CAG recommends CBIC to ensure verification of the high risk claims of Tran 1 and initiating remedial measures for the compliance deviations

The Comptroller and Auditor General (CAG) has recommended that the indirect tax department should ensure verification of the high risk claims reflected in Table 7aB of Tran 1 (credit on duty paid stock without invoices) and the cases where the transitional credit claim under Table 5a (closing credit balance of legacy returns) was in excess of the closing balance of legacy return.

The Comptroller and Auditor General (CAG) tabled in Parliament on Monday, the Compliance Audit Report on Indirect Taxes – Goods and Services Tax for the year ended March 2021 prepared for submission to the President of India under Article 151 of the Constitution of India. The report deals mainly with the issues involving levy and collection of Goods and Services Tax.

This report is divided into six chapters:

Chapter I provides a brief description of the nature of indirect taxes, organisational structure of Central Board of Indirect Taxes and Customs (CBIC), trends in Indirect Taxes revenue, comparative growth of various components of Indirect Taxes and comparison of GST Budget Estimates vs Actual Receipts.

Chapter II describes the CAG’s audit mandate for audit of revenue receipts, audit universe, audit sample, and result of audit efforts.

Chapter III brings out the status of implementation of the simplified GST return mechanism; and the Department’s performance with respect to the compliance verification functions such as scrutiny of returns, internal audit and anti-evasion activities; and recovery of arrears.

Chapter IV discusses the audit observations relating to significant data inconsistencies noticed during GST data analysis by Audit.

Chapter V discusses the systemic and compliance issues, observed during the course of the Subject Specific Compliance Audit (SSCA) of processing of refund claims under GST.

Chapter VI contains significant findings of the Subject Specific Compliance Audit (SSCA) of Transitional Credits under GST which were noticed during the examination of records pertaining to transitional credits under the jurisdiction of CBIC.

During analysis of pan-India data provided by GSTN, Audit noticed significant data inconsistencies between the taxable value and declared tax liability. Inconsistencies were also noticed between the CGST and SGST components of GST, and between ITC figures captured in GSTR-3B and GSTR-9 returns. Due to significant inconsistencies in the GST data, Audit could not establish the reliability of data, for the purpose of finding audit insights and trends in GST revenue, and assessing high risk areas such as tax liability and ITC mismatch at the pan-India level.

Audit recommended that the Ministry should consider introducing appropriate validation controls (controls which prevent unreasonable data entries or alert the taxpayer to unreasonable data or both) supplemented by post-facto data analytics in respect of important data elements, where in data (such as tax amounts; taxable values; tax components, like CGST and SGST; validation of ITC and tax amounts, between the annual and monthly returns) is entered by the taxpayer. An effective review and follow up system needs to be developed at GSTN to review and address cases of data inconsistencies. In case of significant deviations, tax officers may be alerted to the inaccuracies and directed to take necessary action.

During the course of examination of records, Audit observed certain systemic and compliance issues in relation to grant of refund by the Department, which need to be addressed.

Audit observed that there exists a mechanism to match ITC availed by a taxpayer with the GSTR-1 returns filed by the suppliers and to identify fraudulent cases through data analytics after the amount has been paid. However, adequate systems were not in place to prevent and mitigate refund related frauds by using real time/near real time data analytics so as to alert the tax officials before sanction of refunds.

Audit analysed the data of Public Financial Management System (PFMS) relating to GST refunds pertaining to the period from July 2017 to September 2019 (Pre-automation) received from 34 Commissionerates and followed it up with substantive audit of the payment process. Audit noticed 410 instances of double payments owing to lack of reconciliation and monitoring by the Department amounting to ? 13.73 crore.

Even after four years of implementation of GST, a proper system of review and post-audit of refunds had not been effectively institutionalized so that the Department may rectify mistakes in time.

Audit examined compliance to the provisions of the CGST Act, associated rules, procedures, etc. with respect to a risk-based sample of 12,283 refund cases processed by the Central tax authorities. Audit noticed 522 cases where excess/inadmissible refund of ? 185.28 crore was sanctioned due to various reasons such as incorrect computation of Adjusted Total Turnover, consideration of ineligible accumulated ITC, claims which were time-barred etc.

Audit noticed significant number of refund cases where the Department did not adhere to the prescribed timelines for processing of refunds leading to instances of significant delay in issue of acknowledgement, deficiency memo and sanction of refund orders. Further, in the majority of cases, the department did not pay interest to the taxpayers in case of delayed refunds.

The Department identified 50,000 (Antarang6 data set) high value transitional credit cases for verification by CBIC field formations. Audit selected pan-India sample of 8,514 cases for detailed audit based on data analysis of these 50,000 cases. The sample size of 8,514 cases represented a transitional credit of ?82,754.77 crore and constituted about 62 per cent of the total transitional credit on the Central side.

In spite of requisitions and follow up, the CBIC departmental formations did not produce records of 954 claims. As a result, 11 per cent of sample size representing ?6,849.68 crore of transitional credit claimed could not be audited. Further, in another 2,209 cases representing ?19,660.72 crore of credit claimed, records were partially produced as relevant underlying records determining the eligibility of credit were not produced, which constituted a substantial scope limitation. Out of these records, the Ministry stated that some of the records and verification related records have since been produced to Audit. These would be audited and reported separately. Further, record keeping by the departmental field formations varied widely and maintenance of records for verified cases were inadequate in most of the jurisdictions.

Audit observed that though the Department had identified the top 50,000 cases for verification as a priority for 2018-19, the exercise was not yet completed, and the Department was yet to verify 8,849 cases7. The rate of recovery of detected irregularities was low. Cross jurisdictional issues and lack of co-ordination in Central Tax jurisdictions in some zones impeded verification and initiation of recovery actions.

In view of these findings, Audit recommends :

Audit review disclosed significant irregularities in the transitional credit claims of taxpayers across various categories regulated by the sub sections of Section 140, Section 142(11) as well as Section 50(1) of the CGST Act 2017 pertaining to payment of interest.

Audit observed 1,686 compliance deviations in 1,438 cases, out of 7,560 cases examined in detail, amounting to ? 977.54 crore, constituting a deviation rate of 22 per cent. Irregularities noticed were relatively higher in four categories viz; ineligible credit of duty paid goods in stock without documents, irregular claim on unavailed credit on capital goods, ineligible credit on inputs or input services in transit, and irregular claim on closing balances. Considering that the Department had verified 79 per cent of these claims, the deviation rate suggested that the verification process carried out by the Department suffered from inadequacies. Out of 1,438 cases, where Audit noticed irregularities, 1,132 cases had been verified by the Department, and the Department did not point out irregularities amounting to ?735.69 crore.

In view of the above compliance findings, Audit recommends: