What is a GST Audit? A Guide for Businesses

A GST audit consists of official evaluation procedures designed to check taxpayer financial records and returns with supporting documentation that validate tax payments, reported revenues, and input tax credit claims. The primary purpose behind GST audits is to verify complete business compliance with Goods and Services Tax legislation.

Under the GST framework, audits serve as a regulatory tool to identify discrepancies, detect tax evasion, and promote transparency. The audits will either run as self-certified checks (for companies preparing GSTR-9C) or through formal tax authority inspections as departmental or special audits.

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    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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    Types of GST Audits

    Depending on the situation and authority involved, there are several types of GST audits, each governed by specific provisions of the CGST Act. Here are the common types of GST audits:

    Departmental Audit (Section 65)

    A departmental GST audit is conducted by tax authorities under Section 65 of the CGST Act. This audit is typically initiated based on risk parameters, data analytics, or discrepancies identified during routine scrutiny. The officer issues a prior notice (Form ADT-01) at least 15 working days before starting the audit. The GST audit must be completed within 3 months from the date of commencement, extendable to 6 months by the Commissioner.

    If a retail company gets flagged for repeated mismatches between GSTR-1 and GSTR-3B, it will be served a notice for a departmental audit by the GST authority.

    Special Audit (Section 66)

    A special audit under GST is initiated by the Assistant Commissioner if they believe that the taxpayer has undervalued supplies or wrongly claimed input tax credit beyond normal limits. The audit must be completed by a Chartered Accountant or Cost Accountant nominated by the Commissioner. This type of audit can be ordered regardless of the taxpayer’s turnover.

    A small electronics importer with ₹1.5 crore turnover can be subjected to a special audit after the officer found a high ratio of ITC claims that didn’t align with industry benchmarks.

    Audit by CA or CMA (Turnover-Based Audit)

    Previously, businesses with an annual aggregate turnover exceeding ₹2 crore were required to undergo a statutory GST audit conducted by a Chartered Accountant (CA) or Cost Accountant (CMA). However, post the Finance Act 2021 amendment, this provision was removed.

    Currently, businesses with turnover exceeding ₹5 crore must submit a self-certified reconciliation statement in Form GSTR-9C, although a third-party audit is no longer mandatory. Despite this, many businesses still voluntarily engage CAs or CMAs for internal audits to ensure full compliance.

    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.

    What Happens if Discrepancies are Found in a GST Audit?

    When discrepancies are discovered during a GST audit, businesses are given an opportunity to correct the errors. However, unresolved or serious inconsistencies can lead to legal and financial consequences under the GST law.

    • Opportunity to Rectify Errors: Taxpayers may be allowed to amend their GST returns or records. Rectifications must be made before the due date of the September return following the end of the financial year, or before filing the annual return, whichever comes first.
    • Penalties for Non-Compliance: If the GST audit reveals tax evasion or incorrect filing, penalties can range from 10% to 100% of the tax due, depending on the nature of the default (e.g., willful or unintentional).
    • Interest on Short Payments: In addition to penalties, interest at 18% per annum is applicable on any underpaid tax amount from the due date until actual payment.
    • Issuance of Show-Cause Notice (SCN): For major discrepancies or suspected tax evasion, the GST department may issue a show-cause notice asking the taxpayer to justify their position.
    • Mandatory Response to SCN: The taxpayer must respond within the prescribed time frame with supporting documents. Failure to do so may trigger legal actions.
    • Consequences of Non-Response: If the taxpayer fails to adequately respond, the department may initiate assessments, impose penalties, or even begin recovery proceedings.

    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.

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