GST and Bank Audit

Season of Bank Audit is back and so is the time for Chartered Accountants to roll up their sleeves. This time it is even more important. The advent of GST on July 2017 is going to change the way audits had been conducted earlier. There are few things which an auditor should keep in mind, when analyzing the GST compliance made by the bank:

1.     Transitional Credit

Most of the bank had opted for centralised registration under pre-GST era, but under GST they are required to take registration either at the branch level, region level or at the state level. Centralised registration is no more permitted. In this scenario they were required to transfer the closing input tax credit as on 30.06.2017 from centralised registration number to the decentralised GST registration numbers.  As per section 140(8) of Central Goods and Services Tax Act, 2017 input tax credit could be transferred as per the will of the bank. The manner of distribution was fully open for bank to transfer the credit as per their own requirements.

 Auditors should call for FORM TRAN-01 and verify Table 8. They should also call for the service tax returns for the period April 2017-June 2017 and verify whether the return has been filed within 3 months of commencement of GST. Also the banks shall be required to prepare a Credit Transfer Document (CTD) on the basis of which the transfer of credit to branch level would have been made. An auditor at all levels should ensure that such compliance have been made.

2.     Stock Registers to be maintained:

Most of the banks have taken region wise GST registration. As per Rule 56(2) of CGST Rules 2017, Banks are required to maintain the stock register in respect of goods received and supplied by them. At branch level, auditors should call for such records which the branch has sent to its regional office for consolidation. Such stock register can be either prepared manually or electronically. The auditor should verify the same and in case the branch reports that it being done at regional level, suitable management representation shall be obtained for record purposes.

3.     Reversal of Input Tax Credit in case of banks:

At various levels of bank the auditor should ensure that proper input tax credit has been claimed. As per Entry 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, the supplies by way of extending deposits, loan & advances where consideration charged by bank is in form of interest shall be exempt. This means that banks are rendering both exempt as well as taxable supplies. In such a case where the bank opts for section 17(2), the input tax credit in respect of exempted supplies (interest) shall be reversed. The other option with the bank is to opt for section 17(4) of CGST Act 2017 and claim only 50% of the eligible input tax credit. Auditors should note that option under section 17(4) can be opted only once and cannot be withdrawn in the same financial year. The auditor should call for input tax account from the branches and rectify the errors in case excess input tax credit has been claimed.

4.     ITC on Expenses incurred by Banks:

The auditors should specifically verify that wherever the bank is claiming any input tax credit, the invoice should be in the name of Bank with GSTIN mentioned on it. The Auditors would come across the instances where the invoices are in the name of bank employee and the credit is being claimed, specifically in case of travel expenses, boarding & lodging charges. The auditor should specifically verify the case of blocked credit in terms of section 17(5) of the Central Goods and Services Tax Act 2017. Since GSTR2 and GSTR 3 has been suspended for FY 2017-18, the auditors would come across the instances where ineligible credit has been claimed while filing monthly GSTR 3B returns. The auditors also work out the differences between the monthly GST Returns and the financial statements. This shall help bank in consolidation as well as filing their annual GSTR 9.

5.     Repossession of assets in case of defaulters:

In case of defaulting borrowers, the bank repossess the assets from the defaulter and sells them through auction. In such cases banks are required to pay GST on the differential of purchase value and sale value. As per Rule 32(5) of the CGST Rules 2017, the purchase value in case of banks would be the purchase price of such goods by defaulting borrower reduced by 5% for every quarter or part thereof, between the date of purchase and the date of disposal by the bank.  The auditors should call upon the purchase invoice of such repossessed goods and verify the payment of GST made by the bank. Wherever lesser tax has been paid, the same should be provided for by the auditors.

6.     Stock statements, GST returns and Drawing Power:

In case of Cash credit limit where stock and debtors are collateral, the auditor should minutely verify all the GST Returns and the stock statements submitted by the borrower. Also an auditor can take support of the audited balance sheet in order to work out the real drawing power of the borrower. The auditors should also match the audited balance sheet as on 31.03.2017 and the stock statements for period April 2017-June 2017 in order to arrive at the closing stock as on 30.06.2017 as declared by the borrower in Form GST TRAN-1. Where the amount declared in the stock statement and those mentioned in Form GST TRAN-01 does not tally, the auditor should work out the deviation and apply the same in all future stock statements. Based upon the new working, drawing powers should be calculated and according the decision regarding the classification of the account can be made.  

7.     Service charges and its treatment:

S. No.	Bank Charges	Treatment under GST
1.	Loan Processing Charges	Auditor should verify the correct processing charges is levied. The auditors might come across the instance where processing charges including GST is charged without bifurcation and again the same is subject to GST. Auditors need to verify the processing charges. GST Rate – 18% SAC:9971
2.	Cash Handling Charges	GST Rate – 18% SAC:9971
3.	Minimum Average Balance Charges	GST Rate – 18% SAC:9971
4.	Service Charges for Extra leaves, Demand Draft etc.	GST Rate – 18% SAC:9971
5.	Penalties in case of Bounced cheque/low balance in case of ECS Mandate etc.	Although it is termed as penalty, it will still be considered as consideration for supply as per section 15 read with section 2(31) of the act. GST Rate – 18% SAC:9971
6.	Pre-Payment Charges/ Foreclosure Charges	GST Rate – 18% SAC:9971
7.	Intersol Charges	GST Rate – 18% SAC:9971
8.	Valuation Charges	GST Rate – 18% SAC:9971