NOVEMBER 23, 2020

By M G Kodandaram, IRS, Assistant Director (Retd.), Advocate and Consultant

THE legal prescription

Section 65, in the CGST Act, 2017 and all the SGST Acts provide the necessary legislative authority for the GST departments - both the States and Centre - to undertake audit of any registered person ('RP' for brevity) for such period, at such frequency and in such manner as may be prescribed. The audit by the department may be conducted at the place of business of the RP or at the office. The frequency of the audit could be a financial year or part thereof. It makes sense that in these days of e-governance and transparency ushered tax systems, the manner of conducting audit should be an integrated uniform methodology, and should not be left to the wisdom of the Officers executing this critical function. In other words, there must be a uniform approach with standard operating procedure in place for selection of RP and more so for execution of the audit verification by the field formations. But the reality is the mechanism in place is totally poor and ineffective, which renders it to be another routine opaque procedure, much against the objectives to be met in the new uniform tax realm. An attempt is made here to present the current faulty and varied methodology followed by authorities, with a hope that efforts would be made to set the system right.

As per the said Section 65 read with Rule 101 of CGST Rules 2017/SGST Rules, some of the manners/procedures prescribed are as follows:

1) The RP shall be informed by way of a notice in FORM GST ADT-01, not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.

2) The audit shall be completed within three months from the date of commencement of the audit which could be extended in writing upto six months. The "commencement of audit" has been prescribed as the date on which the records /other documents, called for by the tax authorities, are made available by the RP or the actual institution of audit at the place of business, whichever is later.

3) During the course of audit, the officer may require the RP (i) to afford him the necessary facility to verify the books of account or other documents; (ii) furnishing such information as he may require; and (iii) render assistance for timely completion of the audit.

4) On conclusion of the audit, the proper officer shall, within thirty days, inform the RP the findings of audit in FORM GST ADT-02, with the findings and the reasons for such findings.

5) The authorized officer shall conduct the audit of the records and the books of account of the RP, verify the documents on the basis of which the books of account are maintained, verify the returns and statements furnished, the correctness of the turnover, exemptions and deductions claimed, the rate of tax applied, the ITC availed and utilized refund claimed, and other relevant issues and record the observations in his audit notes.

Now the ground reality

In the process and procedure of conduct of audit by the field formations of the Central and state authorities concerned, there is abundance of ambiguity existing in the manner of conduct of this vital executive function, which needs to be properly prescribed so that the objective of GST system remain intact.

a) Most of the authorities call for submission of long list of readily available list of records from the RP without citing any reason for the same. As the entities are filing returns, both monthly as well as annual returns with due certifications by an authorized chartered accountant or cost accountant, most of the information and records exists and is available in digital form with the authorities. Some of the records called for includes: Invoices, debit notes, balance sheet, GSTR 1 etc. which are digitally accessible by all authorities concerned from the credible source. The present practice of routinely calling for list of records with no reasons cited is an opaque start for conduct of audit. It becomes a tool of harassment by the authorities, which should be avoided.

b) When the authorities are in possession of such information and records, calling for the same from the RP appears to be an undesirable activity. Instead, the officers should be asked to conduct audit using the digital data / records available in the systems and for any discrepancy they can call the RP to produce specific records in writing, after due approval of a senior officer of the rank of Commissioner, citing the reasons for verification of such records or information. The timely verification of the records and data available with the departments is of utmost importance as auditors are supposed to verify the records maintained for the purposes of compliance with GST laws and is readily accessible to the authorities concerned. This could be done regularly by officers of audit in their offices without the need of the RP to attend. Therefore, in the changed situation, in majority of the instances, all necessary verifications could be conducted in the office itself, the author feels.

c) As the audit could be carried out using digital tools, all officers of audit should be mandated to undergo a requisite training, get certified and then allowed to resume audit. This needs to be strictly adhered to as most of the officers are not equipped, both technologically as well as legally, for the specialized task.

d) There is a need of specific tailor-made programme in place for this purpose with standard operating mechanism. It should be ordered that only officers, including those in senior posts, duly qualified as above and certified, will be posted for audit. As on date, we have data fully available but the manpower is totally under-prepared for the assigned task as they do not know the method to be followed. This gap at the back-end should be covered first before allowing the audit, so that unnecessary harassment to the RP could be minimized.

e) The unskilled audit officer (both in digital and legal analysis) may not be in a position to observe any deviations that may result in loss of revenue to the exchequer. By adopting the present un-organised varied approach of audit, the department may not be in a position to notice and plug the possible revenue leakages in an effective manner.

f) When audit is being conducted after due analysis of in-house data as suggested, identifying the issues to be audited, the notice/intimation for audit could be sent asking for the specific documents/information only with reasons duly recorded. Later, if required, the officers should be allowed to visit the business premises with specific verification tasks assigned in writing.

g) In cases where the audit, after due specific analysis, are conducted at the GST offices, the Authorities expect the RP to be available at the office when they undertake the audit process, which could be avoided. The RP finds it difficult to assign an employee exclusively for this purpose for many days to the office. Instead, the officers should be asked to communicate in writing the issues that require further clarification by mail and also call for the visit personally for clarifying the required issues.

h) There is no uniform approach or SOP prescribed for the officers to conduct audit at the backend. Each authority follows one or more methods of conducting of audit, depending upon their own understanding of law and compliance requirements. This has caused huge problems to the RP as each officer has his own plans and procedure and it becomes difficult to respond immediately in a fair manner. Also, the person in-charge of accounts may not be aware of all the happenings of large entities. There is need of SOP for conduct of audit by the executives and it should be notified to all stakeholders, so that there is transparency in place.

i) The CBIC has come out with an Audit Manual which is a replica of the erstwhile EA-2000 audit methodology, applied to large manufacturing units in central excise tax regime. It is a matter of fact that this procedure is not followed even by all the central authorities, who change the system according their own understanding. Further, it is also a matter to be considered as to how the audit procedures for an origin based tax system could be useful to the changed times of consumption based tax regime.

j) Added to this, the state authorities are not following the said standards as this manual is not tailor-made for the GST regime. Now the larger issue for the RP is how to comply with these varieties of requirements from different authorities. This needs to be set right on priority or else it will compete with the same opaque system which existed earlier, with no useful change on the ground situation and results.

Filling up the gaps

The conducting of an audit by the taxing authorities is one of the most significant functions, especially in the self assessment regimes. But carrying out the audit without a uniform approach and methodology will lead to wasteful practices by the authorities, much against the transparency and utility expected in GST regime. Unless such proper arrangements with qualified and certified officers are in place, the department will be causing unnecessary hurdles to business and trade. In these days of pandemic where running a business itself is a challenging task, becoming a prey to this type of faulty audit mechanism will cripple the business environment.

In view of the present critical business scenario, the best way for the department is to look inwards, plan and prepare itself. It should aim to having a comprehensive digital back-end with required features in place to conduct audit by both state and central authorities in a uniform way. It should be followed up with stringent training of the officers for the specific purpose, both in law and data analytics. Only when the officer duly qualifies and earns her/his certificate, such an officer should be allowed to function and conduct audit as per the standard operating procedure in place, which are to be prepared. Then alone the purpose of conducting audit will be met, the author feels. Both the present mechanism and manpower in place are totally poor to meet the changed situation of the GST digital regime.

It is sad to mention here that the authorities, knowing full well the advantages of a fully digitized environment, have not thought of any such uniform back-end audit methods all these days.

Hope this topical issue will be discussed in the coming GST Council meeting so that there is change in the policy and procedures of audit with a view to attain uniformity, transparency, efficiency and moreover it evolves as a vibrant tool to safeguard revenue.

[The views expressed are strictly personal.]