor is required to identify and report the discrepancies month-wise or annually.


7. Challenges for the year 2017-18: 

There would be many challenges that an auditor as well as an auditee will have to facewhile carrying out the GST audit for the financial year 2017-18, being the first year of GST audit. Among others, some of them are listed below:

a. Multiple audits under indirect tax laws: VAT audits may be required to be carried out for the first quarter and GST audit for the next three quarters;

b. Lack of clarity in the GST law, frequent changes in the law, issuance of more than 300+ notifications;

c. Failure of the matching concept – whether it would be possible to identify if the supplier has failed to remit taxes to determine eligibility of credits;

d. Complex procedural compliance under GST;

e. Reliability of the audit software is not tested;

f. Absence of / incomplete mandatory records;

g. High volume of procedural lapses and non-compliances by the assessees, incorrect documents / documentation procedures;

h. Transitional issues (law does address all types of transactions).


8. Consequence of failure to submit the annual return: 

Section 47(2) provides that in case of failure to submit the annual return within the specified time, a late fee shall be leviable – Computation: Rs. 100 per day during which such failure continues subject to a maximum of a quarter percent of the turnover in the State/UT. There is no specific penalty prescribed in the GST Law for not getting the accounts audited by a Chartered Accountant or a Cost Accountant. Therefore, in terms of Section 125 of CGST Act, 2017 he shall be subjected to penalty upto 25,000/-. This section deals with general penalty and gets attracted where any person, who contravenes any of the provisions this Act or any rules made thereunder for which no penalty is separately provided.


9. Special attention to transactions not appearing in the financial accounts: 

There are several transactions which may not appear in the financial accounts and records maintained by the registered persons such as stock transfers, free samples, services received from outside India from related parties, other supplies made without consideration, etc. Due care must be exercised by the auditor to identify such transactions as there may be no direct reference to these transactions in the financial records.



It is but natural, that any auditee would expect that during the course of conduct of an audit, an auditor would adopt the best practices and put the necessary system checks and balances in place. {The updated internal control questionnaire of the IASB could provide some pointers on evaluation of the internal control system in place.} It must be understood that there is no prescribed method or procedure under any statute for the conduct of an audit. An auditor is expected to exercise due and adequate care, prudence, diligence and adopt the best practices considering the complexity of each business and its surrounding circumstances.



This paper is very brief, given that the rules / forms are yet to be notified. It is written with a view to elicit comments, initiate debates and provide a basic understanding to the reader. It is fondly hoped that this paper would provide to the reader some insight into the manner and method of conduct of an audit. The views expressed herein are the views of the paper writer and cannot be used in framing of opinions or devising methodologies for the purpose of conduct of audits.

1 Comment

  1. Himani

    Happy to read this very useful information. Nice and detailed explanation.
    Appreciate your sharing and tweeted 🙂

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