50K show-cause notices sent to companies, partnership firms after GST audit

It's first comprehensive audit exercise by GST authorities

The goods and services tax (GST) authorities have issued around 50,000 show-cause notices (SCN) to several companies and partnership firms across sectors, including real estate and jewellery, following the findings of an audit exercise they started earlier this financial year.

This is the first comprehensive audit exercise since the inception of the GST regime. It has covered annual GST returns filed by firms in the first two years of the tax regime —2017-18 and 2018-19; in some cases, the audit has even covered 2019-20 and 2020-21. Annual GST returns for 2020-21 were filed in December 2021.

Audit of companies by the GST authorities is in addition to the GST audit that firms do if the turnover of registered taxpayers is Rs 2 crore and above in a financial year.

The show-cause notices have been served after scrutinising several documents during the audit under different Sections of the Central GST (CGST) Act, depending on the issue being flagged during the audit, said a government official privy to the development.

The notices served could be for different reasons, including mis-declaration, tax not paid, short-payment, wrongly availed input-tax credit, incorrect classification of goods/services and export items, mismatch in sale and purchase of items, and so on. Issues and causes differ from companies to companies, another official said.

“Until September, around 20,000 notices had been served to firms where inconsistencies were found. Over 30,000 notices were issued after that. The exercise is ongoing as an audit is done in three months for large businesses; sometimes it goes on for six months if there are complexities. Small businesses audit concludes in a few weeks. Such exercises are significant as they help detect irregularities and fix business issues, and improve returns,” said one of the officials cited above.

The department is learnt to have scrutinised about 100,000 GST registered accounts and accordingly picked them up for auditing. There are 14 million registered GST taxpayers.

“We follow certain key parameters for selecting cases for audit. As we started this year, we tried to cover evasion-prone sectors -- gems and jewellery, real estate, etc. We also consider inputs given by the commissionerate of tier-1, tier-2 cities,” explained a source.

An audit involves visiting the premises of business and inspecting documents, including audited financial statements, income tax returns, filing with the Registrar of Companies (RoC), stock registers, production records, and details of customers and suppliers.

The sources said the assessees have been asked to furnish explanations and reasons for the issues being flagged by the department in 15-30 days. They will also have to submit certain documents sought by the authorities.

After reviewing the reasons and documents, the department issues a final audit report with the observation. These observations typically highlight the matter and raise demand. The matter concludes if the assessee goes with the observation and pays the tax liability. In case of disagreement, the matter goes to litigation.

State GST officials, too, started their audit exercise this July amid a revenue deficit as compensation cess by the central government ended on June 30, an industry source said.

According to experts, multiple GST registrations of a company make the exercise cumbersome.

"With the increasing number of GST audits that businesses are facing across states, it is essential for them to prepare the data, registers and reconciliations, etc, in advance, so that audit queries can be better responded,” said M S Mani, partner, Deloitte. “This is a major challenge, especially for multi-state GST registrants who may be required to deploy significant manpower and efforts, and plan their internal processes so that audit issues can be resolved in a time-bound manner," Mani added.

Under scanner

• The auditing exercise by central GST officials covers annual returns for 2017-18 and 2018-19
• In some cases, returns for 2019-20 and 2020-21 have also been reviewed
• Authorities have scrutinised about 100,000 accounts
• Assessees asked to furnish explanations before the department in 15-30 days
• State GST officials, too, have started audit exercise