GST Audit Checklist | Smarter Way To Prepare For GST Departmental Audit

Most of the businesses in India are expanded with more than two branches or sub-units.

These branches may include GST registered depots, GST registered warehouses, workshops, etc.

All these entities have an individual GSTIN for the convenience of smooth GST return filing.

But often, the attention to detail on these smaller units is missing compared to the headquarters. This may be a bad sign for businesses as it may cause massive losses to your company in the longer run.

This article has discussed a few significant risks that businesses face if any or all of their smaller sub-units DO NOT comply with the GST regulatory requirements. We have also shared an internal GST audit checklist that companies should think upon.

GST Audit by department –A challenge for businesses

In a recent survey conducted by a Fintech firm in Pune, it was observed that around 77% of the large businesses in India are ignorant towards the GST regulatory compliance requirements of their smaller business units like depots or sub-units.

This statistics is something to worry about because the compounding effect of such oversights on a business is massive.

This ignorant behavior of the businesses exposes them to GST non-compliance risks, and most of the businesses are unaware of it until they attract a GST audit by department.

Businesses must follow an ‘internal scrutiny model that will help them identify such ambiguous transactions in GST returns that may cause trouble in the future.

Unrealized GST risks hovering over your business

Implications of ignorance of businesses towards minor mismatches in their GST returns are serious when they are aggregated for all the sub-units together.

Most of these mismatches or anomalies are not even identified by the decision-makers of the business because they do not have a robust tool that shall give them a consolidated report of the whole financial year.

Following are the most common but serious threats your business is facing today!

1. Businesses claim ineligible ITC under GST

Let me give you some statistics that express the severity of this challenge:

Recently, the GST department Delhi has busted a massive tax fraud that accounted for up to Rs.178 Crore.

The thing to note in this example is that out of this, Rs.178 Crore, about Rs.13 Crore, accounted for fake claims of Input Tax Credit under GST.

Around 8,000 ITC fraud cases have been reported in the FY 2020-21, whose aggregated sum is as high as Rs.35 000 Crore. And this is just the reported data; there is no account of the cases that were never identified!

From this data, businesses must understand that claiming ineligible ITC is the most severe harm businesses can do to themselves.

To avoid such instances, businesses must scrutinize the Input Tax Credit they are claiming and take utmost care that no ineligible ITC is claimed.

But is this scrutiny possible for the decision-makers of the business for the whole business setup (including headquarters + depots + warehouses)?

The answer is YES!

A super GST audit tool will not only help you to identify such ambiguous entries in your GST returns but will also run a ‘Predictive Analysis’ to give you a consolidated report.

This report will help decision-makers like tax managers, CAs, CFOs to take corrective actions to slow down the impact or avoid it entirely in their upcoming GST returns.

2. Late fees, Interests & penalties – A major headache

For example:

Suppose a business has a pending outward GST liability of Rs.5 00,000 for a given financial year.

The interest that will be charged on this pending liability lies somewhere between 18% to 24%.

In the best-casescenario, this business shall end up paying an interest of at least 18% on Rs.5,00,000.

If the decision-makers of the business had a comprehensive diagnostic report of the GST audit, it’d have been easier for them to nullify this open risk.

But a lack of internal scrutiny or internal GST audit has now taken a toll on your working capital in terms of fine &interest.

3. Underutilization of your Input Tax Credit

As claiming ineligible ITC is bad for your business, underutilization of GST Input Tax Credit can also put your business into losses.

Most of the time, businesses pay GST liabilities in cash as they remain unaware of the accumulated ITC in different depots.

This affects the working capital of a business, and the accumulated ITC sits idle in the sub-units or depots.

Miscommunication between the branches and the head office can also be one of the reasons for this incident.

Businesses need to have a detailed GST Audit report so that the decision-makers will have a clear account of the unutilized Input Tax Credit accumulated in all of their GST registered business units.

4. Lack of a consolidated monthly & annual break-up of GST returns

There’s a void in the auditing tool’ that will help businesses generate a consolidated report of the GST returns.

Due to the lack of a GST Audit tool, businesses miss out on identifying red flags for ambiguous transactions, unutilized ITC, GST returns filing behavior, etc.

With an increase in automation in the taxation industry, it is essential that businesses have a GST Audit tool that will help businesses to generate such a report in a few minutes.

Following are some of the activities that a GST Audit tool shall run:

1. GST compliance check for each and every GST transaction
2. Granular level reporting (Not just on sampling the GST return data)
3. To put complete financial control in the hands of the upper management, including CFOs & tax managers.
4. Inward & outward monetary flow for all the units combined
5. Identify risks at an early stage that may invite a GST audit by the department.
6. Identify all the financial leakages & manage your pending GST liabilities on time.

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To conclude

This short article discusses a few potential risks your business faces if any GST registered units stay non-compliant with the GST laws.

Businesses must be well equipped for any surprise audit under GST by keeping their records clean and complying with GST regulatory requirements.