India's Goods and Services Tax (GST) framework includes a stringent audit mechanism designed to verify tax compliance and prevent evasion. A crucial element of this system is the internal GST audit, which systematically reviews GST documentation and returns. This process helps identify any inconsistencies, prevents tax avoidance, and ensures compliance with GST rules. A key task during a GST internal audit involves reconciling financial records with GST returns to uncover discrepancies and mitigate non-compliance risks. Given that GST authorities are increasingly issuing show-cause notices for non-compliance, conducting proactive internal audits is essential. Performing an internal audit of GST records allows businesses to assess the effectiveness of their financial controls, pinpoint major risk areas, and implement corrective actions. This article provides a detailed checklist for internally reviewing GST records to detect errors and data gaps.

Understanding GST Returns and Their Audit Role

GST returns are regular submissions containing information about a taxpayer's sales, purchases, GST collected, and Input Tax Credit (ITC) claimed. Essential GST returns include GSTR-1 for outward supplies, GSTR-3B as a summary return, and GSTR-2B for auto-generated inward supply details derived from supplier filings. These documents serve as the foundation for auditors to confirm the precision and thoroughness of tax declarations. During an internal audit, the auditor carefully examines GST returns to ensure that declared turnover, paid taxes, and claimed ITCs are precise and adhere to GST legislation. Any inconsistencies between GSTR-1 and GSTR-3B, or between GSTR-3B and GSTR-2B, may signal errors, oversights, or potential tax evasion. Therefore, a comprehensive understanding of these returns' format, data requirements, and interconnections is vital for successful GST audits, helping to reduce the likelihood of penalties and interest charges.

Checklist for Auditing GSTR-1

• Confirm that all sales invoices are precisely reported, including the correct GSTINs of recipients.
• Verify the accurate recording of all sales subject to the reverse charge mechanism (RCM).
• Ensure proper reporting of interstate supplies made to unregistered individuals.
• Review supplies that are zero-rated or considered deemed exports for appropriate categorization.
• Confirm that debit notes, credit notes, and refund vouchers issued to both registered and unregistered dealers are correctly documented.
• Validate any advances received and subsequently adjusted within the tax period.
• Cross-check the HSN-wise summary of outward supplies to ensure compliance with turnover-based reporting thresholds.
• Perform test checks on sample invoices to confirm they contain all mandatory details as per GST invoice regulations.
• Verify the accuracy of place of supply information, where applicable.
• Confirm that all amendments to invoices or returns are promptly and accurately reflected.

Checklist for Auditing GSTR-3B

• Confirm that sales details (taxable, nil-rated, exports, exempted) align with underlying invoices and GSTR-1 data.
• Verify that credit and debit notes are reported in the correct format.
• Check details of advances received and adjusted during the period.
• Review purchases, encompassing taxable, nil-rated, exempted, and import transactions.
• Validate Input Tax Credit (ITC) claims against eligible invoices and GSTR-2B data.
• Ensure accurate reporting of reverse charge supplies.
• Reconcile declared tax liabilities (CGST, SGST, IGST) with actual payments made.
• Compare summary figures against accounting records and ERP system data.
• Identify and investigate any discrepancies or omissions to prevent interest and penalties.

Reconciliation and Error Correction

Reconciliation involves comparing data from GST returns with accounting records to detect any disparities or inaccuracies. Crucial reconciliation tasks include:

1. Comparing GSTR-1 with GSTR-3B: This ensures that itemized sales reported in GSTR-1 correspond to the summarized figures in GSTR-3B.
2. Aligning GSTR-3B with GSTR-2A: This confirms that the Input Tax Credit (ITC) claimed in GSTR-3B matches the purchase details reported by suppliers in GSTR-2A.
3. Matching Books of Accounts with GST Returns: This step verifies that all taxable sales and purchases are accurately recorded and declared.

Any errors discovered during this process, such as missing entries, incorrect tax rates, or mismatched invoice data, must be corrected swiftly through amendments in subsequent returns. This anticipatory measure helps prevent interest charges, penalties, and show-cause notices from GST authorities. Thorough documentation of all reconciliations and corrections is essential for audit preparedness and regulatory adherence.

Benefits of Internal Audits Under GST

• Prompt Error Detection: Internal audits facilitate the early identification of errors and inconsistencies in GST returns, reducing the likelihood of scrutiny from tax authorities.
• Compliance Assurance: These audits confirm adherence to GST laws, regulations, and filing obligations, thereby lowering the risk of penalties and interest.
• Enhanced Financial Controls: The process highlights deficiencies in accounting and invoicing procedures, prompting corrective actions to bolster internal controls.
• Accurate Input Tax Credit Claims: Audits help verify the eligibility and accuracy of ITC claims, preventing excessive claims and associated liabilities.
• Risk Mitigation: They pinpoint potential areas of tax exposure and non-compliance, enabling businesses to implement timely corrective measures.
• Improved Decision-Making: Management receives reliable data on tax liabilities and credits, which supports strategic financial planning.
• Streamlined GSTR Filing: The audit process leads to more efficient and error-free GST return filing, decreasing the chance of receiving notices or being audited by tax authorities.
• Centralized Monitoring: For businesses operating with multiple GSTINs, internal audits offer unified insights into GST compliance across various branches or units.

Comparing GSTR-3B with GSTR-1 and GSTR-2B

Businesses are required to submit a monthly summary return, GSTR-3B, detailing consolidated sales and purchases, and to calculate and remit taxes through self-declaration. Additionally, they must file GSTR-1 either monthly or quarterly, depending on their turnover, providing invoice-level details of outward supplies. The GST portal automatically populates the GSTR-2B return for recipients based on GSTR-1 filings by their suppliers. Issues arise when there are discrepancies between the figures declared in a supplier's GSTR-1 and the corresponding summary amounts in their GSTR-3B. To eliminate data gaps and prevent notices from GST authorities, auditors should incorporate the subsequent checkpoints.

• Reconcile the aggregate summary figures from GSTR-3B with the total of outward invoices reported in GSTR-1 for each specific month.
  • This includes outward supplies (excluding zero-rated, nil-rated, and exempted categories).
  • Zero-rated outward supplies.
  • Nil-rated and exempted outward supplies.
  • Inward supplies for which the recipient is liable to pay GST under the reverse charge mechanism.
• Verify the Input Tax Credit (ITC) amount recorded in GSTR-3B against the details provided in GSTR-2B, as businesses are entitled to final ITC based on GSTR-2B.
• Confirm that credit notes and debit notes are accurately reported in the appropriate sections of GSTR-1.

Interest and Penalties in GST Act

Claiming excessive Input Tax Credit (ITC) can result in a 24% per annum interest charge on the additional tax amount. Auditors should reconcile GSTR-3B with GSTR-2B to prevent businesses from claiming undue ITC. If an excess claim has been made, the company should promptly pay the interest and tax due. Furthermore, if GST authorities detect discrepancies between GSTR-3B and GSTR-1 returns, taxpayers may face interest and penalties. Additional information on penalties and offenses is available here.

Amendment in GSTR-1

Should an auditor identify any data inconsistencies, they should advise management to revise the invoices and summary-level details in GSTR-1. Further information on GSTR-1 amendments can be found here.

Examining Invoice Particulars

Specific regulations govern the information required on GST invoices. Failure to issue an invoice that complies with these rules can incur a penalty of Rs. 25,000. Auditors must sample invoices to confirm that all necessary details are present. If any deviations from the prescribed invoice format are discovered, the auditor should recommend that management amend the invoice to conform to GST invoice guidelines.

Input Tax Credit Reversal Due to 180-Day Non-Payment

Recipients are obligated to remit the invoice amount, including GST, to their suppliers within 180 days from the invoice issuance date. Should payment not be made within this timeframe, the Input Tax Credit (ITC) claimed will be reversed and added back to the output tax liability. The internal auditor needs to compare invoice issue dates with payment dates to identify instances where payments to suppliers exceeded the 180-day limit.

Points to check

• The interval between the invoice date and the payment date should not exceed 180 days.
• The payment amount must cover the total of the invoice amount plus GST. If the payment is less than this total, the Input Tax Credit (ITC) corresponding to the shortfall must be reversed.

Should an auditor observe persistent discrepancies, they should advise management to refine their invoice payment procedures, ensuring all outstanding amounts are settled within 180 days to secure the full Input Tax Credit.

Reviewing e-Way Bills Against Invoices

For goods movements exceeding Rs. 50,000 in value, transporters are required to carry an e-way bill alongside the invoice. In specific situations, an e-way bill might be necessary even if the goods' value is below Rs. 50,000. Comprehensive information regarding e-way bills is available here. Auditors must integrate specific checkpoints into their audit checklist to verify that businesses adhere to e-way bill regulations.

Consequences of Mismatch in e-Way Bill vis-à-vis Invoice

Once an e-way bill is created, it cannot be removed or altered; it can only be cancelled within 24 hours if the goods' movement does not occur or deviates from the e-way bill's details. Transporting goods without an e-way bill can lead to penalties and/or detention of goods by the authorities until the owner pays the correct tax and fine. Further details on penalties can be found here. Auditors must include e-way bill compliance checks in their audit checklists and advise management to implement robust controls before generating e-way bills to prevent financial or legal repercussions.

Points to check

• Confirm that the business issues e-way bills whenever required.
• Ensure that the information on the e-way bill corresponds accurately with the details on the respective sales or purchase invoice.

Moving Goods in Non-Motor Vehicles

Transporting goods via non-motorized vehicles exempts the requirement for an e-way bill. However, some businesses might exploit this by using traditional methods like bullock or horse carts to circumvent e-way bill regulations. Internal auditors should meticulously examine transactions exceeding Rs. 50,000 where an e-way bill was not generated due to non-motorized transport. The auditor's role is to ascertain if non-motor vehicles were genuinely utilized or if this method was employed to bypass the e-way bill system. Any detected irregularities should be reported to help the business avoid substantial penalties.