Scrutiny & audit under GST - Dr Sanjiv Agarwal - Article published in Business Advisor, dated December 10, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

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Scrutiny & audit under GST
Dr Sanjiv Agarwal
Scrutiny and audit provisions in the GST regime are
covered in the following provisions of Model GST Act:
Section Relating to
2(14) Definition of audit
2(23) Definition of chartered accountant
2(33) Definition of cost accountant
42 (4) Turnover based audit by chartered
accountant/ cost accountant
45 Scrutiny of returns
49 Audit by tax authorities
50 Special audit
Meaning of ‘audit’
According to section 2(14) of the Model GST Law, ‗audit‘ means detailed
examination of records, returns and other documents maintained or
furnished by the taxable person under this Act or rules made there under or
under any other law for the time being in force to verify, inter alia, 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 rules made there under.
Accordingly, ‗audit‘ implies –
(a) detailed examination of records, returns and other documents -
(i) maintained/ furnished by a taxable person;

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(ii) under GST law/ any other law or rules.
(b) Verification of correctness of -
(i) turnover declared;
(ii) taxes paid;
(iii) refund claimed; and
(iv) input tax credit availed.
(c) Assessment of compliances with provisions of GST law and rules.
Scrutiny and audit
The scope of audit would include the first two which aid in the conduct of
audit.
The purpose of preliminary scrutiny of returns includes:
 ensuring the completeness of the information furnished in the return;
 arithmetic correctness of the amount computed as tax and its timely
payment; and
 timely submission of the return and identification of non-filers and stop-
filers.
Scrutiny of documents, viz. ledger accounts, returns of tax, compliances etc.
is nothing but a strong compliance verification procedure or mechanism.
For example, in the case of a return, the purpose of detailed scrutiny of
returns is to ensure the correctness of the assessment made by the
assessee. Such scrutiny plan only supplements the audit programme. It is
expected that, for an effective scrutiny, it shall follow the best audit
practices.
The scope of audit, on the other hand, is to inspect the financial records of a
company for a complete financial year in order to identify non-compliance
issues and to evaluate the assessee‘s internal control system. The two
processes of audit and scrutiny are, in fact, complementary to each other.
Audit based on turnover
According to section 42(4) of the Model GST Law, every registered taxable
person whose turnover during a financial year exceeds the prescribed limit

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shall get his accounts audited by a chartered accountant or a cost
accountant and shall submit to the proper officer a copy of the audited
statement of accounts, the reconciliation statement along with annual
return under sub-section (2) of section 30 and such other documents in the
form and manner as may be prescribed in this behalf.
According to section 42(4), following features of turnover based GST audit
are important –
(a) Audit provision is applicable to every registered taxable person (not
meant for unregistered assessees).
(b) Audit will be required in cases where turnover during a financial year
exceeds the limit which will be prescribed.
(c) Taxable person is required to get its/ his accounts audited by a
chartered accountant or cost accountant who will be appointed as well
as remunerated by the taxable person only.
(d) Taxable person shall be required to submit the following to the proper
officer of GST –
(i) Copy of audited statement of accountants;
(ii) Reconciliation statement required u/s 30(2) of the GST Act (i.e.
annual return);
(iii) Other prescribed documents (to be prescribed).
(e) Reconciliation statement should contain reconciliation of the value of
supplies declared in the return furnished with the audited financial
statements.
Statements required to be furnished along with annual return
According to section 30 of the GST law, every taxable person who is required
to get his accounts audited under sub-section (4) of section 42 shall furnish,
electronically, the annual return along with the audited copy of the annual
accounts and a reconciliation statement, reconciling the value of supplies
declared in the return furnished for the year with the audited annual
financial statement, and such other particulars as may be prescribed.
Scrutiny

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Section 45 of the Model GST Law authorises the proper officer to scrutinise
the return for verification of correctness of the return and, if any
discrepancies are noticed by the officer he shall inform about the same to
the taxable person. Where the explanation regarding such discrepancies are
found acceptable, no further action shall be taken against the assessee, but
where no explanation is furnished or the explanation furnished is not
satisfactory, the proper officer may initiate appropriate action against such
taxable person.
According to provisions of scrutiny of returns –
 scrutiny shall be done by the proper officer;
 scrutiny shall be done of return and related particulars furnished by
taxable person;
 purpose of said scrutiny shall be to verify the correction of return;
 manner of scrutiny of return will be prescribed;
 proper officer shall inform the taxable person (assessee) about the
discrepancies noticed during the course of scrutiny;
 by such intimation, explanation is sought from the assessee;
 where explanation furnished by assessee is found acceptable, no further
action shall be required and assessee be informed accordingly.
Action by proper officer against assessee
According section 45(4) of the Model GST Law, where –
 no explanation is furnished, or
 explanation furnished is not found satisfactory, or
 taxable person fails to take corrective action/ measures after accepting
the discrepancies,
the proper officer may initiate appropriate action against such taxable
person which may include–
 audit by tax authorities u/s 49;
 special audit u/s 50;

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 inspection, search or seizure u/s 60;
 proceed to determine tax and other dues u/s 51A or 51B of the Act
providing for recovery of dues.
According to section 45(2) of the Model GST Law, where the explanation
given by the taxpayer in response to discrepancies informed by the proper
officer is found acceptable, the taxable person shall be informed accordingly,
and no further action shall be taken in this regard by the proper officer.
Audit by tax authorities
According to section 49 of the Model GST Law, in relation to audit in GST
regime, the following points are worth noting:
(i) who can authorise/ conduct audit – Commissioner of CGST or
Commissioner of SGST or officer authorised by him by an order
(general or specific);
(ii) audit of what – business transactions of any taxable person;
(iii) audit when - after at least 15 days advance notice;
(iv) how audit will be done – to be carried out in a transparent manner;
period to be covered, frequency and manner to be prescribed;
(v) where audit may be conducted - at place of business of taxable person
or their office (revenue department);
(vi) audit period to be completed - within three months of date of
commencement of audit (may be extended by further period of six
months);
(vii) what is expected from auditee taxable person – auditee is required:
(a) to afford the officer auditing the necessary facility to verify books of
accounts/ other documents as he may require at such place;
(b) to furnish information which he may require;
(c) to render assistance for timely completion of audit.
(viii) what auditing officer should do on completion of audit – to inform the
taxable person about –
(a) audit findings without delay;

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(b) taxable person‘s rights and obligations;
(c) reasons for audit findings.
‗Commencement of audit‘ shall imply that date on which the records and
other documents, called for by the tax authorities, are made available by the
taxable person, or date of actual institution of audit at the place of
business, whichever is later. The period of three months can be extended by
six months for reasons to be recorded in writing.
On completion of audit u/s 49, proper officer is required to do the following
without delay –
(a) inform the audit findings to the taxable person whose records have been
audited;
(b) Inform the taxable person of his rights and obligations;
(c) Inform the taxable person the reasons for the audit findings;
(d) Initiate action u/s 51, i.e., determination of tax not paid or short paid or
erroneously refunded, if the audit results in detection of (i) tax not paid
or short paid, or (ii) tax erroneously refunded, or (iii) input tax credit
erroneously availed.
Audit u/s 49 is a discretionary audit and shall be carried out only in cases
where such audit of business transaction as is deemed proper, in the given
set of facts and circumstances.
Section 49 only provides for audit of business transactions of a taxable
person. Only when the audit results in detection of tax evasion or wrong
input credit availed, proper officer may initiate action u/s 51 of the GST
law.
Section 51 provides for determination of tax in the following situations –
(a) Determination of tax not paid or short paid or erroneously refunded or
input tax credit wrongly availed or utilised for any reason other than
fraud or any willful misstatement or suppression of facts;
(b) Determination of tax not paid or short paid or erroneously refunded or
input tax credit wrongly availed or utilised by reason of fraud or any
willful-misstatement or suppression of facts.
Special audit

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Special audit is a tool provided to the revenue to order for special audit
under section 50 of the Model GST Law to be carried out by a chartered
accountant or a cost accountant on the directions of Deputy or Assistant
Commissioner with prior approval of the Commissioner, if such officer is of
the opinion that the assessee has not declared the value correctly or credit
availed is not within the normal limits.
The Deputy/ Assistant Commissioner should consider the following factors
before taking a decisions to direct special audit u/s 50 of the Model GST
law:
(a) nature and complexity of the case;
(b) Interest of revenue.
These principles should guide his opinion that –
(a) Value has not been correctly declared, or
(b) Credit availed is not within the normal limits, i.e., there are instances of
abnormal variation in credit amount.
Special audit u/s 50 of Model GST Law can be ordered or directed –
(i) with prior approval of the Commissioner;
(ii) by Deputy or Assistant Commissioner;
(iii) in writing to the auditee taxpayer;
(iv) to get records including books of account examined and audited;
(v) to get audit done by a chartered accountant or cost accountant
nominated by Commissioner (not by Deputy or Assistant
Commissioner).
The auditor appointed for carrying out special audit is required to submit
audit report duly signed and certified by him, within ninety days to the
Deputy/ Assistant Commissioner. The report shall also contain other
particulars in the report as may be specified in his terms of reference.

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The Deputy/ Assistant Commissioner may relax or extend the period by up
to another ninety days in the following situations –
(a) on application by taxable person, or
(b) on application by chartered accountant/ cost accountant, or
(c) for any other material and sufficient reasons.
The discretion to extend time rests with the Deputy/ Assistant
Commissioner.
Where the special audit conducted results in detection of tax not paid or
short paid or erroneously refunded, or input tax credit erroneously availed,
the proper officer may initiate action under section 51 of the Model GST
Law.
The expenses of, and incidental to, the examination and audit of records,
including the remuneration of such chartered accountant or cost
accountant, shall be determined and paid by the Commissioner and that
such determination shall be final. The taxpayer shall not bear such
expenses.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur.)