The Union Budget (2021-22) has proposed withdrawal of GST Audit. Now, a self-certification by management will do. One principal reason ascribed to the proposed withdrawal is lower revenue collection as per the audit report (GSTR 9C) compared to the revenue disclosed in the annual return (GSTR 9). Two other reasons have also been flagged. One is that the audit requirement leads to a higher compliance burden, and the other is that certain auditors did not carry out the job in a manner expected of them. While the change appears close to ensuring ease of doing business, the reasons attributed to the elimination of audit are a bit awkward. Let’s look at these factors in turn.
Lower revenue reported in audit report: Audit of any kind is an integral ingredient of the maker-checker concept. It is an independent review of transactions, and as such, the findings enable taking an informed view of the way affairs are managed. Hence, audit exercise as a pure play of revenue augmentation is a distortion of the very idea of audit. Needless to say that collections as per GSTR 9 may be more because of auditor’s findings accepted by the managements. Naturally observations to the extent not agreed and reported by the auditors are to be of lower amount. Notably, this kind of audit is currently inbuilt into another central regulation, i.e.Income Tax Act. And the essence of the audit objective remains identical under both rules. Also the objective of audits under both is to allow auditors to step into the shoes of assessing officers and facilitate collection of revenue and to reduce the cost of collection on the part of the government.
However, the guiding principle to do away with the audit may lie in the transaction level reporting under GST, which is fully digitalized. The introduction of Electronic Invoicing and Electronic Waybills will add to the robustness in the compliance ecosystem. In other words, sales transactions are neither escaping nor is Input Tax Credit being unduly availed under the reporting framework in vogue. But if that be the case then why retain provisions of Sec.65 and Sec.66 of GST Act providing for Audit by Tax Authorities and Special Audit respectively. Our argument is that the digitalization is yet to stabilise and doing away with an audit can be considered once you are super-sure of the system’s robustness.
At a different level, let’s understand a couple of points. You lock the door not because someone can’t break it open, but it makes the job more difficult. Similarly, policing may not eliminate the commission of a crime, but it does have a deterrence effect. Therefore, writing off the functional usefulness of audit even before the GST regime is adequately stabilized is a bit sad.
We are a far cry from getting into selfcertification. Also, the Institute of Chartered Accountants of India front-ended the rollout of GST rollout by playing several roles, including capacity building. This included imparting extensive training to its members and staff of revenue agencies. Also, the members incurred costs on resource building to cater to the client’s needs considering GST compliance’s digital nature. Even the taxpayer community embarked on a fit-for-purpose capacity- building journey by either enhancing the existing IT system or deploying satellite systems integrated into leading ERP. Also, the hiring of manpower happened at both ends; auditors and clients. Whereas no one can deny government the right to introduce and to withdraw any provisions in different tax statutes but at the same time the professional and business community deserve a certain degree of assurance with regard to compliance provisions so as not to build up facilities which may be left redundant because of sudden changes in laws. The need for policy certainty as an essential factor can not be overstated. Mark it, while the extension of due date for filing audit reports was sought for on multiple occasions, no one asked for skipping the requirement itself. Instead, companies used this opportunity to develop assessment dossiers as part of the go-to-audit/assessment strategy as a matter of best practice. The various tax positions and practices are dispassionately reviewed during an independent audit, and course correction is triggered by audit findings. In this context, the sudden announcement of doing away with audit naturally is a setback to all those who committed to incremental resource build-up.
Adds to the cost of compliance: Higher compliance cost as one of the trigger points to abolish GST Audit sounds a bit far-fetched because, for large organizations, it’s not a big ticket. To address that concern instead of complete scrapping, a change in threshold criteria may have been better. Smaller business entities could have been saved from compliance costs by changing the threshold. It should not so happen that the cost of noncompliance outweighs the cost of compliance. An audit provides a fair opportunity for revisit of significant positions. Thus, independent eyeballing helps prevent lapses that otherwise can bring significant hardship if found during departmental scrutiny.
Role of GST Auditors: Lastly in case there was any negligence on the part of a few attesting members of the ICAI, this could have been effectively addressed through the disciplinary mechanism already institutionalized. It’s like a few vehicles meet with an accident, but that seldom makes a valid case to make the roads free of vehicular movement.
The declared intent of the treasury is to improve the ease of doing business index. But it runs the risk of sending confusing signals in the absence of a preemptive audit before the departmental scrutiny. With the change, the assessee would get exposed to the revenue authority’s scrutiny without the first line of filtering available. In some ways, the proposal is perceived as empowerment of jurisdiction officers, which may even result in a more discretionary attitude during adjudication proceedings leading to rebirth of Inspector Raj.
But it should not end up as a self-goal.