Hello Auditor

What is the relevance of VAT in post-GST audits?

Continuing Validity of VAT Laws Post-GST

  • Although GST subsumed most indirect taxes from 1st July 2017, VAT laws were not repealed
  • VAT continues to govern transactions up to 30th June 2017, especially for goods not under GST like alcohol and petroleum
  • Therefore, VAT records remain legally enforceable and subject to audit by state tax departments
  • States retain the right to initiate or complete VAT assessments and audits for the pre-GST period
  • Businesses must maintain VAT records, returns, and documents for several years post-GST as per state laws

VAT Records Required in Post-GST Audits

  • Auditors may request VAT returns (e.g., Form 231, Form VAT 100), purchase/sales registers, and stock records
  • Documents like input tax credit ledgers, tax invoices, VAT payment challans, and audit reports are examined
  • Businesses must reconcile VAT closing balances with GST opening balances (via TRAN-1 filings)
  • Records for interstate stock transfers, works contracts, and branch transactions under VAT are often reviewed
  • VAT compliance history influences transitional credit eligibility and audit findings in GST

Transitional Credit and VAT-GST Linkage

  • One key focus in post-GST audits is the carry forward of VAT input credit into the GST regime
  • Auditors verify the correctness of credit reported in TRAN-1 and its correlation with VAT returns
  • Any mismatch or unsupported VAT credits may result in reversal of GST credit or penalties
  • Proper treatment of closing stock and input tax on stock is critical to avoid disputes
  • Auditors also check if VAT credits were legally admissible and properly documented before migration

Risk Areas and Audit Triggers

  • Non-reversal of VAT input tax credit on exempted goods or stock given away as free samples
  • Incorrect classification of goods under VAT leading to underpayment or misreporting
  • Use of ineligible VAT credit in TRAN-1 due to expired invoices or missing records
  • Differences in inventory valuation or turnover between VAT and GST periods
  • Incomplete documentation of last VAT return filed before 30th June 2017

Importance for Compliance and Litigation

  • VAT audit findings can result in tax demands, interest, and penalties, affecting financial reporting
  • Unresolved VAT matters can delay GST refunds or result in notices from both regimes
  • Many businesses are facing ongoing litigation for VAT disputes, even several years post-GST
  • Effective handling of VAT audits supports closure of legacy tax issues and strengthens compliance systems
  • VAT findings may also influence income tax scrutiny or other indirect tax verifications

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