Sec 65 – Audit by tax authorities

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Sec 65 – Audit by tax authorities 2017-04-14T10:49:59+00:00

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  • Ashish BadalaCA Ashish Badala
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    (1) The Commissioner or any officer authorised by him, by way of a general or a specific order, may undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed.
    (2) The officers referred to in sub-section (1) may conduct audit at the place of business of the registered person or in their office.
    (3) The registered person shall be informed by way of a notice not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.
    (4) The audit under sub-section (1) shall be completed within a period of three months from the date of commencement of the audit:
    Provided that where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within three months, he may, for the reasons to be recorded in writing, extend the period by a further period not exceeding six months.
    Explanation.–For the purposes of this sub-section, the expression “commencement of audit” shall mean the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later.
    (5) During the course of audit, the authorised officer may require the registered person,-

    (i) to afford him the necessary facility to verify the books of account or other documents as he may require;
    (ii) to furnish such information as he may require and render assistance for timely completion of the audit.
    (6) On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings.
    (7) Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, the proper officer may initiate action under section 73 or section 74.

    Priya MadrechaPriya Madrecha
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    65.1  Introduction
    (a) Audit of records of tax payers is the bed rock for the proper functioning of a selfassessment based tax system. This provision provides for audit of the business transactions of any registered person. It is an important tool in the tax administration to ensure compliance of law and prevent revenue leakage.
    65.2  Analysis
    (a)    Section 65 authorizes conduct of audit by the proper officer or the Commissioner of the transactions of the registered persons only. The Commissioner may issue a general order or a specific order, to authorize officers to conduct such audit. As per the draft Assessment and Audit Rules, the period of audit under sub-section (1) of Section 65 shall be a financial year or multiples thereof. The frequency and manner for conducting such audit are yet to be prescribed. It is important to note that the said order of Commissioner must be specific to the auditee and the tax period selected for audit. Absence, error and deficiency in such orders aborts any preparatory step taken by the audit officer and preparation to respond taken by the auditee.
    (b)    The audit will be conducted at the place of business of the registered person or office of tax authorities. Intimation of audit is to be issued to the taxable person at least 15 days in advance in Form GST ADT-01 and the audit is to be completed within 3 months from the date of commencement of audit, which may be extended by the Commissioner, where required, by a further period not exceeding 6 months.
    The Commissioner needs to record reasons in writing for grant of any such extension.
    (c)    During the course of audit, the authorized officer may require the registered person to afford him the necessary facility to verify the books of account and also to furnish the required information and render assistance for timely completion of the audit. As per the draft Assessment and Audit Rules, the proper officer shall verify the documents on the basis of which the accounts are maintained and the periodical returns/statements are furnished.
    (d)    The proper officer while conducting the audit is authorized to:
    a.    Verify books & records
    b.    Returns & statements
    c.    Correctness of turnover, exemptions & deductions
    d.    Rate of tax applicable in respect of supply of goods and/or services
    e.    The input tax credit claimed/availed/unutilized and refund claimed.
    (e)    The provisions of section 65(5) casts an obligation on the registered person to afford necessary facility for verification of books and records, render assistance for timely completion of audit and furnish information and statements.
    (f)    Some of the best practices to be adopted for GST audit among others could be:
    The evaluation of the internal control viz a viz GST would indicate the area to be focused. This could be done by verifying:
    (a)    The Statutory Audit report which has specific disclosure needs in regard to maintenance of record, stock and fixed assets.
    (b)    The Information System Audit report and the internal audit report.
    (c)    Internal Control questionnaire designed for GST compliance.
    (ii)    The use of generalised audit software to aid the GST audit would ensure modern practice of risk based audit are adopted.
    (iii)    The reconciliation of the books of account or reports from the ERP’s to the return is imperative.
    (iv)    The review of the gross trial balance for detecting any incomes being set off with expenses.
    (v)    Review of purchases/expenses to examine applicability of reverse charge applicable to goods/services. The foreign exchange outgo reconciliation would also be necessary for identifying the liability of import of services.
    (vi)    Quantitative reconciliation of stock transfer within the State or for supplies to job workers under exemption.
    (vii)    Ratio analysis could provide vital clues on areas of non-compliance.
    (g)    On audit completion, information is required to be Provided to the registered person including the findings during the audit in FORM GST ADT-02 within thirty days of conclusion of the audit. In cases where tax liability is identified during the audit or input tax credit wrongly availed or utilized by the auditee, the procedure laid down under Section 73 or 74 is to be followed. Audit cannot conclude automatically resulting in a demand. Independent application of mind is necessary for a valid demand to be raised.
    65.3 Comparative Review
    1.    The Central Excise law empowers the Central Government to make provision for verification of records of assessee. However, the GST Act itself specifically provides for audit of the registered person. In EA 2000, the Director General of Audit supervises the audit functions. Separate Audit Commissionerate have been constituted with effect from 15.10.2014 which will plan, delegate and administer the audit. The audit of the assessee is carried out through visits by ‘audit groups’ which consist of Superintendents and Inspectors.
    2.    The audit groups shall prepare the assessee master file, collect the relevant information and documents. Desk review shall be done before forming the audit plan. As planned, audit will be conducted and corrections and improvements shall be suggested to the assessee.
    3.    The draft audit report would be discussed and communicated to the assessee and with the details of spot recoveries and willingness of the assessee to accept the demand etc. the same shall be placed before monitoring committee. If the assessee does not accept the audit para, adjudication process will be initiated by the Jurisdictional GST Officer.
    65.4    Related Provisions
    Section     Description
    Section 73     Determination of tax not paid, short paid, erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any wilful misstatement or suppression of facts
    Section 67     Determination of tax not paid, short paid, erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any wilful misstatement or suppression of facts
    65.5    FAQ
    Q1.     Whether audit is mandatory in case of every registered person?
    Ans. No, it is not mandatory. It will be applicable only in cases where the appropriate authorities authorize the same by issue of general / specific orders.
    Q2.     Whether any prior intimation is required before conducting the audit?
    Ans. Yes, prior intimation is required and the taxable person should be informed at least 15 days prior to conduct of audit in FORM GST ADT-01.
    Q3.     What is the period within which the audit is to be completed?
    Ans. The audit is required to be completed within 3 months from the date of commencement of audit or within the extended period of 6 months in cases where the Commissioner is satisfied for reasons to be recorded in writing that the audit cannot be completed in 3 months.
    Q4.     What is meant by commencement of audit?
    Ans. It means the date on which the records and documents requisitioned by the tax authorities are made available by the registered person or the actual institution of audit at the place of business whichever is later
    Q5.     What are the obligations of the taxable person when he receives the notice of audit?
    Ans. The taxable person should afford necessary facility / information / assistance / documents for smooth conduct of audit and its timely completion.
    Q6.     What would be the action by the proper officer upon conclusion of the audit?
    Ans. The proper office must within 30 days inform the registered person (i.e. the auditee) about his findings, reasons for findings and his rights and obligations in respect of such findings.
    65.6 Case Study 1:
    A notice for audit was served to M/s. ABC Ltd, on 20.02.2020. Required information was given by M/s. ABC Ltd, on 25.05.2020. The audit officers visited the place of business on 26.06.2020. What is the last date within which the audit is to be completed?
    It will be 3 months from 25.05.2020, viz., 24.08.2020 or within an extended period of 6 months. The extended period would be 24.02.2021.

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