GST audit checklist: Ensuring compliance and mitigating risks

With never ending changes in the law in the GST regime, digitalisation of compliances and the pace with which the international trade is growing, make it essential for businesses to have a comprehensive strategy to avoid indirect tax exposures and keep their indirect tax processes up-to-date.

GST due diligence basically means to investigate and assess the impact of GST on a company's operations from a financial, operational, business, and strategic standpoint. The due diligence also reviews the contingencies and aggressive tax positions, identification of risk areas, tax planning and opportunities. GST due diligence facilitates consistent diagnosis of GST risks and opportunities across multiple jurisdictions. It also helps in assessing unutilised tax opportunities and identifying the company historical tax risks.

GST law in India is complex and to an extent ambiguous, and we have seen that businesses have suffered due to lapses made in assessment and other compliances. Hence indirect tax due diligence is definitely considered as a value-added effort by the industry.

In terms of the GST laws, every taxpayer is required to maintain books of accounts, issue proper invoices, and other records apart from the monthly, quarterly or annual compliances. The review under a due diligence helps in identifying lapses in compliances obligated by the law and also revisit the stand taken by the company on various aspects such as taxability, availability of input tax credit, valuation, etc.

The first step while conducting a due diligence is to understand the company’s operations and check the accounting records in view of the obligations under the GST law. The GST diligence helps companies to review their returns and ensure that the business is GST compliant. Further invoices need to be reviewed in order to verify that the tax has been levied correctly. With the menace of fake invoicing also, it has become imperative that vendor invoices and compliances are also reviewed regularly.

Transactions also need to be re-visited with respect to place of supply that may have implications on taxability and time of supply to avoid interest and penalty payments in case contrary view is taken from the standard practice. Further in addition to the compliance review, it is imperative that the management is aware of the legislative updates and consequences of non-compliance.

Apart from mitigating the risk of non-compliance due to such due diligence, it also reduces litigation risk to a great extent and the cost involved. For companies who are required to do global reporting, indirect tax diligence helps in reducing the tax exposure a company would report in its global report.

GST diligence does not only involve highlighting the risks and problem areas, but it also includes designing effective strategies to mitigate and resolve the identified areas after such investigation. Thus, giving fair chance to the company stakeholders to take corrective actions before it’s too late to take stock and actions on the strategies suggested.

Further, keeping in view that under the GST laws, the GST officers are nowadays penalising a registered buyer for the non-compliance made by its supplier, thus it becomes all the more imperative that a business conducts GST diligence regularly to avoid such a situation and burden. Nonetheless, with the number of changes the GST law is experiencing, it is advisable for any business to conduct indirect tax diligence to be compliant and updated.

With increasing mergers and acquisitions, it is even more important that the companies take cohesive steps for better valuation by conducting periodic indirect tax diligence. This will not only give a company better positioning in front of the buyer but it will also give the company a better value.

Thus, conducting GST due diligence helps a company to make informed decisions, and it provides a report on which your future actions are planned. The due diligence report contains not just the risks but also their solutions which allows a person to make better choices. Hence the importance of due diligence has been amplified over time. Even a minor lapse in maintaining records or such other compliances can result in fines, penalties and reputation loss. Hence GST due diligence can be very helpful as it entails verification of the classification of goods and services as per the provisions of GST Act and identifies whether financial information and records under GST have been maintained accurately and in accordance with the GST law.

Smita Singh, is Partner, and Khushboo Jain, is Senior Associate at S&A Law Offices.