What is a GST Audit and Why is it Important for Your Business?
A GST audit refers to a systematic inspection of a business’s financial accounts, tax filings, and other paperwork by either the tax department or a professional. Their main focus is to confirm the accuracy of the tax on goods and services payable, inward tax credit claimed, and overall compliance with the GST laws. The Goods and Services Tax Council (GST) has made it mandatory that audits be carried out so that the taxpayers represent their turnover correctly, pay the correct amount of tax, and avoid ineligible or excess ITC claims. A business failing to comply may end up facing hefty financial penalties, interest on the dues, and may even face prosecution in the court.
The audit is a comprehensive procedure. It will look into everything from the filing of returns like GSTR-1 and GSTR-3B, etc., keeping e-way bills and compliance with the Reverse Charge Mechanism (RCM). For an Indian business, the stakes are high. A mismatch between the ITC claimed in GSTR-3B and the ITC available as per GSTR-2A/2B is a common red flag for auditors. That means, proactive preparation and a clear understanding of the audit’s scope are essential for a smooth and successful outcome.
Understanding the GST Audit Applicability
Who Needs to Undergo a GST Audit – GST Audit Applicability
The question naturally arises as to whether or not the whole population is to participate. The answer is simple: no. It depends on the type of the audit and the turnover of the business. Broadly, there are three types of audits that operate in the GST system.
- Turnover-Based Audit (Section 35(5) / GSTR-9C): It is a type of self-audit that is mandatory for any business whose aggregate turnover exceeds a certain threshold limit. Earlier this limit was set at ₹5 crore but now it has changed. At present, a CA or CMA is required to audit the accounts of businesses that have a turnover of more than ₹5 crore. The audit report is filed using form GSTR-9C. This is the main element of the GST audit applicability for the businesses that are expanding.
- General/Departmental Audit (Section 65): This kind of audit is done by a GST officer. The officer may come to the business location or the business may be asked to submit the records for verification purposes. Usually, the selection procedure for this audit is risk-based, with the use of data analytics to find out the businesses that have anomalies in their filings.
- Special Audit (Section 66): A special audit may be ordered by a GST officer if he/she feels that a case is so complex that a thorough investigation is required. It is carried out by a CA or a CMA who is appointed by the Commissioner and the business has to bear the expenses of this audit.
What Triggers a Departmental Audit under GST?
Business audits by the GST department are performed through a sophisticated, data-driven process named ‘Risk Assessment’. At the time of the assessment, audit target selection is made based on the risk factors involved. A few of them are:
- Large ITC claims against the actual taxes paid on outward supplies
- Mismatches in filing of returns
- Nil returns with high turnover
- Suspicious E-Way Bill activity
- Unexpected changes in turnover
The Step-by-Step Process of a GST Audit
Businesses have to get ready for the audit process by knowing what will happen step by step.
Step 1: Notice for Audit (Form GST ADT-01)
At the official stage, the audit is communicated to a business through an audit notice. In case of GST audit under section 65, the notice is communicated through Form GST ADT-01. It will tell the business of the audit period and the documents that are going to be inspected. A business has to acknowledge the notice and start the preparations.
Step 2: Document Preparation and Reconciliation
For a business, this is the most important and challenging part. Firms must have ready with them documentation such as tax returns (GSTR-1, GSTR-3B, GSTR-9), tax invoices, e-way bills, financial statements, and bank statements. The most important work is reconciliation. This includes:
- Compare GSTR-1 with GSTR-3B to check if the outward supplies declared in both returns match
- Match the ITC claimed in GSTR-3B with the ITC made available through GSTR-2B
Step 3: Verification and Examination
An auditor may want to speak directly to employees to understand their accounting system or inspect the physical assets of the firm. Main concern areas during this phase are:
- Checks for ITC ineligible (ITC of motor vehicles, food & beverages, etc.)
- Compliance with E-way Bill: Matching e-way bills with invoices and actual movement of goods
- Valuation: Preventing undervaluation of goods or services to evade taxes
- HSN code/SAC code verification: Correctly classifying goods or services for the applicable tax rate
Step 4: Draft Report and Show Cause Notice
Once the physical verification and other audit processes are completed, the initial audit report is prepared. If any discrepancies are found during the audit (like ITC not matching), the tax department issues a Show Cause Notice to the business entity. The taxpayer will be asked to submit a written explanation for the discrepancy and/or provide additional documents.
Step 5: Final Audit Order (Form GST ADT-02)
Based on the reply from the business, the auditor releases a final report in the format named Form GST ADT-02. This document contains the amount of tax, interest, and penalty the business needs to pay, if any. But, if the auditor does not find any discrepancies, then he/she simply closes the case.
A Practical GST Audit Checklist for Indian Businesses
Getting ready for a GST audit might seem like a formidable task. But, a checklist will help you complete preparations and make sure the auditor finds everything in order. The following checklist will assist you in getting your affairs in order before the auditor visits.
- Reconcile Your Returns: Make sure that the details of your GSTR-1 (sales) and GSTR-3B (summary return) are completely consistent with each other. Any kind of variation will be considered a serious issue.
- Verify Your Input Tax Credit (ITC): Carefully check every ITC that you have claimed against your purchase register invoices and statement of GSTR-2B. Remember, disallowance of ITC can be a source of huge tax demand. This is a major point in any GST audit checklist.
- Compile a Complete Document File: Assemble a comprehensive and well-arranged file that comprises your GST registration certificate, all the returns filed (GSTR-1, GSTR-3B, GSTR-9), trial balance, financial statements, sales and purchase tax invoices, debit/credit notes, e-way bills, and bank statements.
- Check E-Way Bill Compliance: Generate a register of all the e-way bills and ensure that no bills were missing for the inter-state or high-value intra-state movements of goods.
- Review Reverse Charge Mechanism (RCM) Compliance: Confirm that you have rightly categorized supplies covered under RCM and have paid tax, within the prescribed time, on those supplies.
- Prepare for Common Auditor Queries: Be prepared to respond to inquiries on high-value ITC claims, nexus of transactions with related parties, and exports effected based on Letter of Undertaking (LUT).
Final Checklist for a Smooth GST Audit
So, here is the list of the very basic things that you simply cannot overlook if you want your GST audit to be a hit:
- Reconcile GSTR-1 with GSTR-3B so that you do not have any mismatch in the sales data
- Match ITC claimed in GSTR-3B with GSTR-2B to avoid getting your credit disallowed
- Compile a complete audit file containing all the invoices, e-way bills, and financial statements
- Check the adherence to the Reverse Charge Mechanism (RCM) related to the supplies specified
- Make a comprehensive review of the e-way bills to confirm that they were generated for all the movements of goods
A business that is well prepared is a business that is confident. By doing these steps, you will be able to alleviate the tension and the risk arising out of the GST audit largely.
Conclusion
A GST audit is a key compliance event for Indian businesses. Understanding the GST audit applicability, the process step-by-step, and the main areas of auditors’ attention will help you prepare beforehand.
Although it may appear as a huge task, in fact, it is not so if you have the right approach and expert support. Foxtax will assist you along this path and keep you compliant, which means no penalties for you. Do not leave your tax compliance matters to fate — take the help of our experts at Foxtax to make a trouble-free audit preparation.
Frequently Asked Questions (FAQs) on GST Audit
What are the 7 steps of an audit in a professional context?
The 7 steps of an audit are: 1) Planning and Risk Assessment, 2) Evaluation of Internal Controls, 3) Substantive Procedures – the detailed testing phase, 4) Evidence Gathering, 5) Analysis and Evaluation, 6) Reporting, and 7) Follow-up. These steps are generally followed in financial or project audits.
What are the 5 steps of an audit for a business?
The 5-step audit cycle for a business, in a nutshell, consists of: 1) Initiation – to choose the audit area, 2) Preparation – get ready to conduct audit, 3) Execution – audit work, 4) Reporting – summarize audit findings, and 5) Closure – final actions on audit report.
How to prepare a GST audit report?
Preparing a GST audit report (such as GSTR-9C) is mainly the job of a qualified Chartered Accountant. First, the report describes the extent of audit, the audit standard, etc. (e.g., relevant sections of CGST Act). Next, it records the differences that the audit uncovers. These are examined and finally, suggestions are made for corrective action. The report must be simple and concise, strictly stick to facts, and quote precise legal provisions.
What is the turnover limit for a GST audit by the department?
There is no definite turnover limit for a departmental audit under Section 65. The GST department conducts audits based on the risk factors. So, even a small turnover business can be selected for a departmental audit if the pattern of their filing or data aberrations are found to satisfy the risk criteria.
What is the difference between a GST audit (Section 65) and a special audit (Section 66)?
A departmental audit under Section 65 is conducted by a GST officer. For complex cases, a GST officer orders a special audit under Section 66, and it is conducted by a Chartered Accountant, Cost Accountant, or a professional nominated by them. The business has to bear the cost of a special audit.