The Directorate General of Audit - Indirect Taxes (the Directorate General) has chalked out a comprehensive audit plan for audits to be conducted by the departmental officers based on the â€Ürisk scoresâ€" of taxpayers. The â€Ürisk scoresâ€" will be generated based on a â€ÜRisk Assessment Programâ€" developed by the Directorate General. Key features of the audit plan have been highlighted in this alert.
Annual turnover and risk flag indicators

The taxpayers would be first given â€Ürisk scoresâ€" based on various parameters. Later, they will be segregated in three categories –

  1. Large (Annual turnover above INR 400 million),
  2. Medium (Annual turnover between 100/75 million to 400/300 million) and
  3. Small (Annual turnover below 100/75 million).

The turnover for this purpose will include taxable, exempt, and zero-rated supplies. The final list of taxpayers would include â€Ürisk flag indicatorsâ€" based on which the â€Ürisk scoresâ€" have been derived.
A Large number of taxpayers to be audited

Each audit commissionerate will be provided with a list of 80% taxpayers out of which 70% of the taxpayers have to be audited. Another 10% of taxpayers have to be selected randomly for audit by the audit commissionerates. Another 20% of the taxpayers have to be selected by the audit commissionerates based on local risk factors, after obtaining approval from jurisdictional Chief Commissioners. Examples of local risk parameters that will be considered are as follows:

  • Delay in providing documents sought by the audit team
  • Quantum of turnover/profits/loss/refunds/exemptions
  • Quantum of mistakes detected by the department
  • Involvement in legal disputes
  • Inconsistency in filing returns
  • High-risk sectors (e.g., chemicals, retail, apartment rentals, hotels, spare part for vehicles, etc.)
  • The taxpayer involved in the supply of goods on which GST rate has been reduced (examining compliance with anti-profiteering)
  • Taxpayer not audited in the pre-GST era for 4-5 years etc.

The number of businesses to be audited by the department in key jurisdictions have been encapsulated in the table below:

Commissionerate No of audits
Large Medium Small
Mumbai 1296 1350 1494
Delhi 864 900 996
Bengaluru 396 450 498

Audit procedure

The notice of audit is to be issued by the proper officer in FORM GST ADT-01. On conclusion of audit, the proper officer has to inform his findings in FORM GST ADT-02. The said forms would have to be issued manually by the proper officer till they become available on the GST common portal.
The audit of the large and medium taxpayers will be conducted at the premises of such taxpayers. The audit of small taxpayers will also be premise-based if any inherent weakness is identified in the internal control systems.
The procedure for conducting the audit would be based on the GST Audit Manual issued by the Directorate General.

SKP's Comments

The preparation of a detailed plan of departmental audit, even before the annual return (GSTR-9) and audit (GSTR-9C) are filed for 2017-18, is an indication of the departmentâ€"s proactive approach towards conducting an audit of taxpayers. The financial year 2017-18, being the first year of implementation of GST, is expected that businesses may have made some inadvertent errors at the time of adopting positions or filing returns. Businesses should ensure that they identify and rectify these errors at the time of filing GSTR-9 to avoid any demand for tax, interest, and penalty at the time of the departmental audit.

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