Due Diligence Under GST

Before entering into any type of agreement, contract or transaction, you must exercise extreme caution. Doing your due diligence means that you should thoroughly investigate and evaluate any potential business opportunity. Investors typically practise due diligence before investing in any business. The process of due diligence that investors typically follow involves assessing the operations and management of a business and verifying the material facts and figures provided by the business themselves. Often, investors may hold sessions with the management of the company to get answers to their questions and also to ensure that any and all information that they should be made aware of has been disclosed. The outcome of such sessions often has a great bearing on whether or not the investor goes through with the deal.

In this article, we will look at the process of due diligence under GST.

What is Due Diligence under GST?

GST compliance laws dictate that all taxpayers must maintain accurate records of transactions in their books of accounts. They must also file all their GST Returns as per the timelines laid down by the laws. Both these compliance requirements start with accurate invoicing, and using a robust GST Software can help you make this process smooth.

When conducting due diligence for GST, it is important to first get a thorough understanding of the business operations of the company in question, as that will be a major determining factor of how they maintain GST compliance. The accounting records must be carefully reviewed in accordance with the requirements as per GST laws. This is a highly specialised job, where the experts will reconcile entries in GSTR-3B with those in GSTR-1 in order to find discrepancies, if any. Through this reconciliation process, they will move the business towards getting GST compliant.

Typically, during the due diligence process, annual returns of the last three years are evaluated, along with reviewing any previous tax filings, due diligence reports and GST Returns.

How to conduct due diligence?

The process of due diligence is conducted in three phases that are listed below:

Phase- I : Pre- Due Diligence 

• A consultation with the customer is done to get better acquainted with the transaction 
• An evaluation of the scope of work and a technique that would be best suited to the process
• A project team from a central location is assembled
• A list of all due diligence processes is to be made

Phase- II : Due Diligence Process And Negotiation Phase

• It is confirmed whether the work is on-site or off-site 
• A flexible approach needs to be maintained even after the project has been launched
• A ‘QnA’ process is also initiated with the management
• Assistance is provided for both the formulation of financial aggregates and the phrasing of financial clauses in reports
• The negotiation terms are also drafted with the assistance 
• There is regular communication is maintained with the client 

Phase-III : Closing And Post Closing Process

• Preparation of a study of the client’s paperwork
• Assistance is provided on PPAs and other post-closing transactions 
• Based on the results of due diligence, the price adjustment process is initiated

Critical Areas Of Diligence Under GST 

Specific areas can be highlighted, and they are listed below:

Understanding of Business 

Before acquiring or investing in any enterprise or business, it is imperative to understand and interpret the company’s operations following the GST codes for goods and services. Along with the functions, it is also essential to observe their accounts to minimize any chance of fraud or sniffing out a hidden liability. By understanding the above information, the acquirer gets a better picture of GST’s effects on the total goods and services.

GST Compliance by Business 

Experts of GST compliance assist clients in reviewing their GSTR-3B filings to compare them to GSTR 2A, which are essential for the book-to-return reconciliation, exempted/ non-GST supply delivery under warranty and the matching of the input tax credit. 

Supply Related Details 

The transactions related to ”place of supply” and ”time of supply” are measured and reviewed to circumvent any interest or penalty payments. 

Transactions Related to Input Tax Credit

Checks for the delivery of goods/services, receipt of tax invoice, filing of GST return by the vendor, payment of GST to the government, and payment made to the vendor within 180 days.

Important Points To Consider While Conducting Due Diligence Under GST

Due diligence is an essential process that businesses must undertake to ensure compliance with Goods and Services Tax (GST) regulations. Conducting thorough due diligence can help businesses identify potential risks and liabilities, which can save them from costly penalties and legal consequences. In this regard, there are several important points that businesses need to consider while conducting due diligence under GST, which we will explore in detail. Here are some important things to consider while conducting due diligence under GST.

• Whether or not the manager can demonstrate the reconciliation of GST returns and audited financials.
• Whether GST returns have been filed within the timelines.
• Whether all GST compliances have been met
• What are any notices they have received from the GST department?
• Are there any outstanding legal compliances/cases from the previous indirect tax regime? ( service tax, VAT etc.)
• The stock report is verified to ensure no lost or damaged goods.
• Whether credit is allowed under GST law

Conclusion

GST laws are detailed, complicated and, in some cases, there is ambiguity as well. This leaves some laws open to interpretation, which can cause mistakes. Such mistakes lead to non-compliance and can attract heavy penalties. Therefore, in order to avoid the hefty penalties and the resulting problems, large businesses often consider it a worthwhile investment and exercise to conduct timely due diligence of their GST compliance.