What is a GST Audit? A Guide for Businesses

When is a GST Audit Required?

The Goods and Services Tax requires extensive tax reporting oversight through GST audit operations for maintaining transparent, accurate, and compliant data. The evolution of mandatory audit based on turnover has brought changes, but additional thresholds and certain special scenarios require checks under the GST law. The authority must perform audits as a necessary step to validate the accuracy between tax payments and claimed ITC, along with documented returns against business records.

Statutory Threshold for GST Audit

The CGST Act involved Section 35(5), which stated that businesses exceeding ₹2 crore in annual turnover needed auditing by Chartered Accountants or Cost Accountants. The Finance Act 2021 eliminated the requirement for account audits as set out in the original CGST Act, Section 35(5).

All taxpayers that generate more than ₹5 crore in aggregate turnover must file a self-certified reconciliation statement through Form GSTR-9C, along with their annual return using Form GSTR-9. The requirement for self-certified reconciliation statements through Form GSTR-9C does not force taxpayers to undergo third-party audits, yet it makes taxpayers responsible for accurate financial and tax reporting.

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Other Scenarios Where an Audit May Be Ordered

Even if a taxpayer’s turnover is below the statutory threshold, a GST audit can still be ordered by tax authorities in the following scenarios:

1. Departmental Audit under Section 65: The Commissioner or an authorised officer may initiate an audit at their discretion to examine the taxpayer’s records. This may be based on risk parameters, data analytics, or unusual transactions.
2. Special Audit under Section 66: If the tax officer suspects that the value of supply is incorrect or the ITC claimed is higher than usual, a special audit can be ordered. This audit is conducted by a CA or CMA nominated by the Commissioner.
3. Mismatched Filings or Suspicious Refunds: If the data filed in GSTR-1, GSTR-3B, and GSTR-2A/2B don’t match, or large refund claims are made, it could trigger an audit despite turnover being under ₹5 crore.

GST audit is not limited to big businesses. Non-compliance, errors, or inconsistencies in filings can invite scrutiny and enforcement even for smaller entities. Regular reconciliations and internal checks are the best ways to stay audit-ready and avoid penalties.

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Process of GST Audit

Step 1: Issuance of GST Audit Notice

The GST audit process begins when the tax authorities issue a formal notice.

• For a departmental audit under Section 65, Form ADT-01 is issued at least 15 working days before the audit begins.
• In case of a special audit under Section 66, the Assistant Commissioner directs the taxpayer to get audited by a Chartered Accountant or Cost Accountant nominated by the Commissioner.

Step 2: Submission of Required Documents

Upon receiving the audit notice, the taxpayer must submit necessary documents and records for examination. Commonly requested documents include:

• GST returns (GSTR-1, GSTR-3B, GSTR-9, GSTR-9C)
• Sales and purchase registers
• Input Tax Credit (ITC) ledgers
• E-way bills and tax challans
• Trial balance, profit and loss account, and balance sheet

Providing complete and accurate records helps ensure a smoother GST audit procedure.

Step 3: Conduct of the Audit

The GST audit is conducted either at the taxpayer’s place of business or the department’s office. During the audit, officers:

• Examine tax returns and financial statements
• Cross-verify ITC claimed against invoices and GSTR-2A/2B
• Identify discrepancies in tax payment or classification of goods/services
• Review compliance with invoicing rules and statutory provisions

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Step 4: Completion and Communication of Audit Findings

After reviewing all submissions, the findings are compiled and communicated:

• For departmental audits, the findings are shared in Form ADT-02.
• If inconsistencies are detected (e.g., underreported turnover, excess ITC claims), the taxpayer may receive a Show Cause Notice (SCN) under Section 73 or 74.

This step is essential in determining the final tax liability, including any additional tax, interest, or penalty due.

Step 5: Post-Audit Compliance

If any demand is raised, the taxpayer must either pay the liability or contest it through appeal. Timely response to audit findings helps avoid legal complications and ensures GST compliance.

Conclusion

A GST audit is more than just a regulatory requirement; it’s a vital tool to ensure transparency, accuracy, and compliance in a business’s tax affairs. Understanding the audit process, preparing accurate records, and responding promptly to notices can help businesses avoid penalties and maintain seamless operations under the GST framework. Staying audit-ready is not just smart; it’s essential.