Findings of CAG Audit Report on GST issues for 2020-21

by | Aug 30, 2022 | Outlook

The Comptroller and Auditor General of India (‘CAG’) has released its report on Indirect Taxes for 2020-21, focusing on issues involving levy and collection of GST (Report No. 5 of 2022). This report broadly covers revenue trends of Indirect Taxes, effectiveness of compliance verification mechanism under GST, reliability of GST data maintained by GSTN, processing of refund claims along with its compliance issues and transitional credits. Some of the key highlights of this report are tabulated as under:

S. No.




Simplified Return System

Return System


·     Originally envisaged return system with non-intrusive e-tax system (based on preventive checks) is yet to be fully implemented.


·     System allowed changes in auto-populated data in returns, leaving room for mistakes or deliberate mis-statement by taxpayers.


·     Filing of GSTR-1 is yet to be made mandatory before filing of GSTR-3B, which defeats objective of auto-population of ITC on monthly basis.


Scrutiny of returns


·     SOP to be implemented for scrutiny of returns under Section 61 of the CGST Act within 6 months. Currently, the department is using data analytics and system-based tools to identify deviant taxpayers.



Reliability of data maintained by GSTN

·     Due to lack of validation checks in Common Portal to accept only reasonable values, there are significant issues in relying upon data maintained by GSTN. Some of the highlighted inconsistencies are as under:


  • Tax amount more than 28% (highest rate) of taxable value was found.
  • In GSTR-9, taxable values in total outward supplies were inconsistent with tax amount.
  • Difference in declaration of CGST and SGST components, which should ideally be same. Check is now built in GSTR-3B but it still remains to be incorporated in GSTR-1 and GSTR-9.
  • Difference in ITC claimed in GSTR-3B and GSTR-9.
  • Inconsistency in auto-populated details in GSTR-9 of total ITC claimed in GSTR-3B.
  • Incorrect computation of difference in Column 6J (Difference of All other ITC and ITC claimed in GSTR-3B).


·     There are various taxpayers who have not been allocated either to Centre and State.


NITYA Comments: There are many taxpayers who are issued scrutiny notices for difference of value, rate of tax or ITC claimed in returns. Often, values reflected in notices are incorrect and revenue is unable to provide back-up of same. Notable that CAG and the Ministry have acknowledged that there have been discrepancies in various columns of returns including in auto-populated data. Taxpayers facing proceedings from department can rely upon this report to defend their case at suitable forum.



Processing of refund claims

·     Various taxpayers availed fake ITC due to lack of adequate systems. Many such taxpayers were later found non-existent. CAG recommended comprehensive profiling of taxpayers of such nature.


·     Refunds are being sanctioned without proper scrutiny and without mandatory documentary evidence. Such cases have been illustrated in the report.


·     Non-recovery of refund amounts in absence of mechanism to monitor realization of export proceeds. Even though e-BRC module is available with GSTN, it has not been integrated with GSTN.


·     Refund is wrongly allowed even where taxpayers did not debit amount in ECL.


·     Double payment of GST refunds arose due to cross jurisdiction to both Centre and States. There was no data validation to identify such cases and some taxpayers returned refund suo-moto.


·     There is delay / non-conduct of post audit of refund claims.


NITYA Comments: There were Circulars under Excise laws which required post-audit within a week of grant of refund. Under GST, such post-audit procedures were made applicable vide Circular No. 17/17/2017-GST dated November 15, 2017. As these were not being followed, pursuant to this CAG audit, CBIC issued recent Instruction No. 3/2022-GST dated June 14, 2022. Vide this instruction, CBIC has issued detailed guidelines for conducting post-audit scrutiny under Section 107(2) of the CGST Act.


·     Department is non-compliant in granting interest for delayed refunds. It is mandatory to grant interest after 60 days of generation of ARN. CAG recommended amendment to exclude period of delay attributable to taxpayers. CAG also proposed system amendment to compute interest automatically upon delay.


NITYA Comments: This report clearly identifies obligation on revenue to pay interest on delayed grant of refund. Taxpayers can claim interest for past period as well where there was delay in grant of refund, relying on legal provisions and observations of this report.


·     Department has delayed issuance of acknowledgment or deficiency memos beyond stipulated time period.


·     Department has sanctioned excess refund due to incorrect adoption of Adjusted Total Turnover.


·     Department has sanctioned refunds irregularly on ineligible ITC barred under Section 17(5) of the CGST Act and on capital goods in case of zero-rated supplies.


·     Department has sanctioned excess refund due to non-consideration of ITC as per GSTR-2A.


NITYA Comments: Notable that correct way of recovering any excess refund granted to a taxpayer is by filing an appeal against Refund Sanction Order. In many cases, department is issuing SCNs under Section 73 / 74 without filing appeal. Such SCNs can be contested as time limit for filing appeal would have passed in most of the cases.


·     Department has granted excess refund due to non-reversal of ITC by taxpayer on exempted supplies like supply of MEIS scrips.


NITYA Comments: CAG seems to have incorrectly determined amount of reversal since reversal will only be required on common ITC and ITC exclusive to taxable supplies will be fully available.


This observation is not relevant for future since clause (d) has been inserted to Explanation 1 to Rule 43 to provide that ITC reversal under Rule 42 and Rule 43 of the CGST Rules is not required on supply of Duty Credit Scrips.


·     Department has sanctioned refund of ITC to SEZ units.


NITYA Comments: Observations of CAG are incorrect as there is no bar under GST law for refund to SEZ units if they make physical exports. Various High Courts have taken this view and the issue is pending final decision before Supreme Court in UOI v. Britannia Industries Limited, SLP (C) No. 13431/2021.


·     Department has not re-credited ITC back to taxpayers’ account where refund was rejected.


NITYA Comments: This observation is not relevant for future since recently methodology has been proposed for allowing re-credit of ITC in such cases through PMT-03A.


·     Department has sanctioned refund even if taxpayer had not filed return which is contrary to Section 54(10) of the CGST Act.


Overall NITYA Comments: Report has observed various instances of wrong sanction of refund claim as also inaction of Government in issues like automatically granting interest on delay, issuance of acknowledgment of refund claim, deficiency memos within stipulated time period etc.



Transitional Credits

CAG has observed that there was excess carry forward of transitional credits by taxpayers under GST regime. Such excess claim is attributable to following reasons:


·     Carry forward of ineligible credits through TRAN-1 like credit of Cesses, PLA balances etc.


·     Closing balance of credit carried forward exceeds balance appearing in returns including where returns of erstwhile laws was not filed or where closing balance was increased in revised returns.


·     Carry forward of ineligible credits under Section 16 and 17 of the CGST Act.


·     Carry forward of 100% of credit of capital goods and not only unavailed portion.


·     Carry forward of credit of stocks claimed even in absence of stocks, basis time barred documents, without duty paying documents etc.


·     Transitioned credit reflected in ECL upon declaration of goods held in stock in TRAN-1 even before filing of TRAN-2.


NITYA Comments: There are many taxpayers facing audit / adjudication proceedings for dual claim of ITC which got reflected once by declaring goods held in stock in TRAN-1 and secondly upon filing of TRAN-2. While excess claim needs to be reversed, CAG has acknowledged that issue arose due to lack of system validation. Thus, any penalty proceedings on this issue, can be defended by this observation.


·     Claiming transitional credit on goods and services in transit even on invoices booked beyond 30 days and claiming of credit on capital goods received within 30 days from July 1, 2017.


NITYA Comments: While CAG has pointed out several valid issues, some points can be legally defended including transition of credit of cesses, availment of full credit on capital goods (not only 50%) etc. Taxpayers can expect disputes from jurisdictional authorities on these issues for which they need to litigate in appropriate legal forum.


Hope you find this an interesting read! Please feel free to share your comments / feedback.