India To Abolish Mandatory Annual GST Audit Requirement

India’s 2021 federal budget (Finance Bill 2021) has proposed changes to the audit regime for goods and services taxes (GST) to ease the burden on businesses. The amendment calls for removing the mandatory requirement to audit GST accounts annually and submitting reconciliation statements prepared by chartered accountants and cost and management accountants. This could reportedly help over 10 million companies save audit fees worth around INR 300 billion (US$4.12 billion) annually, according to sources in the government.

The GST audit process involves examination of records, returns, and other documents maintained by a GST-registered person. It ensures accuracy of the turnover declared, taxes paid, refund claimed, input tax credit availed. It also involves assessment of other such compliances under the GST Act by an authorized expert.

What is the change proposed and how will it impact businesses in India?

The Finance Bill 2021 seeks to make changes to the Central Goods and Services Tax (CGST) Act 2017 to streamline audit obligations.

The proposed amendment relates to the turnover-based audit as specified in Section 35(5) of the CGST Act, 2017.

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The other types of audits namely General Audit specified U/S 65 and Special Audit U/S 66 of the said Act will not be affected.

It has been reported that the decision to this effect was already taken by the GST Council in March 2020. It was, however, stalled due to the outbreak of COVID-19 and the subsequent lockdowns.

Savings for businesses

According to officials quoted in various news outlets, this proposed amendment will help over 10 million firms save audit fees amounting to approximately INR 300 billion (US$4.09 billion) annually. They also note that it could reduce the compliance burden and, consequently, help expand the GST base.

The 2021 Finance Bill, which is intended to give effect to the financial proposals of the federal government’s budget for FY 2021-22 is still listed for introduction, consideration, and passing. These provisions will come into force only after the bill is passed.

Advantages highlighted by the government

• Simplification of GST filing Procedure: Abolition of GSTR-9C and possible merging of GSTR-9 and GSTR-9C will simplify the GST audit filing procedure to a large extent. GSTR-9C is a statement of reconciliation between the annual returns in GSTR-9 filed for a financial year and the figures as per the audited annual financial statements of the taxpayer.
• Beneficial for smaller taxpayers: As noted in the GST Council Minutes of the Meeting, the cost of compliance for filing of Annual Return and Reconciliation has been high, especially for smaller taxpayers, since it was mandatory to engage a professional (chartered accountant or cost accountant).
• Expansion of GST base: The primary purpose of the government’s move, as highlighted by officials, is to expand the GST base by reducing the compliance burden and saving businesses from paying hefty audit fees accounting professionals. The untapped grey market, which hosts millions of unregistered shopkeepers all over the country, for instance, is expected to be brought under the ambit of GST with this move.
• Increased transparency by leveraging digital economy: The new GST regime has a differential advantage as it has successfully been able to keep up with the spirit of Digital India. Information pertaining to the sales or purchase of goods and services by taxpayers is available online. With the e-way bill system in place and an e-invoicing system likely to be rolled out, all the information required by tax authorities will be available online.

Objections raised by accounting professionals

This move by the government has hurt the pecuniary interests of accounting professionals who stand to lose out on auditing fees. The Institute of Chartered Accountants of India (ICAI) has registered its case against the budget proposal with the government. Nihar N. Jambusaria, ICAI President, is of the view that provisions relating to the GST audit and the certification of reconciliation statement by a chartered accountant should be retained in the GST law.

The objections raised can be summarized as follows:

• Audits are key to ensuring compliance. If the mandatory audit requirement is abolished, taxpayers will find it convenient to circumvent obligations.
• The self-certification process may reduce the time effectiveness, which in turn would lead to increased tax burden coupled with penalties and interests, at a later stage.
• Scrapping the requirement for review of the Reconciliation Statement by professionals might leave scope for mismatches in taxpayers’ accounts. Lack of timely identification of such gaps might prove to be a costly affair for both, the taxpayer and the government, in terms of time and money.

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