Annexure 17 : Recommendations for Model GST Audit Best Practices and Procedure as per the report of the sub-committee on ToR No. 1 - Model All India GST Audit Manual 2023 [CBIC] - GST

Annexure 17 : Recommendations for Model GST Audit Best Practices and Procedure as per the report of the sub-committee on point No, 1 of the Terms of Reference for the CoO on GST Audit Recommendation 01 Basis for selection of cases for audit Identification of cases for audit is of threefold: Based on risk assessment: Selection of cases on the basis of compliance risks is very essential and integral to GST audit. Currently, the returns data of taxpayers i.e., GSTR-3Bs are being considered by various States and the Centre. The guiding principle of audit envisages selection of taxpayers for audit based on certain risk parameters. The Commissioner/Appropriate authority by a general or specific order may select any registered person for audit of his books of accounts for a specific period. on certain parameters as he may deem fit. The Commissioner/ Appropriate Authority may fix the criteria of selection basis This turnover limit while fixing the selection criteria may vary from State to State, in different Zonal levels of a particular State and also for service sector when compared to that for goods. All risk parameters are required to be identified and all probable aspects need to be considered to identify non- compliance and non-payment / short payment of tax, interest, late fee, penalty etc. availment of credit and claims for refund and evasion of tax. The taxpayers may be classified into three segments, Large/Medium/Small based on the total turnover. The States can also be divided into three Categories, viz. I II and III based on the taxpayer s spread across various segments. By and large, the categorization may be uniform across the States subject to the availability of more risky taxpayers in a particular category. Example for categorization is given below. This may vary from State to State and in the Centre. An illustrative scheme of classification is discussed hereinbelow: Large - taxpayers with turnover more than Rs. 40 Crore for category 1 Commissionerates Rs. 30 Crores for category 2 Commissionerates and Rs. 20 crores for category 3 Commissionerates. Medium taxpayers with turnover Rs.10 Crores to Rs.40 Crores for category 1 Commissionerates Rs. 7.5 Crores to Rs. 30 Crores for category 2 Commissionerates and Rs. 5 Crores to Rs.20 crores for category 3 Commissionerates. Small taxpayers with turnover below Rs. 10 Crores for category 1 Commissionerates, below Rs. 7.5 Crores for category 2 Commissionerates and below Rs. 5 Crores for category 3 Commissionerates. The above schema is only indicative and should be adapted keeping in view the risk profiles, revenue involved and the resources available to conduct the audit. The turnover includes total taxable, exempt and zero rated supplies of goods and services but excludes non-GST supplies during a financial year. To select the taxpayers for audit in an effective manner, secondary data source (such as VAT/Service Tax/Central Excise/Custom data, Income Tax data etc.) may be considered along with the primary data source (i.e. GST data). The weightage of each parameter may vary depending upon its importance in selection of taxpayers for audit. Based on the average weight, considering all the parameters, a final score may be calculated on the basis of which the final selection may be done. The final selection of taxpayers to be audited may be done based on the descending order of the final score thus calculated. In case, more than one RTP has the same final score, the parameter of declared liability will then be considered and a taxpayer with more declared liability will be selected first. A Selection Committee may be constituted to identify various risk parameters for selection for audit considering all the aspects where there are chances of lack of compliance of the Act resulting in short payment of tax etc. such as: Entity level risks (e.g. Turnover, Tax, ITC, Refund, Commodity such as Iron Steel, Paints Chemicals, Textiles, Cement, Medicine, Footwear, Branded food grain, Automobiles etc., Service: Works contract, Real Estate, Information Technology, Consultancy service, Manpower service, Hospitality, Travel Tourism, Leasing etc.). Risks associated with compliance behaviour (e.g. late filing of return, non- submission of Form GSTR-1 , Form GSTR-3B , Form GSTR-9 Form GSTR- 9C ). Certain representative selection criteria that can be considered for risk assessment are given below:- 1. Ratio of Taxable turnover present year vis- -vis previous year. 2. Ratio of ITC reversed vis- -vis Total ITC availed during the year. 3. Ratio of total ITC availed in this year vis- -vis previous year. Ratio of IGST payment at the time of import vis- -vis Total 4. ITC availed ({Col.2 of table 4(A) (1) (2) of GSTR-3B } in corresponding period). 5. Ratio of tax paid through ITC to total tax liability 6. Ratio of nil/exempt supplies (Col.2 of Table 3.1(C) of GSTR- 3B) to total turnover (excluding non GST supplies ) (col.2 of Table 3.1(a) + (b) + (c) of GSTR-3B). 7. Ratio of Zero-rated supplies (col.2 of Table 3.1(b) of GSTR-3B ) to total turnover (excluding non-GST supplies) (col.2 of Table 3.1 (a)+(b) + (c) of (GSTR-3B). 8. Ratio of Non-GST supplies to total turnover. {(Col.2 of Table 3.1(e) / (col.2 of Table 3.1 (a) + (b) +(c) of GSTR-3B)}. 9. Ratio of inward supplies (liable to reverse charge) to total turnover [col.2 of Table 3.1(d)}/Col.2 of 3.1 (a)+(b)+(c) of GSTR-3B )]. 10. Ratio of ITC shown in Table 4A(5) of GSTR 3B and ITC as per GSTR- 2A. 11. Ratio of tax paid under reverse charge (as per {Col.3+4+5+6 of Table 3.1(d)} to ITC taken on import of services/other reverse charge (other than import of goods) {Col.2+3+4+5 of Table 4A (2+3) of GSTR 3-B}. 12. Ratio of ISD credit {Col.2+3+4+5 of Table 4A (4) of GSTR-3B) to total ITC taken {Col.2+3+4+5 Table 4A of GSTR-3B}. 13. Ratio of ITC reversed {Col.2+3+4+5 of table 4(B) of GSTR 3B } to ITC taken {Col.2+3+4+5 of table 4(A) of GSTR-3B }. 14. Ratio of zero-rated supply to SEZ as per Table 6(B) of GSTR-1 to total GST turnover. 15. Ratio of deemed exports as per Table 6(C) of GSTR-1 to total GST turnover. 16. Turnover declared in Form GSTR-3B vis- -vis Form GSTR-1. 17. Claim of ITC from cancelled RTPs, aggregate turnover in GST return vis- -vis Turnover disclosed in Income Tax return. 18. Turnover declared by RTP in Form GSTR-3B compared to turnover on which TDS deducted as reflected in Form GSTR-7 submitted by TDS deductor. 19. Turnover declared by RTP in Form GSTR-3B compared to turnover on which TCS collected as reflected in Form GSTR-8 submitted by TCS collector. 20. Refund claimed against purchase from taxpayer having no auto- population of ITC in Form GSTR-2A . 21. Purchases from non-existent RTPs. 22. RTPs having adverse reports in VAT/Service Tax/Central Excise who are operative in GST etc.) 23. In case, the RTP selected for audit has multiple registrations under the same PAN / TAN in the State, it is suggested that all such registration numbers may be selected for audit. 24. 10% of the selection of the taxpayers may be done on a random basis. 25. Relating to compliance behaviour-based risk (e.g. late filer of return) RTPs defaulting in filing GSTR-3B for 3 months will be marked 5, those defaulting for 2 months will be marked 3.33 those defaulting by 1 month will be marked 1.67. 26. Taxpayers claiming ITC of more than the amount from eligible ITC. 27. Taxpayers who have filed all returns and tax adjusted from cash ledger is less than an amount. 28. Taxpayers who have filed all returns and difference in tax liability in GSTR-1 GSTR-3b by n amount. 29. Composition tax payers having turnover more than 1.25 crore. 30. Newly registered taxpayers with high turnover more than an amount. 31. Newly registered taxpayers with turnover exceeding a pre-decided threshold and cash payout percentage below a certain threshold 32. Taxpayers with (a) multiple use of pan (b) multiple use of email id (c) multiple use of mobile no. 33. Refund amount is greater than the amount. 34. Shipping bill/export proof submitted by taxable person not verified from Ice gate. 35. Turnover declared in GSTR 3b must be compared with TDS/TCS deducted (it should be more than 100 times than TCS deducted and more than 50 times than TDS deducted). 36. Taxable persons dealing in evasion-prone commodities/services as per HSN/SAC code. 37. High spike by n amount in e-way bill value in n months. 38. Ratio of Output Tax paid in cash to the total turnover in the current year is n percentage higher to the ratio of the same in the previous year. 39. Ratio of Output Tax paid to Net Profit in the current year is n percent higher to the ratio of the same in the previous year. 40. Taxable Person whose Turnover is less than n percentage of turnover from previous year. 41. Ratio of expenses to turnover in the current year is greater than by n percent than the ratio of the same in the previous year. 42. Inward supply from bogus dealers. 43. Zero cash set-off against tax liability. 44. Inward supply received but no outward supply. 45. GSTR-1 submitted but GSTR-3B not submitted. 46. Manufactures whose cash set-off is less than 5 per cent. 47. Three or more cases apprehended by mobile squad. 48. Cancellation of E-way bill is more than 2 per cent. Based on Local Risk parameters/wild card entry: Several State GST Departments have mobile squads for checking the correctness of the documents carried in support of the goods transported in the state and it is an integral part of their enforcement activity to supplement their efforts to prevent and check tax evasion. It is the experience of the States that tax is evaded by businesses by transporting goods without documents or with fake/ invalid documents or by recycling of old documents that were not checked earlier, enabling them not to record and declare the corresponding transactions in their books. Apart from the seller and purchaser, unscrupulous transporters also form part of the network indulging in tax evasion. Based on the inputs gathered from mobile squad vigilance, risk parameters can be identified by the Officers of Anti-evasion/Enforcement wings and the corresponding tax payers may be selected for audit based on the above risk assessment. Percentage of taxpayers that may be selected on the basis of the above risk assessment may be left to the decision of the State GST Departments. Random selection: Tax payers (roughly around 10%) may also be selected randomly on the basis of local intelligence networks which otherwise may not be covered strictly by the overall risk parameter selection. The discretion for selecting cases may rest with the appropriate authority of a Zone or a Division. Recommendation 02: Scope of audit Whether restricted to only the flagged risk parameters or all business transactions of the auditee. Risk parameters are meant for determining the total risk score based on which registered persons would be selected for audit. When, once a registered person is selected, the audit should be carried out as per definition of Audit (under Section 2(13) of the CGST Act / KGST Act). Thus, audit would not be restricted only to the flagged risk parameters and audit should be taken up based on desk review conducted by the audit team and audit plan prepared accordingly. An efficient and effective Audit system in all aspects based on a checklist will increase voluntary compliance. A focused audit increases taxpayers cooperation, shortens audit and improves audit yield. Recommendation 03: Norms for audit and co-ordination among audit officers. Audit of all or some of the other related registered persons in the value chain based on audit findings in selected primary cases. Norms for such action i.e., whether to have the same audit officer for all cases, approach for coordination among different audit officers, oversight etc. State audit jurisdictions do not have an annual scheduling of Audit for a financial year. Such elasticity in planning Audit of related registered persons in the value chain based on audit findings in selected primary cases is possible. Whereas, in the CGST audit manual, the annual Schedule for audits for a financial year would be drawn at the beginning of the year and there is a need to adhere to such schedule, taking up the audits of other registered persons in the value chain based on audit findings, may not be possible during the same year. Furthermore, taking up audit of other persons in the value chain may not always yield good results unless they are part of a fake credit chain. However, if the risk scores of such registered persons in the value chain are identified to be higher, the same can be taken up for audit during subsequent audit years. Whether to have the same Audit Officer for all such cases including monitoring the same may be left to the discretion of the divisional heads or any officer authorized by the State Commissioner. Recommendation 04: Open ended assignment for Audit. Audit of other years of the same auditee based on audit findings in selected cases. In general, when a registered person is selected for audit based on risk scores arrived at for a financial year or multiples thereof, the audit is to be taken up for the entire period for which previous audit (GST audit) is not covered. It need not be restricted to a particular financial year, a complete audit by clubbing more than one financial year is to be done. In other words, a taxpayer may be subject to Audit from the un-audited period till the last return filed up to the date of visit. The Parameters to analyze data base can be ascertained by adopting the following method as Recommendation 05 - Authorization for Audit. Authorization of the officers for selection of cases for audit and the process for final approval of a case for audit i.e., administrative system of audit in a State including the assignment issuing authority. Commissioner/Additional Commissioners in-charge of Audit work or any other wing entrusted with the task of monitoring audit mechanism in a State may finalize a list of 70% of the taxpayers to be taken up for audit by each Joint Commissioner (Divisional Head), based on risk scores arrived at State level. Joint Commissioner (Divisional Head), may be authorized to select 20% of the tax payers for audit based on local risk parameters and 10% of the tax payers at random based on local intelligence network. However, all such selections must be ratified by the Commissioner/Pr. Commissioner head of Audit before the audit is authorised. The issue of overall number of cases that could be taken up for audit is dealt separately. These numbers may be changed from one year to the next based on audit detections and recoveries in each of these categories. Note: The practice followed in CGST Audit is as under:- The registered persons are selected on the basis of assessment of the risk to revenue. This process, which is an essential feature of audit selection, is known as Risk Assessment . It involves ranking of the registered persons according to a quantitative indicator of risk known as a risk parameter . Risk Assessment Programme jointly run by DG (Audit) DGARM. Lists of category wise taxpayers provided by DGARM. Allocation of units as per Large, Medium and Small amongst the audit teams. Allot to the Audit teams 70% of the taxpayers out of the 80% list of Taxpayers provided by DGARM. Allot 10 % of taxpayers out of the Random list of Taxpayers amongst the Audit Teams. The remaining 20% of the taxpayers to be audited should be selected by the Audit Commissionerate based on local risk factors, after obtaining approval from the jurisdictional Chief Commissioner. Recommendation 06 -Basis/criteria for allocation of cases for audit- cadre, turnover Taxable turnover-wise allocation of cases or pecuniary jurisdiction for audit may be considered based on the corresponding State s GST department s administrative architecture. Audit officers in many States are in the cadres of Deputy Commissioner, Assistant Commissioner and Commercial/State Tax Officer, while it may not be so in others. In keeping with the hierarchical structure in a State, taxpayers for audit may be assigned to the officers. Allocation of cases for audit may be based on the turnover as may be decided by the appropriate authority. Recommendation 07 Numerical targets for Audit Fixing numerical targets, both upper and lower limits, on the number of cases that are to be audited in a year by the State For conduct of audits in a State, targets may be fixed for every year depending upon the number of officers allocated/available for conduct of audits. The calculation of target can be made by taking into account the total number of working days in a year, the norms for number of days required to complete the audit of different years and the working strength of the audit officers. Recommendation 08: Time limit for completion of Audit Time limit for completion of audit of various sectors: large, medium, small etc., (lesser than that mandated by the Act). Section 65 (4) of the CGST Act / SGST Act specifies that the audit initiated shall be completed within three months from the date of Commencement. The word commencement of audit as explained under the said subsection is the date on which the records and other documents called for by the authorities are made available by registered person or date of actual institution of audit whichever is earlier. However, it would be reasonable to fix a lesser duration for Audit depending upon the volume and complexity so that the limited audit resources are utilised optimally. Reliance on documents already available in the system and devising a simpler procedure for audit for certain classes of taxpayers, such as small taxpayers would also enable earlier completion of audit. Recommendation 09: Feedback mechanism Feedback mechanism and its functioning in selection of cases for audit, in the process and conduct of audit and in the acceptance of final audit report. Feedback mechanism under the GST Audit is an important component of the GST eco-system itself; feedback obtained from the taxpayer fraternity in regard to the strength and weakness of the audit system itself will go a long way in not only fixing the rough edges, but also establishing a vibrant and robust audit system. Feedback exercise should be a regular feature in the GST administrative calendar in each and every State. Feedback can be through various modes of taxpayer engagement, such as Third Party surveys, analysis of social media feeds for keywords related to taxpayer s experience of audit, interactive online and physical sessions with taxpayers through industry chambers and associations etc. Further feedback from each exercise should also be made systematically available to their tax managers in order to enable refinement of targeting practises, increasing audit quality and performance, and to identify areas in which audit capacity can be augmented. Recommendation 10: Audit Monitoring Committee Post-audit process (i) Committee for review of the audit report (ii) recommendation for adjudication and the adjudicating authority. Audit is treated to be completed , when an audit report which may contain objections detected during the audit is finalised by the Department. But before finalising the objections, the initial objections being raised by the audit officer may be taken up for discussion by a Committee of officers in a monthly/periodical meeting (which could be called Audit Monitoring Committee ) with regard to the sustainability/correctness or otherwise in respect of each objection. This system of AMC that may be instituted in each State department will probably reduce unproductive disputes and also standardise practices. The Audit Monitoring Committee may consist of the Joint Commissioner (Divisional Head), Deputy Commissioner, Assistant Commissioner and GST Officer (Commercial Tax Officer, Sales Tax Officer as the case may be). However, the constitution of such a committee may be decided by the State Commissioner to suit the administrative architecture in the State. In addition to such a committee, an online exchange of Inter -zonal / Inter- divisional audit insights / findings may also be a useful knowledge sharing platform. Any zone or a division which has come across interesting audit findings may make use of the said platform and update it once in fifteen days (or such frequency that can be decided by State gst administration). such information sharing would be important for identifying productive areas of audit, documents and records required for supporting a particular line of audit inquiry. it would also help to build capacity by enabling exchange of knowledge. Adjudication authority can be established as per the administrative arrangement of each state/centre. It should be ensured that the show cause notice for the recovery of tax as decided by the audit monitoring committee may, preferably, be raised within a period of one month of the meeting. the adjudication of such show cause notices maybe completed within a period of six months. Principles of natural justice should be followed in the adjudication proceedings. Recommendation 11: Post-adjudication proceedings follow- up Mechanism for post-adjudication proceedings and follow-up of additional demand created, ascertaining the correctness of the order for its sustainability, putting up proper defence in appeal, etc. Section 108 of the CGST Act / SGST Act empowers a revisional authority to take up review of any decision taken by his subordinate officers. a Revision or Review wing under the supervisory control of jurisdictional Chief Commissioner (CGST) or the State Commissioner (SGST) should take up review of all adjudication orders so as to ensure there is no loss of revenue on account of some incorrect interpretations/orders. existing Revisional Authorities in the State Administration can also be entrusted with the task of review of adjudication orders. review should end in full, partial or non- acceptance of the adjudication orders, with appropriate subsequent action in each of the three events. Recommendation 12: A Central repository of audit outcomes CENTRAL REPOSITORY OF AUDIT OUTCOMES: At the Central Government level, the Director General-Audit is preparing a monthly/quarterly audit bulletin containing important audit objections raised during each quarter. The same may be considered for circulation amongst the audit officers of all the States too. The State of Karnataka maintains a compilation of interesting audit paras that are discussed in the IDEA-i Meet platform (Inter Divisional Exchange of Audit insights ) held once in a fortnight. Similarly, each State may have its own mechanism of maintaining and circulating Audit outcomes. gst administrations may consider creation of a joint knowledge sharing platform that would enable exchange of knowledge, audit findings and other relevant information. such a repository would go a long way in driving convergence of taxpayer experience of audit under different GST administrations. Recommendation 13: Coordination between State an Central audit officers Coordination between State and Central audit officers - in similar cases, similar businesses, exchange of approaches, findings, outcome in appeals etc. A coordination cell may be established by the GST Council consisting of senior officers from the Centre and the State in order to have collaborative and cohesive strategies for audit and also to share various initiatives developed by the Centre and the State and this will certainly usher in regular sharing of best practices. Recommendation 14: E-Audit Module Role of technology in automating audit process Connecting electronically every audit procedure seamlessly - the E-audit modules developed by States, or those in the pipeline, to introduce technology in the audit process and its interface with the audit officer and the auditee. It is recommended that the e-audit module should attempt to capture as many functions as possible and senior administration should be able to extract all mis reports related to audits. From the feedback submitted by various States, it is found that some of the States are preparing software requirement specification for Audit backend, based on the workflow system of Audit. Several states are also using the audit workflow created by GSTN. Some States and CGST already have functional audit modules. The functionalities that may be designed by the States should cover the entire Audit processes such as Selection, Planning, and actual conduct of Audit, Reporting, Payment, Closure and Adjudication. Capturing the data electronically at each stage of audit will probably enhance the performance of the Audit team and create intellectual and professional atmosphere. 2. The Department of Commercial Taxes, Karnataka has developed an automated online Audit module called E-Shodhane Online Audit module in collaboration with NIC, Bengaluru, i.e.,www.gst.kar.nic.in/gstprime whereby registered persons are selected for scrutiny based on risk evaluation method and the audit officers seek assignment for audit electronically. It s an end-to- end digital back office application which covers the entire audit process starting from the selection of cases to the finalisation of audit report and adjudication process with the exception of on-premises audits physically carried out by designated Audit teams. To be more precise, the Audit module is not 100% seamlessly connected electronically. Certain audit processes are to be carried out by the audit officers physically and results of such audit processes are to be uploaded onto the system. 3. The GSTN has also developed the GST Audit Module which is an end- to-end digital back-office application that helps in carrying out the entire GST audit process electronically (with the exception of on-premises audits physically carried out by the designated Audit teams). Right from selection of taxpayers for auditing and assigning the same to various Audit Teams to serving the Final Audit report and/or SCN to the Taxpayer, every Audit proceeding is seamlessly connected electronically. Some of the Model-II States are found to have adopted the GSTN Audit Module. GST Audit Modules developed by GSTN and the State of Karnataka broadly have the same features with minor tweaks as the GST Audit process is partly dictated by the GST Act itself. Therefore, E-audit Modules that may be developed by States may have these common audit tools with tweaks that conform to their administrative structure. AUDIT MIS APP MIS APP is a tool which focuses on the need for sound information for decision making and which aims to find the relationship between an audit officer and their audit practice. MIS and Audit processes are targeted at satisfying the information required for appraisal of performance of Audit Divisions on a real time basis. MIS is a system that enables the Audit Divisional head and the Head Office or Audit Commissionerate to have access to dependable information for planning and decision making. This information could be either qualitative or quantitative or both depending on the method employed in the process. An MIS APP Tool on the lines mentioned herein may be developed exclusively for audit officers to upload the day- to-day activities with respect to the findings of the Audit, Audit observations made, demand created, collected and the recovery made thereof. Benefits for MIS: - MIS plays the role of information generation, communication, decision making, management, Administration, and operation of an organisation. The benefits accruable from an effective MIS could be reiterated thus: 1) The MIS App fulfils the informational needs of an Individual or a group of individuals. 2) MIS satisfies a variety of systems such as query system, analysis system, modelling system decision support system. The MIS helps in strategic planning, management control and operational control. 3) MIS helps in target setting like Audit disposals, recovery and Refund. The MIS assists the Head Office or Audit Commissionerate in goal setting, strategic planning , evolving audit plans and implementation of the same.