GST Scrutiny by Department: Processes and Key Risk Parameters

Introduction

Goods and Services Tax (GST) revolutionized India’s indirect tax regime, aiming for transparency and reducing cascading effects. However, the vast volume of self-declared compliance also brings the risk of errors, fraud, or deliberate evasion. To manage this, the GST department conducts risk-based scrutiny of GST returns — a cornerstone of its compliance and enforcement mechanism. This article offers a comprehensive insight into the scrutiny process, legal intent, and the evolving analytics-based selection of cases through key risk parameters.

Statutory Framework of GST Scrutiny

Legal Basis

GST scrutiny derives authority from Section 61 of the CGST Act, 2017 and Rule 99 of the CGST Rules, 2017. These establish the procedures for scrutiny of returns by a ‘proper officer’ and outline mechanisms for taxpayer response and departmental follow-up. Here are the salient features:

• Legal intent: To verify correctness of returns filed and self-assessed tax paid.
• Process: Initiated through data analytics, examination of returns, issuance of scrutiny notice, taxpayer response, and further action per the explanations received.
• Forms Used: Key forms include ASMT-10 (Intimation of Discrepancy), ASMT-11 (Taxpayer Response), and ASMT-12 (Order of Acceptance/Closure).
• Automation: From FY 2019-20 onward, an automated return scrutiny module reduces manual intervention, focusing on efficiency and transparency.

Departmental Process: Step-by-Step Scrutiny

Step 1: Selection of Returns for Scrutiny

Directorate General of Analytics and Risk Management (DGARM) is responsible for analyzing GST data nationwide, identifying taxpayers for scrutiny based on risk parameters. This is conducted as follows:

• Data Analytics: Advanced systems and dashboards identify mismatches, abnormal trends, and suspicious reporting across GSTR-1, GSTR-3B, GSTR-2A/2B, E-way bills, and other datasets.
• Communication: Selected GSTINs are shared with field officers via the DDM portal or scrutiny dashboard (ACES-GST application from FY 2019-20 onwards).
• Scrutiny Schedule: The scrutiny process is scheduled and reported monthly, prioritizing cases with higher perceived risk or revenue implication.

Step 2: Initiation by Proper Officer

• The Superintendent of Central Tax reviews all returns filed by the identified GSTIN for the relevant financial year.
• A scrutiny register is maintained to track progress for each case.
• The officer may source information from the GST portal, E-way bill system, bank data, or third-party sources.

Step 3: Detection & Discrepancy Identification

Parameters analyzed can include mismatches in tax reported, Input Tax Credit (ITC) claims, turnover fluctuations, e-way bill data and more. If discrepancies are noticed, further action is initiated:

• Notice in ASMT-10: The taxpayer is notified regarding the specific discrepancy, with clear mention of the issue(s) and supporting evidence if needed.
• Documentation: Officer compiles supporting documentation, including screenshots, financial extracts, or communication records.

Step 4: Taxpayer Response and Adjudication

• Time to Respond: Taxpayer receives up to 30 days (with possible extension) to respond via ASMT-11, explaining or rectifying the discrepancies.
• Departmental Review: If the officer is satisfied, the process closes with ASMT-12 order; otherwise, further action is triggered under audit, inspection, demand, or penalty provisions.

Step 5: Escalation and Enforcement (if needed)

Escalation can involve:

• Audit under Section 65, Special Audit under Section 66
• Inspection/Investigation under Sections 67, 73, or 74
• Initiation of demand and penalty proceedings for confirmed violations

Key Risk Parameters: The Bedrock of Scrutiny

Selection of returns for scrutiny and depth of analysis hinges on an evolving array of Key Risk Parameters (KRPs), many refined annually in SOPs and departmental guidance. Common risk triggers include:

1. Mismatch in Outward Tax Liability

• GSTR-1 vs. GSTR-3B: Reported sales must reconcile with tax paid. Discrepancies indicate under-reporting or tax evasion risks.
• GSTR-1 vs. E-way Bill Portal: Sales or movement of goods must align. Unmatched e-way bills can indicate unreported turnovers.

2. ITC Mismatches

• GSTR-3B vs. GSTR-2A/2B: ITC claimed must be backed by valid supplier invoices as recorded in supplier’s outward returns.
• Excessive ITC Availment: Excess ITC claim, or claims absent in 2A/2B, triggers investigation.

3. Supply Classification Risks

• Tax Rate Misclassification: Incorrect application of tax rates, or reporting taxable supplies as exempt or zero-rated.
• Exempt vs. Taxable Turnovers: Disproportionately high exempt or nil-rated transactions versus industry standards.

4. Refund & Reversal Risks

• Frequent Refund Claims: Multiple or abnormally high refund applications for exports/inverted duty may attract scrutiny.
• ITC Reversal Omissions: Failure to reverse ineligible ITC attributable to exempt/nil-rated supplies, or non-business use.

5. Turnover Fluctuations

• Year-on-Year Variations: Unexplained spikes or drops in turnover or tax liability, without business rationale.

6. E-Way Bill & Movement Data Analysis

• Unmatched Movement: Goods transported as per e-way bills but not reported in returns.
• Inward/Outward Supply Gaps: Gaps between recorded inward supplies and ITC claims.

7. Tax Payment Patterns

• Delayed/Incomplete Payment: Chronic late payments or underpayment versus self-assessed liability.

8. Registration and Amendment Risks

• Multiple GSTINs: Multiple registrations by the same PAN in different states, especially near state borders.
• Frequent Amendments: Regular changes in key registration fields, such as business address or nature of business.

Risk Parameters in Practice: Case Examples

Case Study 1: ITC Mismatch

ABC Ltd. claims ITC worth ₹50 lakhs in GSTR-3B, but only ₹20 lakhs is available as per GSTR-2A. The officer issues an ASMT-10 requiring justification for excess ₹30 lakh ITC claim. On failing to reconcile, further proceedings are initiated.

Case Study 2: GSTR-1 vs. 3B Turnover Gaps

XYZ Enterprises declares outward supplies of ₹5 crores in GSTR-1, but only ₹3.8 crores in GSTR-3B, indicating possible underpayment of tax. This triggers an in-depth scrutiny and potential demand for differential tax with interest and penalties.

The Role of Technology and Advanced Analytics

With increasing compliance data, automation is the backbone of scrutiny:

• Automated Scrutiny Module (from FY 2019-20): Automates identification, notice preparation, tracking, and communication between department and taxpayers. Minimizes human error, standardizes responses, and expedites resolution timelines.
• Interconnected Databases: Integration with income tax, customs, financial intelligence, and even bank/accounting data, giving officers a holistic view of taxpayer profile and risks.
• Continuous Improvement: KRPs, scoring models, and analytical triggers are periodically reviewed and adjusted for new methods of evasion or scheme complexity.

Taxpayer’s Perspective: Compliance and Response

What to Do If Selected for Scrutiny

• Verification: Immediately reconcile all returns (GSTR-1, 3B, 2A/2B, E-way bills, books of account).
• Documentation: Prepare explanatory notes, supporting evidence, and reconciliations for each identified discrepancy.
• Timely Response: Respond within 30 days via GST portal, using precise and convincing documentation.
• Rectification: If a genuine error exists, pay the shortfall (tax, interest) before or along with the response.

Best Practices

1. Routine Self-Audit: Regularly check and match returns with books and GSTN data before filing.
2. Monitor Amendments: Keep care in amending registration details and reporting transactions.
3. Track Communications: Monitor the GST portal for notices or departmental communication.
4. Professional Help: Engage GST practitioners or chartered accountants for complex or disputed matters.

Departmental Reporting and Monitoring

• Monthly Scrutiny Progress: Each officer must submit a monthly progress report on cases scrutinized to higher authorities. CGST zones compile, review, and submit to central oversight boards for compliance and improvement.
• Scrutiny Register: Ongoing records of all scrutinies, taxpayer responses, outcomes, pending and completed actions.

Common Outcomes and Implications

If Discrepancy is Satisfactorily Explained

• Scrutiny closes with no further action; order is passed in ASMT-12.

If Discrepancy Persists/Is Unexplained

• Further action taken under GST Act, including demand, penalty, audit, or investigation.

If Non-Compliance with Notice/Non-Response

• Officer may initiate demand proceedings under Section 73 (non-fraud) or Section 74 (fraud, willful misstatement/suppression), with interest and hefty penalties.

Penalties and Litigation

• Interest: Payable for delayed or short tax payment.
• Penalties: As per the nature (regular vs. fraudulent) of delinquency.
• Litigation: Taxpayers can contest departmental findings via GST appellate forums and higher courts.

Trends and Evolving Practices

GST scrutiny protocols have shifted from manual, ad hoc selection and analysis to data-driven, real-time risk assessment:

• Automated scrutiny via dashboards and cross-database linkages.
• Constant refinement of KRPs based on field experience, fraud trends, and sectoral analysis.
• Enhanced taxpayer education and outreach to reduce inadvertent errors.

Conclusion

GST scrutiny remains a key compliance pillar, protecting revenue, curbing evasion, and upholding the self-assessment principle central to GST law. By leveraging robust key risk parameters and advanced analytics, the department is steadily moving towards a more automated, efficient, and transparent scrutiny regime. For taxpayers, ongoing self-audit, compliance vigilance, and proactive error rectification are crucial to a smooth experience in a tightening scrutiny environment.

Thanks & Regards

CA Mayank Khandelwal