GST Annual Return And Audit: Complexities Galore
In less than 30 days from now, over 1.15 crore taxpayers will have to file the Goods and Services annual return and audit forms. Made available by the government in September this year, the forms require businesses to not only consolidate information that they have been filing in monthly returns but also reconcile it. Both the forms are fraught with complexities and given that many companies have only now engaged auditors, it would be near impossible to meet the Dec. 31 deadline, experts told BloombergQuint.
GST Annual Return: Surprises
The annual return Form 9 is essentially consolidation of information that taxpayers have been filing via summary return Form 3B and outward supplies Form GSTR 1. It requires consolidation of outward and inward supplies, input tax credit, tax paid, GST demands and refunds.
There are two key areas of concerns in Form 9: requirement of HSN Code for input side and bifurcation of input tax credit or ITC.
The HSN Code Problem: HSN codes are prescribed by the government to classify goods and services. So far, a buyer while filing Form 3B and GSTR 1 didn’t have to mention the HSN codes of the inputs—i.e. goods bought from a vendor. But the annual return form requires them to do this classification. This is new information altogether that needs to be given and companies’ ERP systems are not geared to give input classifications, Jigar Doshi, an indirect tax partner at SKP Business Consulting, pointed out.
Ritesh Kanodia, a partner at Dhruva Advisors questioned the need for this data.
The liability for a taxpayer arises only on account of HSN of goods and services he sells and their rate of tax. The HSN of the vendor is not his liability. He merely takes credit for what he has paid for the inputs. He is not going to get into the debate of what is the HSN of the inputs, the rate of tax on them, etc.Ritesh Kanodia, Partner, Dhruva Advisors
So there is no need for him to get into the HSN for inputs and many companies won’t even have this data, he said.
ITC Bifurcation Problem: The annual return requires a three-way split of ITC availed into inputs, input services, and capital goods credits, Doshi said. But in the reporting so far, there was no concept of ITC bifurcation, Kanodia added. He explained the issue by way of an illustration—let’s say, we purchase some machinery. That is a fixed asset. So the credit has been taken as capital goods. If I purchase some inputs, credit has been taken as that and similarly for input services. What has been reported in Form 3B so far is the total figure.
This data is not appearing anywhere else. Credit is available to me, I can consume that credit. Capital goods—I can understand—because there are certain rules around capital goods. But why do I need this bifurcation for input and input service?Ritesh Kanodia, Partner, Dhruva Advisors
That's another layer of complication which has been added in the annual return form, he said.
GST Audit: Complexities
The complexities in the annual return form pale in comparison to what the audit process entails, both the experts pointed out.
Divided in two parts, the GST Audit Form 9C needs to be filed by a taxpayer who has an aggregate annual turnover exceeding Rs 2 crore. It requires companies to reconcile turnover declared in the financial statement and annual return, tax liability and tax paid, input tax credit availed and reported. Any liability arising out of non-reconciliation also needs to be specified.
This form is trying to dissect the entire financial statement—P&L and balance sheet— and compare the numbers on the outward-inward side and the tax-paid side with the annual return numbers which have been disclosed, Doshi said.
The objective is to assess whether you’ve paid GST on transactions recorded in the books of accounts and, if not, then the explanation for it needs to be provided, Kanodia said. “Similarly, on the credit side, whatever credits you have taken, there is entry in the books of accounts. That needs to be reconciled with the annual return. So, reconciling rupee to rupee with the books of account is the objective of this exercise,” he added.
And the complexities are many:
Unclear Time Period: The filing threshold is based on gross turnover in a financial year, Kanodia said, but GST came in July. “You have lot of adjustments which happen in any financial accounting—for instance, unbilled revenue. Do I consider beginning of financial year or beginning of July? There are lot of adjustments which need to be seen,” he added.
State-Wise Audit: Doshi explained that GST Identification Number is the basis for the audit. If a taxpayer has branches in five states and each has a separate GSTIN, then five audits need to be done. This would require GSTIN-level bifurcation of audited financial statements which most companies do not maintain, he said.
Reconciliation Issues: GSTR 1, which is filed at the state level, will need to be reconciled with the income and sales ledger at the company P&L level which is not available state-wise and it’s likely that the consolidated figure of different states’ GSTR 1 may not match with the annual P&L, Kanodia explained. This could be due to accrual entries, IND-AS, out-of-scope GST supplies, etc, he added.
This may entail a line-item level analysis to find out unreconciled line items and ascertain reasons of such mismatch, which is time consuming. Availability of data in the right format is critical to carry out such reconciliations.Ritesh Kanodia, Partner, Dhruva Advisors
Watch the video for insights on what businesses should do in the next 30 days to avoid missing the Dec. 31 deadline.