MARCH 27, 2024

Mr MG Kodandaram, IRS. Assistant Director (Retd) ADVOCATE and CONSULTANT

IN recent times, the GST audits initiated by Central Board of Indirect Taxes and Customs (CBIC) and state GST /commercial tax authorities have surged, accompanied by an increase in notices sent to taxpayers. This uptick in audits has also led to a rise in investigations conducted by GST authorities. However, the experience of taxpayers undergoing these audits within the GST framework has been less than satisfactory. This dissatisfaction can be attributed to several factors, including the proliferation of audits initiated by both central and state authorities, as well as simultaneous investigations by the state investigation wings and Directorate General of GST Intelligence (DGGI).

While audits by tax authorities are crucial in self-assessment systems, conducting audits without a standardized approach and methodology can lead to inefficiencies, contrary to the transparency and utility expected in the GST regime. Without proper arrangements, including qualified and certified officers, the department has created hurdles for businesses and trade as explained in further part of this article.

At present, taxpayers face numerous challenges dealing with inquiries, notices, scrutiny, and audits under the GST laws. These challenges must be addressed by CBIC and state GST/commercial tax formations to transform the audit process into a more taxpayer-friendly mechanism. This transformation is crucial to ensure that GST audits become simpler, fairer, and more transparent for all stake holders involved.

The scope of audit findings should strictly adhere to interpretations derived from Circulars or advance rulings. The audit team must accurately consider and apply the guidelines provided in CBIC / state Circulars and Advance Rulings, ensuring that their interpretations align correctly with these official sources. This approach ensures that audit assessments are based on accurate and consistent interpretations of the relevant laws and regulations.

Concerns related to Scrutiny and Audit in GST revolve around the scope of them. There is often an issue where scrutiny is carried out after an audit has been completed, even though the audit had already covered the relevant period. This practice is deemed inefficient and should be rectified to improve the overall efficiency of the audit and scrutiny procedures under GST.

Even in cases where data submission in frontend are streamlined, taxpayers are required to provide information, such as registration details, monthly and annual returns, DRC-03 challans, and other documentation that is already available with the tax authorities. Additionally, despite advancements in digital technology, audits are still conducted using traditional methods. The delay in creation and implementation of a Backend audit module by the CBIC over the last six years reflects a lack of initiative in digitizing the entire audit procedure. (refer SOP for GST Audit - need of the hour - NOVEMBER 23, 2020, by the author).

One more significant issue is the lack of a common Audit procedure across states and the central government, as each administration have their own audit manual prescribed. This lack of uniformity complicates the audit process and adds to the burden on taxpayers. It is crucial to adopt a more modern and digitized approach to auditing in the GST regime. This includes standardizing audit procedures across different jurisdictions and leveraging digital tools to streamline the audit process, reduce duplication of efforts, and ensure a consistent and fair experience for taxpayers.

The initiation and conclusion of audits under Section 65 need to be clearly defined. While the start of an audit is identifiable, its conclusion often lacks specificity as the department may take several months to provide the final report. Furthermore, there is a lack of communication regarding the audit's completion, leaving the auditee uninformed about the status of the audit process. These issues highlight the need for a more transparent and timelier audit framework that ensures both clarity and communication throughout the audit procedure.

The time frame within which a Show Cause Notice (SCN) based on an audit should be issued needs to be clearly defined. Often, SCNs are issued several months after the completion of an audit, leading to uncertainties and delays in the process. It is imperative to establish a specific time limit for issuing SCNs post-audit to ensure timely and efficient resolution of issues identified during the audit process. This clarity in timelines will benefit both the tax authorities and the taxpayers by promoting transparency and expediency in addressing audit-related matters.

Furthermore, it is observed that Section 74 is invoked in all audit cases, which may not always be appropriate. Not every audit finding necessarily indicates instances of suppression or contravention, warranting action under Section 74. Therefore, it is essential to exercise discretion and apply Section 74 judiciously based on the specific circumstances and merits of each audit case. It is essential to prevent the occurrence of multiple SCNs stemming from a single audit report but issued by different wings of the same department. Often, more than one SCN is issued for a specific period concerning issues discussed in the audit report.

In light of these challenges, it is imperative for the department to introspect, strategize, and equip itself accordingly. This involves establishing a comprehensive digital backend with necessary features to facilitate uniform audits by both state and central authorities. Furthermore, rigorous training of officers in legal aspects and data analytics is essential. Only officers who have completed the required qualifications and earned their certificates should conduct audits following standardized operating procedures.

The Department of Commercial Taxes of the Karnataka Government recently issued Circular No. GST-03/2023-24 dated 13-06-2023, focusing on strategies for optimizing revenue through effective GST audits. The circular emphasizes the importance of adhering to tax laws and regulations, conducting thorough examinations, and addressing critical areas of concern. However, the circular also introduces additional offline reports, adding to the reporting burden for both field audit officers and taxpayers. This seems to be a repetition of routine audits without clear indications of how it will enhance auditor performance.

The circular also mentions the establishment of an Audit Monitoring Committee. This committee is tasked with intensive interactions within and across jurisdictions to identify risk parameters, themes, sectors, and high-risk taxpayers, and to devise action plans and strategies. The respective reviewing Adcoms of the DGSTOs will monitor the AMC to improve audit outcomes. This administrative setup it appears was apparently not in place previously, indicating that audits were conducted without a proper monitoring mechanism. This situation is likely prevalent across many states and central administrations, highlighting the need for more structured and monitored audit processes.

ACES-GST, which is hosted on www.cbic-gst.gov.in and overseen by CBIC, acts as the backend portal for GST and excise operations under CBIC. On the other hand, the frontend operations are managed by the GST network, which is hosted on www.gstn.org.in. By June 30, 2022, GSTN underwent a transformation into a fully government-owned entity in line with decisions taken by the GST council and the Union Cabinet. This front-end network also oversees the backend activities for the GST departments of 27 states, while nine other states/union territories have their own backend software similar to CBIC's. However, the existence of multiple applications for backend activities goes against the government's vision of GST as 'One Nation; One Tax'. This diversity in backend software has a significant negative impact on the overall efficiency of the GST system and its ability to detect revenue leakages, highlighting the need for standardization.

The lack of a standardized approach and methodology in conducting audits, coupled with delays in communication and clarity regarding audit processes, has contributed to inefficiencies and dissatisfaction among taxpayers. There is immediate need of standardizing backend audit procedures, leveraging digital tools for efficiency, establishing clear timelines for issuing notices and completing audits, and exercising discretion in invoking relevant sections of the law based on specific circumstances. In addition to a comprehensive digital backend for Audit, rigorous training of audit officers, and the establishment of online real-time monitoring mechanisms like Audit Monitoring Committees are essential steps toward improving the overall audit experience and ensuring transparency, fairness, and consistency in GST audits across different jurisdictions.

Addressing these challenges and implementing necessary reforms will not only benefit taxpayers by simplifying the audit process but also contribute to a more efficient and effective tax administration system, aligning with the vision of GST as a unified tax regime for the nation.

[The views expressed are strictly personal.]