CA. Jatin Christopher / Don’t fear the Taxman

GST has come with its set of challenges. As auditors adapt to the new law, they will have to find ways to respond to the changes. In order to ensure complete compliance with the law and protection of the interests of the client, auditors will have to study the law in detail. Both taxpayer and the taxman have to adhere to the same law so it is important for auditors to understand that while they must follow the letter of the law, they should gauge whether the taxman too is following the law and whether the GST act has empowered him to do so. To highlight many such nuances in GST law and the various scenarios where the taxman may not be necessarily in compliance with the law, CA. Jatin Christopher, Partner at JCSS, conducted a riveting session at the recently held ‘GST Gyan Manthan’ at Sri Balaji University, Pune (SBUP). Corporate Citizen brings you the excerpts from his fascinating talk

CA. Jatin Christopher has conducted many programmes on indirect taxation. He has contributed towards the publication of educational and research material on various indirect taxation topics. He is also a research person for ICAI. He has been practising since 2000, and specialises in advisory and litigation matters in indirect tax legislations. Jatin is a partner in JCSS. He speaks from his rich experience as well as his domain knowledge about a range of topics as regards GST.

Regardless of which domain we belong to, whether GST, Income Tax or statutory audit functions, GST has expanded its reach into territories that were never the subject matter of tax under the earlier tax laws. Please consider the new areas that GST has entered into to impose taxes and how we will need to respond. If we look at the new law based on our understanding of earlier laws, we will be greatly misled. If you look at the reactions to every new circular announced or every new rule that has been amended or introduced, we will find great disappointment all around. The root of the disappointment is expectations. It’s surprising that we already have a lot of expectations about what this law is supposed to be, rather than accept this new law as being able to do things which was not possible earlier, in the earlier laws. Is GST a destination based consumption tax? If we ask ourselves this question, the answer that comes to most minds is that obviously, it is one. But let me tell you that there is no provision under the law that says GST is a destination based consumption tax. Does GST then promise a seamless flow of credit? Does it promise that there will be no cascading of taxes? Most of us think even this is true but there is no provision in GST law that says that it is a seamless flow of credit or there will be no cascading of taxes. GST law makes no commitment regarding the basic structure of GST. If we bring these expectations and pre-conceived notions about what GST entails, we are sure to be disappointed. Legitimate expectation rides on the principle that there is a basic structure laid out. It also proceeds on the promise that there will be reasonable restrictions imposed. Let’s consider for a moment that GST is attempting to some remarkable new things. Lately, people have received so many extensions that they have stopped taking GST audit seriously. Let’s take a few steps back and see what is going on. I will give you an example of an authorised service centre where you take your vehicle to get repaired. That centre has an annual turnover of Rs.200 crores. They sell and repair vehicles. In their balance sheet, they have presented crores in scrap sales for which they have discharged GST at a rate applicable to automobile scrap. Obviously, there is nothing amiss here. But let us consider this. If the authorised service centre has sold the scrap, where has the scrap originated from? The owner of the vehicle owns not just the vehicle, but every part of the vehicle. So if you take your vehicle to the authorised service centre for repairs, the centre charged you MRP of the parts replaced, the faulty parts were removed from your vehicle, and the mechanic left them in a bag inside the vehicle. When you saw the junk in your vehicle, you told the mechanic to get rid of it. You left the scrap in the service centre and left with your car. This happens with hundreds of other vehicle owners who decide to discard their scrap at the service centre itself rather than finding a scrap dealer on their own and attempting to sell it themselves. For most people, the amount earned in this exercise is not worth the time and effort they will have to expend for it. Now, this scrap has accumulated in the Garage over many months and at some point, the service centre decides to sell the scrap. But here lies the conundrum. The service centre owners cannot sell that which was never his to sell. As a service centre, either they have to record a URD purchase in order to make a sale. If the owner of the vehicle has not conveyed change of title of the parts to the service centre, they cannot transfer the title to anyone else, and if it is not a ‘transfer of property’ and he is instead disposing of your scrap with your implicit permission, then that is not a supply of goods, it is a supply or services. We need to look at GST law very differently. We cannot look at it based on traditional notions of what trade in accounts should look like. If you found a remarkable number of differences in GST audit, let us look at what this new law is trying to do and examine the role that we need to play.

"A lot of mistakes have been made while filing returns which have not been corrected, one after the other. You find that while making corrections, some new mistakes have been made (laughs)"

A lot of mistakes have been made while filing returns which have not been corrected, one after the other. You find that while making corrections, some new mistakes have been made. Everyone has made mistakes according to his own capability (laughs). We are already thinking ahead of what the software can do, so we are very sure that we have corrected it, but while correcting, some new mistakes take place. How do we make changes after filing returns and the passing of the deadline? Those who are below the threshold limit do not have to file an annual return. But not having to file an annual return does not mean that you have not made any statement. Your annual return is deemed to be filed. It is a great challenge having to defend this. There was an art class, where the teacher had told students to draw whatever they like. A boy was looking at a plain piece of paper. The teacher came to him and asked him what he was making. The boy said I’m drawing a bus stop. The teacher asked where the people were. The boy replied that they had boarded the bus. The teacher then asked where the bus was, to which the boy replied that it had already left. Auditors of GST are like this (laughs). You are required to disclose and discover things you had no knowledge of. I would advise you not to take the option of ‘Deemed to be filed’ on your annual returns. It’s a far bigger disservice than filing it.

Filing annual returns is a very important first step. Once you have that, you are in a good position to prepare a reconciliation statement. If two clients came to your office, one whose books and GSTR 9 were not tallying, would this client cause you a lot of anxiety and worry, or another client whose books and annual returns are perfectly tallying? The answer seems obvious but it is in fact, the opposite. The books which are tallying 100% will cause you more concern because if the books are not tallying, you know the things you need to look for to find the reasons for the discrepancy. Once the files come to our hands, first, we will bring it to a state of not tallying, and then we will do the reconciliation. An auditor can at best, give only reasonable assurance of accuracy. If anyone thinks that they can get better assurance, then they are mistaken.

Many people have a gripe that the software changes a lot. Not much has changed. Not one line of software code has been changed. The software is as it is, but now you can proceed without filing certain tables. Those who take the option of not providing details won’t be spared from furnishing details. You will have to eventually provide all the details. The question is only whether it will be now or tomorrow. By not furnishing the details upfront, you are in most cases only delaying the inevitable. GST is a self-assessment tax. This is a key aspect. I will cite two instances to highlight the importance of a self-assessment tax. Let’s say, for example, that On January 17, there was an invoice of Rs.10 lakh, with a GST of Rs.1,20,000 that I had forgotten to report until December. Much later, there were capital goods purchased in October of the same year. Is it possible for me to pay arrears of tax out of annulled credits in the future? Every month is a tax period, and I need to bear in mind which month the liability belongs to and which month the credit belongs to. Liability belongs in the month the supply occurred, regardless of when I issued the invoice and regardless of when I reported the invoice. Input credit belongs to the month in which I have taken that credit. Input credit does not travel back in time. It could very well be an invoice dated January 18, but if you have taken that credit on May 18th, it will be a credit of 2018-2019, and won’t travel back in time to become credit of 2017-2018. Had I taken this credit in January 2017, I could have utilised it.

"If two clients came to your office, one whose books and GSTR 9 were not tallying, would this client cause you a lot of anxiety and worry, or another client whose books and annual returns are perfectly tallying?"

As I reported some exercise turnover in GSTR 1 and paid the tax, and during the annual return exercise I discovered that I have paid Rs.2 lakh in excess taxes. Simultaneously, I also discovered that there is another output tax that I have not paid. Is it possible for me to adjust the unpaid tax liability with the excess tax that I have reported? My submission for GST auditors to consider is Section 59 which authorises taxpayers to follow self-assessment tax. 59 does not override 64. Self-assessment does not appoint the taxpayer as the suo motu refund sanctioning authority. Section 54 requires us to submit ourselves to the jurisdiction of the respective officer to process our refund, and pay the self-assessment tax independently. Please recognise that there is an expectation of self-assessment but it has certain limitations.

There was once a taxpayer, several years ago, in the sales tax regime, who would charge different rates of sales tax to every customer who walked into his shop. For some, he charged 4%. For others, he charged 12%. For yet another customer, he gave an exemption. This file went for an assessment, and the assessment officer was shocked. He passed an assessment order for the forfeiture of the excess amount of tax collected. The assessee took that order and went to the high court and said that he cannot collect more tax than the prescribed rate. Similarly, the taxman too cannot collect more tax than the prescribed rate. The high court agreed with the taxpayer. The tax department was up in arms saying that if this was allowed, there would be pandemonium in the market because everyone will misuse this opportunity by collecting varying amounts of taxes from buyers. The court agreed that this was a real possibility but said that the court doesn’t have a remedy in the current law. You will have to make a law to deal with this situation. That’s when penalties began to be imposed.

In many cases, I have noticed that we seem to be visualising situations that don’t exist in the law, we seem to be submitting to authorities that don’t exist in the law. The taxpayer and the tax analyst must follow the same law. We will need to recognise, first of all, whether annual returns are reliable before we do a reconciliation statement.

When I was doing articles, there were two sets of books I had encountered. One had Rs.250000 lakhs of difference in the trial balance. Another had Rs.2500 thousand of difference. I was asked which one of them I wanted to take up to an audit. I took up the two and a half thousand option. I thought I would finish it and be on my way home in no time. I couldn’t find anything. The next day, I told myself that I would finish it in any case that day. But I still couldn’t find the root of the two and a half thousand discrepancy. This went on for a whole month. Now, I was too far down the road to quit. I refused to accept that I couldn’t do this. The due date also came close. The partner in the meantime went ahead and filed the returns and then told me ‘now you continue searching for the error’. Reconciliation is of this nature. Reconciliation itself is not a challenge, but discovering whether they should be a reconciliation difference is the challenge.

A software company in Bengaluru took out a contract from a US client. This contract said 50 engineers have to work on the project. I found that there were only 40 engineers available in the Bengaluru office. The company can’t say that 40 people will work on the project and simultaneously bill for 50. I discovered that there were 10 engineers in the Pune office who were available to be assigned to this project. Some were even available to work from home. The export was completed. The company raised a bill and the payment was done. From a GST point of view, who is the distinct person who has made the 0 rated supply? If you look at the Bengaluru trial balance, you will find the P&L account, which will show an expense of 40 people but an income of 50 people. In the Pune office’s trial balance, there will be an expense of 10 people but an income of 0. In the eyes of GST law, the Pune office has acted as a subcontractor to the Bengaluru office, and the Bengaluru office has carried out the export. If you explain it in this fashion to the client, he will change the auditor. But GST expects us to carry it out this way.

"Consideration has a very remarkable concept in contract law, which is borrowed in GST. There are two parts to it. One is where consideration is in monetary form and the other is in nonmonetary form"

There was a client who had engaged a contractor in Hyderabad to do some civil construction work. The contractor needed some excavators. The client said that I already have some excavators with me which you can use and start the work. The contractor used the client’s equipment, finished the project, and presented the bill to the client. The client said that your bill includes the work done and machinery, but since my machinery has been used I will deduct the rate contract to the extent of machinery hired. The contractor agreed. In this case, the tax department said that deduction towards machinery usage charges is liable for lease tax. The contractor fought back. Finally, a court judgement was referred to which said that no lease tax was applicable between the hire of machinery between a client and a contractor. This decision finally went to the Supreme Court and was approved.

GST law says it can look into any transaction. If it is taxable, you should state it, and if it isn’t taxable, you should prove that it isn’t so. A CA gave a bill to his client of Rs.10 lakh for various services provided. The client has given him the total GST amount as well in his bank account, totalling Rs.10 crore. This CA has total fee receipts of Rs.10 lakh and total money received from a client of Rs.10 crore. The question to consider is whether this Rs.10 crore is part of his turnover? Of course, it is not. Because of Rule 33, he will exclude it while computing tax. Please recognise, that this entire Rs.10 crore has to find a proper place in table number 5. This cannot be taken lightly. There are a number of transactions in a business that takes place where the consideration is not in the form of money.

For example, a manufacturer purchased Rs.2 lakh of gold coins from SBI. He organised a function where he invited all his dealers from Maharashtra and identified the top two dealers and gave them Rs.1 lakh each of gold coins. My question is when you gift gold coins, is there a transfer of property from the manufacturer to the dealer. Quite clearly, there is. When there is a transfer of property, the next question is whether there is a supply? To qualify as supply, there are two other criteria. The first is that it should be in the furtherance of business and secondly, it must be for a consideration. Was this gift for the furtherance of business? Yes. Was there consideration? Consideration has a very remarkable concept in contract law, which is borrowed in GST. If you read the definition of consideration, you will find that there are two parts to it. One is where consideration is in monetary form and the other where consideration is in non-monetary form. What motivates you to make a supply, the monetary value of that act or abstinence is also part of the consideration. In the course of business, will a manufacturer give something in return for nothing? Obviously not. Is the manufacturer giving the coin to the dealer out of charity or is it earned? If it is earned, it is enforceable. If it is enforceable, it is under a contract. If it is under a contract, it is a supply. Since it is under a contract, it must have consideration. We will need to understand the business of the client to be able to do GST Audit. Things that we think are not so important now regain significance.

"GST law says it can look into any transaction. If it is taxable, you should state it, and if it isn’t taxable, you should prove that it isn’t so"

Nowadays, the government has become very strict about a traffic violation. But as citizens, our knowledge of the law has improved. If we were stopped late at night by a traffic constable, we would get scared. Nowadays, when the same constable stops students riding a bike in the night, the students respond by asking ‘which section are you stopping me for’. Similarly, we should know which section to quote when we get a notice from the department. If the department sends you a notice, you should read the particular sections quoted to find out whether the contents of such sections actually confer jurisdiction on the officer to ask you to furnish certain information, and if not, you must politely reply to the department stating as such. Section 61 is the only provision which provides authority to the officer to peep into our books. Section 61 says that the proper officer may issue a notice to scrutinise our returns and call for escalation regarding any discrepancy in the returns. If we receive a notice, we must first evaluate whether the issuing officer has been officially designated to send the notice. Additionally, the designated officer can only ask me about any discrepancy in the return. For example, an officer sent a notice, stating to be under section 61, saying ‘I find that you have a factory in Pune, you have your sales outlet in Nagpur, then how come you don’t have GTA services and GST paid on RCM basis? This is a logical question. Since the factory is in Pune and the outlet is in Nagpur, obviously, the goods must have been transported. Transportation charges must have been incurred; therefore RCM liability would have arisen. Although the question was logical, the reply was ‘Dear Sir, we are in receipt of your letter. Please explain how this question is a discrepancy in the return’. The suspicion arising out of the officer’s wisdom is not the scope of Section 61. It’s important to remember that we don’t need to be fearful of authorities. We need to only be respectful. Asking an officer his jurisdiction is perfectly fine. Both taxpayer and tax officers have to follow the same law. Officers can ask all sorts of questions, and far too often, we provide all the answers. We need to understand that we don’t need to provide all the answers. If we provide all the answers then the show-cause notice comes. Section 61 says that when a discrepancy notice is issued, the response will be one of two things. You accept or you reject the discrepancy. Thereafter, if the explanation is satisfactory, the officer must inform the taxpayer and drop the proceedings or he must take the next step, which is audit under 65 and 66, inspection under 67 or show cause notice under 73 or 74, which means that the proceedings under section 61 have come to an end. We think that there will be spot recovery. There is no spot recovery in GST. This is a long procedure. We need not fear it. Fear goes away once you have knowledge.