Year End Review of Accounts with GST Perspective

GST is based on the principles of self-assessment and the responsibility has been cast upon the registered persons to evaluate and comply with the requirements of the law.

To be compliant with the law, the taxpayer’s responsibility can be briefly summarized as follows:

• determine the scope of supply and applicable exemptions for outward supplies,
• determining the time, place and value of supply,
• duly reporting the transactions and filing GST returns,
• following the provisions relating to availment and reversal of ITC,
• discharging tax liabilities on outward supplies and procurements under the reverse charge.

The GST Act mandates filing of an Annual Return (GSTR-9) and Audit report (GSTR-9C, applicable till FY 19-20) by Chartered accountant. Since the removal of audit provision responsibility of filling GSTR-9C rest with management of company

Review of Balance Sheet 

Assets

Property, Plant and Equipment (commonly known as Fixed/ Tangible Assets)

While reviewing the balance sheet for the assets commonly classified as land, land and building, plant and machinery, furniture and fixtures, office equipment, etc., the following points needs to be considered:

1. Section 17(5) of the CGST Act restricts availment of credits on specified categories of assets or services. It needs to be capitalized that the portion of such ineligible ITC in the books of accounts.
2. In case of the assets in the custody of third parties, such as moulds in possession of job worker, it needs to be ensured that proper records of the assets are maintained and in case they are not returned within specified period, they shall be deemed to be supplied and tax liability will have to be discharged on such assets.
3. In case of services received from the service providers outside India and capitalized as part of cost of asset as per AS-10/ IND AS-16, it needs to be ensured that the tax is paid under reverse charge and ITC is not claimed
4. In case of disposal of assets on which ITC has been availed, it needs to be verified that an amount equal to ITC availed as reduced for the period for which asset was used or the tax applicable on transaction value is discharged in terms of Section 18(6).
5. In the case of companies where IND AS is followed, right to use of assets would be created in the books of accounts – ITC can be taken only on the basis of actual invoices without considering any factors like time value, discounting etc.

Inventories

Inventories includes goods in various forms such as raw materials, work-in-progress, finished goods and stock-in-trade. While finalization of the accounts, caution needs to be exercised in case of goods-in-transit, goods sent to job workers and goods sent to agents.

1. Goods in Transit: Section 16 required receipt of goods as one of the conditions for availing the ITC under GST, hence it needs to be ensured it is availed only once the goods are received. In case the goods are sent directly to the job worker, ITC can be availed only once the goods are delivered to the job worker.
2. Goods sent to job worker: Register person should maintain a record of inventories sent to job worker or raw materials sent directly to the premises of the job worker and should have proper documentation for delivery challan.
3. Sale on approval basis: In the case of goods sent on sale or approval basis, they shall be deemed to have been supplied at the time of actual sale or six months from the date of removal in case they are not received back and tax would have to be discharged on the same.
4. Adjustments to inventory on account of physical verification: Discrepancies in the books and actual inventories needs to be written off along with reversal of the ITC for such goods.

Trade Receivables

In case of exports, the amendment in Section 16 of IGST Act introduced through the Finance bill 2021 and the existing Rule 96A stipulates that in case of non-receipt of consideration within the specified time the tax shall become payable if the exports were under LUT and in case refund of unutilized ITC has been claimed, the same shall be payable back with interest.

In export of services, sub-contracting of some services outside India may be involved which has to be considered as an import of services in India and accordingly liability is to be discharged by the Indian entity.

Thus, an auditor needs look into various aspects in relation to exports of goods or services such as whether the supply qualifies as an export, receipt of consideration in time, appropriate claim of refunds of unutilized ITC and discharge of liabilities.

Other Current Assets

The ITC legers as per the financial statements and the GST portal should be reconciled to ensure there are no material or unexplained differences. The following items would generally form part of reconciliation between books and GST returns:

1. different accounting period,
2. non-filing of forms in cases of merger/ acquisition of companies or ITC taken before registration etc.,
3. non-reversal of ITC in books of accounts,
4. refunds rejected / short received not adjusted in the books of accounts.
5. refunds filed without transferring ITC to ‘refund receivable account’ in the books,
6. differences on account of non-availment of ITC due to restriction under Rule 36(4).

Further, material differences between GSTR-2A and ITC taken as per returns needs to be looked into and reconciled. The auditor should verify the reconciliation of the ITC as per books, GST returns and GSTR-2A to ensure completeness of the credits availed.

Cash Balances in ledger on GST portal

The balance of electronic cash ledger on GST portal needs to be verified for differences arising on due to non-accounting of TDS/TCS credits, tax paid on account of demand etc.

Disclosure of GST liability/ GST asset in the Financial Statements

The ITC balances and output liability shall be allowed to be offset when the entity has legally enforceable right. The excess of ITC over tax payable shall be disclosed as part of other current assets and excess of output liability over ITC shall be disclosed as other current liabilities.

In case the balance cannot be setoff between the tax heads, the asset / liability needs to be disclosed separately.

Liabilities

Trade Payables

The auditor should verify the following from GST perspective for the trade payables:

1. In case of foreign creditors, particularly service vendors, the impact of import of services and payment of tax under reverse charge.
2. For domestic creditors, reversal of ITC along with interest in case payment to the creditor is not made within a period of 180 days from the date of invoice and subsequent reclaim on payment to vendor.

In case of e-commerce companies, provisions relating to TCS have to closely monitored and discharging of liability should be done on a periodic basis.

Review of Income statement

Revenue

During the course of verification of the credit items in the statement of profit and loss, the auditor should necessarily map the revenue as per books with GSTR-3B and GSTR-1. Any material or unexplained differences needs to be examined and should form part of reconciliation between books and GST returns.

Turnover of each registration in case of multi- location/ multi-registration

An entity may have separate registration for business verticals in the State, or separate registration for DTA and SEZ units within the same State. Consolidated data of all such registrations has to be considered for financial reporting and methods, processes and controls around preparation of data obtained for different registrations needs to be examined.

Supply between GSTIN of same PAN

Inter-company transactions such as stock transfers will not be considered as turnover for the purpose of financial statements but are to be considered for GST returns. The completeness of such reporting can be verified through e-way bills, sales/stock transfer registers.

Cross utilization of services / cross charges

Cross charges for allocation of common functions to different registration is chargeable to GST and the liabilities and ITC needs to be accounted in respective registrations.

Activities treated as supply, even if, made without consideration

The auditor needs to verify the reporting and discharge of tax liabilities on deemed supplies such as services between related person without consideration as such transactions may not necessarily form part of financial statements.

Classification of supply under various chapters (HSN Classification)

The auditor needs to check the classification of goods and services and the applicable rate of taxes thereon. GST liability may vary based on such classification and can result in exposure to interest and penalties in case of payment of taxes at lower rate.

Impact of Discounts on GST

Discounts can be reduced from the value of supply only if the conditions stipulated in section 15(3) of the CGST Act, are complied with. Discount agreed, provided or traceable at the time of supply can be reduced from value of supply and any discrepancies or excess reduction in value of supply needs to be disclosed in audit report.

Impact of GST on Advances received

The auditor should review the impact of GST liability on advances received and discharge of tax liability on such advances. Following points needs to be noted to verify proper discharge of tax liabilities.

• Security deposits are taxed only when they are adjusted against any supply and notional interest on such deposit will not be taxable.
• Retention money held back by the customer for safeguard for any defective or non-conforming work cannot be reduced for purpose of tax liability. GST liability on the whole invoice value needs to be discharged including retention money.
• Advances for supply of goods are not taxable but advances received for services to be rendered in future are taxable.

Exchange rate impact on turnover

The rate notified under section 14 of the Customs Act is to be considered for turnover which leads to difference between books and GST returns. The turnover as per books and GSTR-1 needs to be reconciled to ensure that there are valid reasons/ explanations for the differences.

Non-GST supplies

ITC on goods/services used for goods or services outside the scope of GST (covered under Schedule III) needs to be reviewed for eligibility and if found ineligible, needs to be charged to profit and loss account.

Sales promotion schemes: Free supplies/samples (FOC) and buy one get one offer

Free samples or gifts, which are supplied free of cost are not treated as supply under GST but ITC availed on the inward supply of these items must be reversed. At the same time, marketing scheme such as ‘buy one, get one’ are not treated as free supplies but exposure on account of litigation in such cases needs to be factored.

Expense reimbursement

Reimbursement claims where there is no element of profit and the expenses and backed by proper supporting documents does not make the claim free from the applicability of GST unless they were paid as pure agent. The auditor must exercise due caution while checking the same and ensure that a liability is recorded and discharged.

Accounting Standard adjustments

Entities preparing their Financial Statements following Generally Accepted Accounting Principles as applicable under Companies Act, 2013 may adopt revenue recognition policy which may vary from the provisions of the GST Act and Rules prescribed thereunder. The auditor should review the accounting policies adopted by the entities and ensure that the adjustments are properly kept on record as part of reconciliation. Any liability on account of the said adjustments are to be discharged at the appropriate time as prescribed under the GST Act.

IND AS Adjustments

The company preparing its Financial Statements following IND AS principles as applicable under Companies Act, 2013 may adopt accounting policies which may not map with the provisions of the GST Act and Rules made thereunder. In cases where the accounting treatment mandated by the Accounting Standards is not in consonance with those dictated by the GST Act/ Rules, then the auditor should ensure that the adjustments are meticulously kept on record as part of reconciliation. Any liability on account of the said adjustments are to be discharged at the appropriate time as prescribed under the GST Act.

Expenses

The auditor needs to verify that the ITC is availed on satisfying the conditions under Section 16 of the CGST Act and ITC specified as ineligible are not availed. Claim of ITC without fulfilling the above conditions can result in tax exposures which may affect the Financial Statement at large.

Blocked and Common credits

The auditor needs to ensure that blocked credits are either not availed, and if availed are subsequently reversed and charged to profit and loss account. Same will be the reversal of Common credit with respect to exempt supply and non-business credit under Rule 42 and 43 of CGST Rules

Expenses on which GST is payable on reverse charge basis

Section 9(3) of CGST Act requires payment of taxes by the recipient under reverse charge in case of specified goods or services. The auditor should specifically look for such procurements to verify the payment of taxes under reverse charge.

Import of services

The auditor should verify the statement of profit and loss and review for any services which are liable to be paid as part of import of services under reverse charge mechanism and review the reconciliation of the supplies made under RCM/ import of services disclosed in GSTR-3B returns with the financial statements to ensure completeness of the data submitted.

Recoveries from employees and perquisites to employees

Recoveries from employees for the benefits enjoyed by those employees in the nature of subsidised food, sponsorship fees or membership fees paid, mediclaim expenses are liable to GST unless such benefits or facilities is mandated by a statute. The auditor should verify the statement of profit and loss and review for the creation of GST liability on the recoveries made.

Companies Auditor’s Report Order

In addition to the balance sheet and statement of profit and loss account, it has impact on CARO and tax audit reports as summarised below:

Inventory [Clause 3(ii)]

While reporting under this clause, the auditor should ensure that ITC availed on the inventory destroyed, damaged, lost, etc. have been reversed in the books of accounts.

Undisputed statutory dues [Clause 3(vii)(a)]

The default in deposit of undisputed statutory dues such as GST liability and the extent of the arrears of outstanding statutory dues as on the last day of the financial year for a period of more than six months from the date they became payable, shall be included in the CARO.

Disputed Statutory Dues [Clause 3(vii)(b)]

The tax dues not been deposited on account of any dispute shall be indicated in the report along with the amounts involved and the forum where dispute is pending.

GST and Tax Audit Report

Tax audit report has a considerable amount of disclosure to be made in relation to GST. The auditor should ensure proper disclosure of registrations under GST, reconciliation of GST on the various items mentioned as part of inclusive accounting under Income Tax Act, capitalisation of the assets, penalties and demands should be disclosed.