GST Audit
Gaurav Yadav

Updated on December 4th, 2023

Most of the businesses in India are expanded with multiple branches or sub-units. Most companies register these sub-units under GST for easier GST compliance and claiming the benefits of GST Input Tax Credit. Audit under GST is important key factor for the all types of business.

These units 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.

However, it’s a tedious process to monitor the small units and their compliance with all the GST laws and many times, attention to detail gets missed in the GST return filing of all these sub-units. These smaller oversights can cause massive losses to the business in terms of ineligible ITC under GST, penalties on delayed / inaccurate filing, interests, etc.

In this article, we have discussed a few significant risks businesses face if any or all of their smaller sub-units DO NOT comply with the GST regulatory requirements. We also shared an internal GST audit checklist that businesses should consider.

GST Audit by Department – A Challenge for MSMEs

GST audit & challenges for MSMEs

In a recent survey conducted by GSTHero in Pune, it was observed that around 74% of the large businesses in India are ignorant of the GST regulatory compliance requirements of their smaller business units like depots or sub-units.

This statistic 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 businesses are unaware of it until they attract a GST audit by the 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.

GST audit risk faces

Risks your Business Faces – On GST Non-compliance

Many small and medium-sized businesses tend to ignore the minor mismatches that are introduced in their GST returns. However, these minor mismatches are a part of a bigger problem when the GST returns of all the sub-units are aggregated 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.

In this section, we have introduced you to the most common yet ignored threats your business faces due to an ignorant approach towards mismatches in the GST returns.

1. Claiming ineligible ITC under GST

This is a severe challenge that directly impacts the working capital of your business.

Let us explain to you its severity with an example from the current happening in the GST arena.

Recently, the GST department, Delhi, has busted a massive tax fraud that accounted for up to Rs.170+ Crore.

The critical thing to note in this example is that around Rs. 13 Crore from this total amount accounted for fake GST Input Tax Credit claims.

Around 7,500+ ineligible ITC cases have been reported in the FY 2020-21, whose total aggregate sum goes as high as Rs.35, 000 Crore.

This is just the reported data; there is no account of the cases that were never identified!

Cases claiming ineligible Input Tax Credit under GST have seen a voluminous increase due to counterfeit invoices and exaggerating the existing ones. Claiming ineligible ITC can be massive damage in monetary and reputational terms.

To summarize the hazards of ineligible ITC:

  • Working capital is disturbed
  • Penalties and interest on the ineligible ITC claimed
  • Threat of GST registration suspension/cancellation
  • GST departmental audit can cause reputational loss to the business

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

Read our comprehensive article to understand the GST Audit limit from the link.

2. Under-utilization of your Eligible ITC

When there are multiple GST registrations under a single PAN, it is difficult to track down the eligible Input Tax Credit available for all the business sub-units.

If the eligible ITC sits idle, it simply means that the business has to pay its GST liabilities in cash.

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 checklist report so that decision-makers can clearly understand the unutilized Input Tax Credit accumulated in all of their GST registered business units.

Following are some of the reasons that your business is availing lesser ITC than eligible ITC:

  1. Your supplier has not filed his GSTR-1 corresponding to the transaction you are missing out on.
  2. There has been an ITC reconciliation error that was not rectified.
  3. Your defaulting supplier was not informed about the discrepancy, and this error was never corrected.

3. Monetary drain in penalties & interest

Let’s not talk theory on this point.

Just observe the following numbers to understand the gravity of this problem:

A business Perennial Realties has a pending outward GST liability of Rs.7, 80,000 for FY 2021-22.

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

In the best-case scenario, this business shall end up paying an interest of at least 18% on Rs.7, 80,000.

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 tool has now taken a toll on your working capital regarding fines & interest.

If businesses have an internal audit under GST mechanism, they can save on these expenses yearly.

4. Businesses miss monthly & quarterly GST data

Due to the lack of a GST Audit tool, businesses miss out on identifying red flags for the ambiguous transactions, unutilized ITC, the GST return filing behaviour and so on.

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

It is possible that the frequency of GST filing may vary from business to business (monthly or quarterly). Visit our detailed blog to learn more about the GST return filing limit.

Hence, businesses must have monthly, and quarterly GST returns data. This helps businesses track all their GST return filings, be it monthly or annual.

This data also helps in the year-end GSTR 9C applicability audit.

Why is an Internal GST Audit essential?

GST internal audit tool

When your company has multiple registrations situated in different states of India, there is a need for a joint report that gives an idea of all the business units and their financial health.

These consolidated reports shall help the business decision-makers make effective strategies to minimize their tax exposures and nullify the risks their business faces due to non-compliance with the standard regulations of the GST.

After running an internal GST Audit, a consolidated report gets generated for all the GST registered units. However, this task is possible only when the business uses a multi-functional GST Audit tool.

Bird’s Eye view of all the GST registered businesses will save time and establish a centralized mechanism between all the business units & the headquarters.

Following are the benefits of running an audit under GST will done using a GST Audit Tool like GSTHero’s ThirdEye:

  • Provides an Unbiased & third-party review of your business
  • All units/depots are brought under joint review
  • Identify Input Tax Credit leakages for all your business units
  • Calculate the total accumulated ITC in all branches combined
  • Internal monitoring of inward & outward monetary flow of your business
  • Root-level reporting of your GST return filing activities
  • Identify & mitigate risk exposures that may invite GST audit by the department

How is GST Audit Tool Different from your ERP?

internal audit tool

When businesses rely on their existing ERPs and their checkpoints, they try to bypass the step of auditing their GST returns for the month.

It’s true that the ERP systems do have few checkpoints in place, but an internal GST audit benefits your business more than the standard checkpoints in your ERP system.

 An internal audit under GST will help businesses to be compliant with the dynamic GST laws in India.

Following are some of the things that the ERP is INCAPABLE of doing & an Internal GST Audit tool is CAPABLE of doing:

  • Identifying ineligible ITC & potential threats for all your sub-branches all at once
  • Identify risk exposure & suggest corrective actions on pending liabilities.
  • Generate a ‘Bird’s Eye’ view of the complete GST return filing of all the branches registered under the single PAN.

What will your business gain with the GST Audit tool?

GST Audit tool will help businesses check their business units' financial health and identify gaps in their return filing behavior.

An internal GST Audit tool like GSTHero ThirdEye provides features like interactive dashboards & predictive analysis.

GST audit tool features

Following are some of the significant edges that the GST Audit tool has over traditional MIS reports:

  • The interactive dashboards help the decision-makers to analyze the data in less time.
  • Granular-level reporting is done automatically, which, if done manually, is a very tedious and time-consuming task.
  • Error introduction in data is shunted as the complete auditing and reconciling process will be automated.
  • GSTHero is a Government of India authorized GST Suvidha Provider and can fetch the authenticate GST data directly from the GSTN. This data helps the tool to analyze the previous years’ return filing trends and identify if there are any possible risks with this approach.
  • Traditional MIS reports DO NOT focus on the ‘Predictive Analysis’ part of the data.

For these reasons, a business diagnostic tool like GSTHero ThirdEye is essential to flag the risks and suggest corrective actions. In addition, this tool saves the resource drain on paying penalties and interest if the GST compliance requirements are not met.

To Summarize

In this article, we have specified the threats your business faces if you do not follow routine internal GST audits for all your business units.

Businesses must have a routine diagnostic mechanism that makes them ready for GST audit by the department. This is possible with robust GST audit software that provides them with consolidated data and saves their business time and revenue.

Businesses must note that their ERP alone is insufficient to scrutinize their GST return filing date. Hence a separate GST audit software is the need of the hour for every business with multiple or single GST registration.

Stay updated; stay ahead!

Until the next time…..

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Gaurav Yadav

About the author

Gaurav is an Engineer by training with a deep interest in Economics & Finance. He has been associated with the Fin-Tech industry for quite some time now. He writes for GSTHero for topics including GST Compliance, GST Structure, etc & aims to break down complicated technical jargon into simple terms for the taxpayers.

His expertise includes GST Laws, Corporate Finance & Macro-Economics.

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