Significance of Due Diligence under GST

Ashish M. Shaji

17 Mar, 2023

Before a person enters into a contract or a transaction with another party, conducting due diligence becomes essential. The information collected through the process of due diligence can help both parties as some crucial factors emerge out of it.  In this article, we will discuss Due Diligence under GST.

Overview of Due Diligence

It is a process of researching and analysing before initiating an acquisition, investment, business partnership or bank loan. Through Due Diligence, an entities’ commercial potential is analysed, and the financial viability of an entity is analysed in terms of its assets and liabilities. Any potential risks or unexpected liabilities can be detected. The information that is collected from legal due diligence, it will help both buyer and the target company in preparing M&A document and other ancillary documents.

Objective of Due Diligence

The following objective can be achieved through due diligence:

• The main objective of the due diligence process is to help the buyer or investor to know everything about the company he is buying or investing into before entering into the contract. Here “everything about the company” includes success factors, strengths, potential risks etc.
• It also reveals issues that may be addressed during the pricing negotiations.

How is due diligence conducted?

The process of due diligence is as follows:

• Firstly consultation is done with the customer, which helps in knowing about the proposed transaction;
• Then the scope of work and technique is evaluated;
• Necessary documents and information is collected from the target company;
• Once the documents and the documents sought are obtained, the next step is all relevant information from such documents is jotted down;
• Any other document or information may be asked for;
• After that DD report is prepared;
• Once all the chapters of the DD report is drafted, an executive summary is prepared, which contains the gist of key findings of the Due Diligence transaction. The report is prepared in a detailed manner outlining all the compliances and risks or concerns, if any.

Due Diligence under GST

Under the GST Act^[1], every taxpayer is required to maintain books of accounts, invoices, and such other records and should also file GSTR on time. GST due diligence helps in identifying whether GST compliances have been complied with by the businesses. In order to conduct a due diligence under GST, firstly understand the company’s operations. Check the accounting records while keeping in mind the obligations under GST law. The GST diligence specialists help clients to review their GSTR 3B filings and compare them with GSTR 1. Experts ensure that the business is GST compliant.

Due diligence experts handle and review invoices in order to make sure that the tax is levied correctly. Transactions relating to place of supply and time of supply are measured precisely in order to avoid interest and penalty payments.

Checks are made in respect of delivery of goods/service, tax invoice receipt, payment of GST, filing of GSTR etc.

As the GST law is complex and ambiguous, many businesses suffer due to mistakes they make in assessment and other compliances. Hence various large scale manufacturers and service providers consider indirect tax due diligence as a value added endeavour.

The Due diligence under GST entails review of last 3 annual return, reconciliation of financials with furnished returns, review of previous due diligence report, review of completeness and accuracy of tax filing under GST. Apart from the compliance review, due diligence should also ensure that management is aware of the legislative updates and that it is aware of the ramifications of non-compliance.

Crucial questions to be asked

Despite the fact that as an expert, one may undertake a thorough assessment of GST compliances, one should never avoid the following questions:

• Whether or not GST returns have been timely filed;
• Whether or not all compliances under GST has been complied with;
• Whether any notice has been received from the GST department;
• Whether any compliance is pending from previous indirect tax regime;
• Whether stock report has been verified;
• Whether credit is taken in accordance to the GST law.

Takeaway

Due diligence under GST helps you to make informed decisions, and it provides a report on which your future actions are planned. The Due Diligence report contains not just the risks but also their solutions which allows a person to make better choices. Hence the importance of due diligence has been amplifying over time. Even a minor lapse in maintaining records or such other compliances can result in fines, penalties and reputation loss. Hence GST due diligence can be very helpful as it entails verification of the classification of goods and services as per the provisions of GST Act and identifies whether financial information and records under GST have been maintained accurately and in accordance with the GST law.

Read our Article:Types of Due Diligence Services and Benefits