Digital Synchronisation of Income Tax vis-a-vis GST

If one is curious to know from where I derived the name of the Article “Guns N Roses”, let me tell you that I have drawn inspiration from the band “Axle Rose and Tracy Guns” from their performance in 1985.

General Meaning

Individually, the words

"Guns" symbolize war, destruction and death

"Roses" usually symbolize love, beauty and romance; their use in making perfumes, as well as their association with Valentine's Day reinforces this symbolism.

General Meaning in the context legal lexicons

And when used together in the context of legal maxims, in my view it conveys and signifies the following: -

“Guns” symbolise legal provisions which intend to regulate, streamline, detect, prevent, unearth, disclose, digitally match etc. whereby Assessee is asked to formulate the business processes and systems whereby such data reported under any law matches or reconciles without any deviations so that users of such data can derive suitable samples to verify the authenticity of such reported transactions;

“Roses” symbolise words of appreciation, commending the Complier for the timely reporting of legal compliances as per stipulated time limits under respective provisions of the law, whereby if everything is matching or reconciled to the last dot, there are no prime facie deviations in data reported under different laws. This will reduce the initiation of inquiry and litigation proceedings, and lead to overall acceptance of financial reporting statements deeming the same to be a true and fair view of financial results – from which applicable taxes are computed and paid by the assessee. This will result in the well compliant Assessee/Taxpayer following GBP (Good Business
Practices), leading to award of Star Status to such Assessee and getting recognised/rewarded in form of award certificates or rating on the Portals. 

Formal Introduction of GUNS N ROSES of Digital Synchronisation under Income Tax and GST

I have used the word GUNS N ROSES in conjunction with Digital Synchronisation (which was engendered vide Order passed u/s 119 of the Income Tax Act 1961 read with Rule 114 I ( 2) of the Income Tax Rules 1962 on 29th September 2020 where the time limit of three months was provided to the Principal General of Income Tax (Systems) or Director General of Income Tax (Systems) to upload information pertaining to GST Return and thus consequently it was uploaded in Form 26AS on November 12, 2020 (within the time span of just one and half months which reflects the ammunition (data) available with the Sovereign or firing through its GUNS). One such bullet shot through this GUN has alerted all of us viz. Assessee, Board of Advisors, Trustees, CAs, CMAs, Advocates, Legal Counsels, Tax Practitioners and/or anyone who is involved in legal compliances for any business enterprises – requires that the details of Turnover as per GSTR 3B discloses information about each GST Number (GSTIN), ARNs ( Application Reference Numbers), Date of Filing, Return period, Taxable Turnover and Total Turnover which includes business transactions involving Stock Transfers as well. Such information has been updated for FY 19-20 and for FY 2021 up to May 2020 only in Form 26AS of the Assessee.

In a recent article appearing in the newspapers, there was an announcement that to combat the menace of Fake Invoices, Govt. may invoke COFEPOSA (Conservation of Foreign Exchange and Prevention of Smuggling Activities Act) against such evaders and the provisions of the said Act could be extended to cover GST Laws, Income Tax Laws, and Prevention of Money Laundering Act. Though legally to my knowledge and understanding, such provisions are not being contemplated for immediate application to Income Tax and GST, the signs are ominous that the net will be stretched far and wide through appropriate enactments.

Considering the above, I have penned my thoughts to cover the digital synchronization between Income Tax Law and GST Law only. I have desisted from the temptation of touching other business laws which may be applicable because if I try to correlate multiple laws, this article can run into several reams of pages. The intention of penning down this article is to broach the concept to the readers of the articles who can develop such concepts in respect of matters relating to their clients, customizing as per the needs of their clients for different types of assignments.

This article can be issued as an illustrative Reference Guide for MIS reporting, Working Papers, and/or documentation to be prepared for executing the assignments of Advisory Services, Statutory Audit, Tax Audits, Income Tax Returns, Tax Assessments, GST Audit and/or Compliances vis-à-vis Outward supplies. It needs to be noted that information pertaining to Outward Supply is reported and auto-populated in Form 26AS of the Assessee.

In the table below, for the benefit of Readers, I am presenting a Ready Referencer which suggests Data Mining Information be collated in respect of Outward Supplies (article covers information on outward supplies only, thus Input Tax Credits or Tax pay-outs not covered hereunder) in the process of data synchronization:

Once all above data is collated and maintained for single or each multi GSTIN and summarised for PAN India consolidations, one will be in a position to draw suitable conclusions for accurate reporting and reconciliation of data to be reported in the Financial Statements, Income Tax Returns as well as GST records - which can constitute summary documentation for supporting the defense if any inquiry is initiated under different applicable laws.

PAN India consolidation plays a pivotal role in data reconciliation reporting because only one Income Tax Return is filed on a PAN India basis whereas GST compliances are done for single or multi GSTIN registrations as the case may be. Under GST laws, annual return in the form GSTR 9, as well as Reconciliation statement in GSTR 9C, is filed separately for each GST registration of Registered Taxable person, as transactions amongst them are considered as separate supplies in the light of the references provided in explanation of Section 8 of IGST Act, Section 25 of the CGST Act 2017 and valuation points arising as per Section 15 of CGST Act 2017 - if the same are not accounted and reported in the Financial statements as well as in the Income Tax Returns.

Standard Reconciliation Statements (Illustrative Tabulation shared below which can be customized as per one’s requirement considering size, nature, and volume) to be prepared for the outward supplies or sale of goods or services or both are presented below:

1. Reconciliation of Turnover as per Books of Account with Audited Financial Statements or Non-Audited Financial Statements with reasons for deviations, if any (Table 1)

2. Reconciliation of Turnover declared in Audited Financial Statements or Non-Audited Financial Statements with Income Tax Returns with reasons for deviations if any (Table 2)

3. Reconciliation of Turnover declared in Audited Financial Statements or Non-Audited Financial Statements with GSTR 1 for single or each multi GSTIN followed by PAN India consolidations with reasons for deviations if any (Table 3)

4. Reconciliation of Turnover declared in Audited Financial Statements or Non-Audited Financial Statements with GSTR 3B for single or each multi GSTIN followed by PAN India consolidations with reasons for deviations if any (Table 4)

5. Reconciliation of Turnover declared in GSTR 1 vis-à-vis GSTR 3B for single or each multi GSTIN followed by PAN India consolidations with reasons for deviation if any (Table 5)

In each case, the impact of deviations and the reasons, therefore, need to be analyzed both from the disclosure perspective as well as from the remedial aspect. Corrections in the form of revisions in Financial Statements and Income Tax Returns need to be corroborated by Stakeholders so that instances of show-cause notices on account of mismatch of data reporting is minimized or if there are genuine deviations, then they can be confidently explained when mismatch inquiries are initiated under the law by the Appropriate Authorities.

To conclude, considering rampant developments in technology using Artificial Intelligence and Data synchronization affecting several business laws that apply to every business enterprise, one needs to be proactive with Business Processes and Systems to compliantly respond to such technology related developments. This will ensure that correct and timely information is reported on the dotted lines and corrections or remedial options can be carried out to minimize resultant damages. It can be now easily perceived and imagined that Sovereign has all information on their dashboard which can be fired using "Guns" if system-derived reports "shoot down" anomalies in reporting by the Assessee under any laws. And if no anomalies are reported, then Assessee can expect "Roses" to be awarded by the Sovereign to felicitate genuine stakeholders by way of "Appreciation Certificates" or "Star Ratings" or by way of minimum litigation inquiries.

In my considered view, if all stakeholders should strive to customize their Business Processes and Reporting System to gear up and cope up with such challenges, and if this extends seamlessly to the finalization of the Financial Statements, it would help each one of us in the long run - whereby we don’t have to face the "Gun", instead we enjoy the bed of "Roses" while compliantly discharging our obligations. Another spin-off is that none of the stakeholders need to face the challenges of due date pressures if proper systems are planned and executed by all.

Time has come whereby all stakeholders need to enhance their Systems Deployment thereby generating information on a real-time basis - and all applicable benefits due to timely and proper legal compliances are maximized efficiently and effectively in the interest of all.

With this, I complete my article GUNS N ROSES of Digital  Synchronisation with reference to Income Tax vis-à-vis GST. My views can be adapted or improved by any reader, considering the due dates extension available to each one of us. Similarly, reconciliations can be planned for compliances under other laws (Note 6) that may be applicable to various business enterprises – how to do it is some food for thought!

(Note: Views expressed are my personal views and they are based on my understanding of the subject as dealt by this article and views shared may be acceptable or may not be acceptable to the readers of this article. All readers are requested to take their considered views based on their own study to reach any suitable conclusions. There can be many other situations under the law but through this article, I have tried to sow the seed of thought in the minds of readers. Suggestions to improve the article are always welcome with folded hands).

Initially, such an exercise of Reconciliation will appear to be lengthy, arduous, and demanding but once we are accustomed to doing such reconciliations and document them, the initial feel of facing the battle of guns will yield to the pleasure of enjoying the bed of roses. Of course, this requires that we undertake such exercise by customizing and building systems according to one’s needs considering the size, volume, and complexities involved in different assignments.

Illustrative Table of Reconciliations

Table 1 – Reconciliation of Turnover as per Books of Account with Audited Financial Statements or Non-Audited Financial Statements

Table 2 – Reconciliation of Turnover declared in Audited Financial Statements or Non-Audited Financial Statements with Income Tax Returns

Table 3 – Reconciliation of Turnover declared in Audited Financial Statements or Non-Audited Financial Statements with GSTR 1 for single or each multi GSTIN followed by PAN India consolidations

Table 4 – Reconciliation of Turnover declared in Audited Financial Statements or Non-Audited Financial Statements with GSTR 3B for single or each multi GSTIN followed by PAN India consolidations

Table 5 – Reconciliation of Turnover declared in GSTR 1 vis-à-vis GSTR 3B for single or each multi GSTIN followed by PAN India consolidations

Notes

1. Finalised Trial Balance at Pan India level supported by Trial Balances of multi GSTIN is a starting point to undertake this exercise. Trial Balance would reflect all requisite information needed to undertake such reconciliation exercise.

2. Trial Balance Finalisation and Compilation is fundamental to the drawing up of the financial statements, and Users are expected to be aware of the impact of adjustments on Financial Statements - in a holistic as well as the cross-relating manner to perceive their impact under Income Tax Laws, GST Laws and all other laws that apply to the enterprises. If other adjustments are recorded/given effect to in the books of account, then they will not appear in the Reconciliation Statements. But if they are not recorded, then they would impact the reconciliations.

3. The figures of Turnover/Gross Receipts that would be reported for the Audited Financial Statements or Non-Audited Financial Statements need to be meticulously computed and validated, as these figures would need to be reconciled with such values disclosed under various laws viz. Statutory Law,

Tax Audit, Income Tax Returns, MCA Compliances, MSME compliances, Management Reporting, etc.

4. Definition of Aggregate Turnover as per section 2(6) of CGST Act, 2017 is much wider and inclusive as compared to Turnover/Gross Receipt of Business or Profession as reported in the Financial Statements. Under GST Law, all reconciliations are invariably linked to the definition of Aggregate Turnover. The concept of "Turnover" in Financial statements and under GST Regulations are different, so such distinction needs to be kept in mind and one needs to build up suitable convergence systems for reporting and timely reconciliations.

5. "Turnover" as per GSTR 1 as well as GSTR 3B are preferably expected to be equal and if not equal, then the need for reconciliations would arise - which should appropriately state the causative factors for such deviations while considering their implications under the provisions of GST laws.

6. Other illustrative reconciliations that may be considered by the readers viz. Input Tax Credits, GST Levies, Outward and Inward E Way Bills, RCM, TDS under Income Tax & GST, ISD, Corporate Laws, FEMA, Labour, and Social Security Laws, Audits (viz. Statutory Audits, Internal Audits, Secretarial Audits, Inventory Audits, Investigation, and Forensic Audits, etc.), Directors Report, Stock Exchange Listing, Regulatory Compliances, Industry Specific Regulatory Reviews, etc. to build up the business processes review.