Karnataka Government released GST Audit Manual

The GST is an integrated scheme of taxation of goods and services and is efficient and harmonized consumption based tax system replacing a plethora of indirect taxes like VAT, Central Excise, Luxury Tax, Entity Tax, Entertainment Tax, Betting Tax and Cess and surcharges relating to supply of goods and services.

The Goods and Service Tax is a trust-based regime wherein the taxpayer is required to self-assess his tax liability and file the returns. To ensure whether the taxpayer has correctly self-assessed his tax liability, the concept of Audit has been incoporated under the GST Act. This involves examination of records, returns and othe documents maintained by a registered taxable person.

The Audit involving scrunity of financial statements and documents, therefore, forms an integral part of the work of the officers of the tax department. The objective of audit of taxpayers is to measure, improve and sustain the level of compliance in the light of the provisions of the KGST Act 2017 and the rules made there under.

It is gratifying to note that the KGST Audit Manual has been prepared by the Commercial Taxes Department in a comprehensive, hoslistic manner. I am sure it will serve as a guide to the officers implementing the provisions of the GST Law.

KARNATAKA GST AUDIT MANUAL

CHAPTER-1

INTRODUCTION

1.1 Preamble:

Audit is a systematic and independent examination of books of accounts, statutory records, and documents as required by the relevant law applicable to the organisation. Audit by the tax authorities entails a deeper scrutiny of tax compliance by a tax payer from such examination and the effort is not only to ensure that the books of accounts and documents etc., of a tax payer are maintained as required under the law but they also reflect the correct liability and its compliance thereof. While the traditional tax systems relied on verification of tax compliance by every tax payer through tax assessment with varied approaches by the individual tax authorities, modern tax systems rely on a more uniform, systematic and information based approach involving selection of cases for audit, uniform audit procedure and standardised reporting of results of audit for analysis of such data to make changes in the approach and management of audit.

The objective of audit is not only to ensure uniform tax compliance but also to educate the tax payer and facilitate more voluntary compliance. It is critical and important to ensure compliance in tax administration and prevent revenue leakage and Audit is a mechanism in this direction.

The effective administration of this new technology based tax system requires standard operating systems and procedures at various levels of integrated administration i.e., at registration, return filing, assessment, audit, enforcement, recovery, appeal etc.

Since audit is an important departmental activity, there is a need for a standard audit manual for the same. The purpose of this audit manual is to outline the principles and policies of audits conducted under the KGST Act, 2017 and the Rules made thereunder. Guidelines provided herein are intended to ensure that the audit of taxpayers is carried out in a uniform, efficient and comprehensive manner adhering to the stipulated principles, policies and as per the best international practices. Hence, this manual is an effort to bring together various aspects of audit under the GST law for the benefit of departmental officers and staff.

1.2 What is audit under GST:

In terms of Section 2(13) of the KGST 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.

1.3 Why Audit under GST:

Tax liability of a registered person on supply of goods or services or both under GST Law is computed by himself under self-assessment scheme of the Act as provided u/s 59 of the KGST Act, 2017. However, the correctness of such self-assessment on the part of the taxpayer needs to be ensured by the Tax Authorities through periodical audit of books of account, returns and other documents maintained and furnished by such person to ensure the correctness of turnovers declared, tax liability, claim of input tax credits in the returns filed and also the payment of taxes.

As per the provisions of the GST Act such audit can be undertaken not only by an officer of the tax department but also by professionals in certain cases.

The major outcomes of Audit envisaged are;

• Verification of complete and correct recording/accounting of all transactions relating to supply of goods and services, their correct classification and their correct tax liability.
• Verification of the correctness of turnovers declared, taxes paid, refund claimed and input tax credit availed.
• Verify whether the taxpayers have applied the correct rates of taxes on supply of goods and services.
• Verification of compliance of relevant notifications, circulars, clarifications, Government Orders.
• Verification of compliance of the relevant judicial precedents applicable to the registered person.
• Data compilation relating to nature and patterns of incorrect claims of input tax /exemptions for taking corrective/preventive administrative/statutory measures,
• Identification and understanding of any suspected/doubtful tax management practices adopted by the registered persons.
• Facilitating better and improved tax compliance through tax payer education and bringing any changes /reforms required to make compliance simpler and easy.
• Audit results in facilitating better and improved tax compliance through tax payer education and bringing any changes/reforms required to make compliance simpler and easy.

1.4 The Purpose of Audit Manual:

The purpose of this manual is to outline the principles, policies, procedures and practices of audit conducted under the KGST Act, 2017 and the Rules made thereunder. It contains guidelines and operating procedures intended to ensure that the audit of taxpayer is carried out in a uniform, efficient and comprehensive manner, adhering to the stipulated principles, policies and procedures aimed in that direction.

• It provides members of the audit team with practical professional guidance, tools and information for conducting and managing the audit activity.
• It provides standard procedure for planning, conducting and reporting on audit work carried out.
• It helps to bring a systematic and disciplined approach to the audit by departmental authorities so as to enhance the quality and effectiveness of audit by putting into practice standard procedures and processes that would help it conform to professional standards and best practices.

1.5 Scope of the Audit Manual:

The manual covers subjects that are related to principles, policies and other issues pertaining to conduct audit of taxpayers under KGST Act, 2017 and rules made there under. The manual does not deal with legal interpretations and rulings on GST matters. The guidelines provided in the manual are advisory and educative in nature and are not binding either on authorities or the tax payers. The relevant judgements of the honourable courts and tribunals applicable to the transactions of the tax payer should be kept in mind at the time of audit.

The manual does not contain answers to all the problems that may arise in the day-today audit work. In such cases, the audit officer/audit team has to apply his/their mind, keeping in view the spirit of the principles and policies outlined in the manual. If needed, he/they may seek guidance from the supervisory officer.

1.6 Amendments to the Manual:

Any future amendments to the KGST Act, 2017 and Rules made thereunder, Notifications, Circulars/Orders, administrative policies and procedures etc. may require changes to this Manual. Experience gained during the conduct of audit would also necessitate periodic updating of the manual to maintain its utility.

The users of this manual are requested to provide suggestions for the improvement of this Manual and to make its scheme, procedures and contents more useful. Suggestions may be forwarded to the Commissioner/ Additional Commissioner (Audit) through their Joint Commissioners or Additional Commissioners.

1.7 Removal of difficulty:

Difficulties faced, if any, in the implementation of guidelines and instructions contained in this manual may be brought to the notice of ADCOM (Audit) at an early date. The ADCOM (Audit) and Joint Commissioners of DGSTOs are authorized to issue appropriate instructions in certain cases which may be aligned with any subsequent modifications and changes made by the Commissioner to remove any difficulty in conduct of audits.

CHAPTER-2

THE LEGAL PROVISIONS: ANALYSIS OF PROVISIONS, RULES AND RELEVANT FORMS

2.1 Provision:

The legal provisions relating to audit by tax authorities under GST are contained in Section 65 of Chapter XIII under the heading Audit of the KGST Act/ CGST Act, 2017 and Rule 101 of Chapter XI under the heading Assessment and Audit of KGST/CGST Rules, 2017. The legal provisions are detailed as under:

As per Section 65(1) of the Act, the Commissioner or an officer authorized by him, may undertake audit of any registered person by issuing a general or a special order.

General Order shall specify the criteria and all the registered persons fulfilling that criteria shall get covered in the ambit of audit.

On the other hand, Special Order for audit shall be issued in the name of a particular registered person and only such person shall be subjected to audit.

As per Rule 101(1) the period of audit to be conducted under section 65(1) shall be a financial year or part thereof or multiples thereof. Thus, audit need not be conducted for a part of the Financial Year in normal circumstances. Period to be covered under the audit can be a single financial year or two financial years or three and so on.

As per Section 65(2) the authorized officer may conduct Audit either at the place of business of the registered person or in his own office.

As per Section 65(3) read with Rule 101(2), the registered person shall be informed by way of notice in FORM GST ADT-01 at least 15 working days prior to the conduct of audit.

As per Section 65(4), audit of a registered person shall be completed within three months from the date of commencement of audit. However, if the Commissioner is satisfied that audit of the registered person cannot be completed within three months, he may extend the time period for a further period not exceeding six months after recording the reasons for doing so in writing.

The expression ‘commencement’ shall mean the date on which the books of account, records and other documents, asked for by the tax authorities, are made available by the registered person or the date of actual institution of audit at the place of business, whichever is later.

As per Section 65(5), the authorized officer, during the course of audit, may require the registered person to:

i. afford him necessary facility to verify the books of account or other documents required by him;

ii. furnish such information as may be required by him for the conduct of audit, and to provide assistance for timely completion of audit.

As per Rule 101(3), the proper officer who has been authorized to conduct the audit of the records and books of account of the registered person shall, with the assistance of his team of officers and officials, verify:

a) the documents on the basis of which the books of account are maintained,

b) the returns and statements furnished under the provisions of the Act & Rules,

c) the correctness of the turnover, exemptions and deductions claimed,

d) the correctness of rate of tax applied in respect of supply of goods or services or both,

e) the input tax credit availed and utilized,

f) the correctness of refund claimed, and

g) other relevant issues

and record the observations in his audit note.

As per Rule 101(4), the proper officer may inform the registered person of the discrepancies, if any, noticed. The registered person may file his explanation to discrepancies in his reply. Thereafter, the proper officer shall finalise the findings of the audit after due consideration of the reply furnished if any.

As per section 65(6) read with Rule 101(5), the proper officer, on conclusion of audit, shall, within 30 days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings in FORM GST ADT-02.

As per Section 65(7), where audit conducted results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, the proper officer may initiate action u/s 73 or 74.

Section 70. Power to summon persons to give evidence and produce documents. –

(1) The proper officer under this Act shall have power to summon any person whose attendance he considers necessary either to give evidence or to produce a document or any other thing in any inquiry in the same manner, as provided in the case of a civil court under the provisions of the Code of Civil Procedure, 1908 (Central Act 5 of 1908).

(2) Every such inquiry referred to in sub-section (1) shall be deemed to be a “judicial proceeding” within the meaning of section 193 and section 228 of the Indian Penal Code (Central Act 45 of 1860).

The audit officer shall exercise these powers judiciously and shall record reasons for issue of summons and draw proceedings relating to the subsequent appearance of such person or production of the documents sought.

Section 71: Access to business premises.- (1) Any officer under this Act, authorized by the proper officer not below the rank of Joint Commissioner, shall have access to any place of business of a registered person to inspect books of account, documents, computers, computer programs, computer software whether installed in a computer or otherwise and such other things as he may require and which may be available at such place, for the purposes of carrying out any audit, scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

(2) Every person in charge of place referred to in sub-section (1) shall, on demand, make available to the officer authorized under sub-section (1) or the audit party deputed by the proper officer or a cost accountant or chartered accountant nominated under section 66––

(i) such records as prepared or maintained by the registered person and declared to the proper officer in such manner as may be prescribed;

(ii) trial balance or its equivalent;

(iii) statements of annual financial accounts, duly audited, wherever required;

(iv) cost audit report, if any, under section 148 of the Companies Act, 2013 (Central Act 18 of 2013);

(v) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961 (Central Act 43 of 1961); and

(vi) any other relevant record,

for the scrutiny by the officer or audit party or the chartered accountant or cost accountant within a period not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by the said officer or the audit party or the chartered accountant or cost accountant.

The audit officer should draw appropriate proceedings relating to demand of any record, statement etc, and their production or otherwise. While non-production of any records etc sought may result in drawing adverse inference in appropriate cases, action to deal with such non-production may also be initiated.