GST Departmental Audit – Definition | Scope | Compliance Guide
- Blog|GST & Customs|
- 14 Min Read
- By Taxmann
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- Last Updated on 1 May, 2025
GST Departmental Audit is a statutory examination carried out by tax authorities under Section 65 of the Central Goods and Services Tax Act, 2017, aimed at verifying a registered person’s compliance with GST law. During a GST Departmental Audit, officers scrutinize books of account, returns, and other records to confirm the correctness of turnover declarations, tax payments, refund claims, and input tax credit availed. This audit process helps identify instances of non-payment or short-payment of tax, wrongful exemptions, irregular credits, and improper classification or valuation of supplies. By plugging revenue leakages and ensuring that statutory exclusions and classifications are properly applied, GST Departmental Audit safeguards government revenue and reinforces overall taxpayer compliance.
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1. Audit
Audit by officers of the tax department has been in vogue since pre-GST days. The main objective of audit is to plug revenue leakage and maximise tax revenue. In particular, instances of non-payment or short-payment of tax, wrong availment of exemption and irregular availment of input tax credit are some of the areas that the departmental audit focuses. Determination of taxable value by the taxpayer is also verified so as to ensure whether exclusions claimed are statutorily admissible and whether any other item requires inclusion. Classification, refund claimed, treatment of advances, damages or penalties, free supplies and similar issues are also examined for compliance with the legal provisions.
1.1 Definition of Audit – Scope and Purpose
Section 2(13) of CGST Act defines audit as –
“Audit means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or rules made thereunder or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of this Act or the rules made thereunder.”
Audit is an examination of the records for verification. At this stage there is no suspicion, no reason to believe that tax evasion is taking place. Information gathered during audit process may lead to formation of such belief and subsequent search operation. As per Law Lexicon examination refers to weighing, balancing, search, minute inspection, investigation made with a view to form a judgment.
The activity contemplated under the term “audit” is examination. Therefore, audit is not mere checking of arithmetic accuracy or verification of certain compliances. Records, statutory returns and other documents are those which will be subject to examination. Records may be related to supply, exemption, transport, storage, tax payment, accounts, etc. As per Section 2(97), return means any return prescribed or otherwise required to be furnished by or under the CGST Act or the rules made thereunder. This is the reason “statutory returns” has been used above. The words “other documents” convey that any other material available with the taxpayer can be examined. Section 2(41) defining “document” includes written or printed record of any sort and electronic record as defined in clause (t) of Section 2 of Information Technology Act, 2000. As per Section 2(t) of IT Act, “electronic record” means data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche. Both print as well as soft copy of any record including images is treated as documents under GST law. This means, for the purpose of audit, those records stored or generated by computers are also liable for examination.
Both categories of records, returns and documents are covered, those maintained by the taxpayer as part of his business operations and those which are required to be furnished as per law as in the case of statutory returns. GST law is a business law and therefore, for proper examination of the records, not only those maintained or furnished under GST law should be analysed but also those under any other law should be seen by the officers of audit. The definition seeks to, therefore, include such records, returns or documents maintained or furnished under any other law also within the ambit of audit.
The purpose of audit is to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess compliance of the registered person with the provisions of the CGST Act and the rules made thereunder. This should be read as an indicative list of areas to be subjected to verification. The audit party from the department is required to scrutinise claims of exemption and refunds besides classification and valuation adopted so as to verify whether the same is per law. Sub-rule (3) of Rule 101 of CGST Rules casts the obligation on the officers to verify the documents on the basis of which the books of account are maintained and the returns and statements are furnished in accordance with the provisions of law. It also requires verification of exemptions and deductions claimed, the rate of tax applied in respect of supply of goods or services or both, refund claimed and other relevant issues. Inclusion of “other relevant issues” makes the provision comprehensive as the audit party can verify records for any issue considered as relevant to safeguard revenue.
Assessment of compliance not only points to verification of returns but also the documents which are required to be issued for every type of transaction and the information required to be included in such documents as prescribed in the rules.
1.2 Period Covered Under Audit
Section 65(1) of CGST Act empowers the Commissioner or any officer authorised by him to undertake audit of any registered person. The same may be by way of a general or specific order. Audit may cover period as specified and frequency and manner of audit will be as prescribed. As audit results in issuance of show cause notice wherever there is non-payment or short-payment of tax and the same is not accepted by the taxpayer, the period covered under audit cannot go beyond the time prescribed for issuance of such notice including the one invoking extended period of limitation. This means audit generally covers any part or whole of the previous five years. This can also be gleaned from Rule 101(1) of CGST Rules which states that period of audit shall be a financial year or multiples thereof. Frequency and manner are prescribed by way of internal instructions of the department as the same is based on risk factors as perceived by the department which in turn is dependent on risk to revenue, sensitive commodities, abnormal reduction in tax payment, excessive use of ITC, higher reporting of exempt or non-taxable supplies, compliance history, etc.
As per sub-section (2) of Section 65, audit may be conducted at the place of business of the registered person or in the office of the department. A hybrid method whereby part of the audit is conducted at the premises of the taxpayer and part in the department’s office can also be undertaken. As place of business is mentioned, it can be principal place of business or additional place or places of business as mentioned in the registration certificate and therefore, it may cover a factory premises, depots and branch offices. There is no bar on conducting audit in multiple premises. Though definite article “the” has been used before “place of business”, considering the fact of legal requirement under GST law to include in registration each of the place of business, wherever multiple places of business is available, the same can be visited for audit purpose.
1.3 Advance Notice Before Audit
The department is required to inform the taxpayer fifteen days before the proposed conduct of audit. As per Rule 101(2), the proper officer shall send the notice in Form GST ADT-01. This is a statutory notice and not mere intimation. Therefore, the departmental audit party is bound to issue such notice without which it will not have jurisdiction to conduct the audit.
1.4 Commencement and Time Limit for Completion of Audit
Sub-section (3) of Section 65 prescribes three months as the maximum time period for completion of audit. Such period is to be reckoned from the date of commencement of audit. An explanation under this provision provides that “commencement of audit” shall mean the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later. This may become subjective as the tax authorities may call for documents in instalments over a period of time and till the time, the same are furnished by the taxpayer, audit cannot be said to have commenced. The alternative of actual start of the audit at the taxpayer’s premises, however, has the effect of restricting such period indefinitely.
Compared to the date of commencement, the time limit fixed for completion of audit in Section 65(4) is definite in nature as it provides three months time. This can be extended by the Commissioner for further period of maximum of six months. Reasons shall be recorded in writing by the Commissioner as to why audit could not be completed within three months and such extension is required.
1.5 Duties of Taxpayer
Audit is a statutory function and the taxpayer has no option to accept or refuse to cooperate. The provisions are also silent about extension of time which may be required by the taxpayer to comply with any of the directions of audit including commencement. Sub-section (5) of Section 65 empowers the audit officer to require the taxpayer to provide him the necessary facility to verify the books of account or other documents as may be required by him. “Necessary” means “essential”. The taxpayer is required to provide such facility which is essential or indispensable in the absence of which verification may not be feasible.
The provision further requires the taxpayer to furnish information as required by the audit officer. As to what is the scope of “information” and how to judge reasonableness of “requirement” as considered by the audit officer, the provisions offer no guidance. The taxpayer cannot question the audit officer as to the necessity of particular information sought. The information sought may not be readily available in returns or documents but may have to be aggregated from different sources which may mean sharing of such information may come at the expense of resources which would have been available otherwise to business activities. The law does not state that the information as maintained or as furnished in the format submitted to the department should be provided.
Clause (ii) of Section 65(5) further requires the registered person to render assistance for timely completion of audit. This apparently points to sharing of information and documents as required by the audit party so that the officers may be able to scrutinize them and complete the audit exercise expeditiously. However, if audit party is not able to arrive at a decision on certain issues which may be complicated, then question of assistance by the taxpayer may not be relevant.
1.6 Audit Report
Rule 101(4) provides for communication of discrepancies noticed by the audit party, taxpayer having an opportunity to file his reply and then finalization of audit report after consideration of the version or reply furnished by the taxpayer. Such reply is required to be taken into account at the time of preparation of the findings.
When the audit is completed, the proper officer is required to inform the registered person whose records have been audited about the findings, his rights and obligations. The department shall also inform the taxpayer the reasons for the findings. These are generally referred as audit paras or audit objections wherein the audit party expresses its interpretation about the provisions and the non-compliance as per such interpretation.
The taxpayer may or may not accept any or all of the findings. There is no requirement to pay any tax or reverse input tax credit on receipt of such audit objection as the same gets triggered once show cause notice is issued. This is clear from sub-section (7) of Section 65 which requires the proper officer to initiate action of issuing show cause notice under Section 73 or Section 74 if the findings are to the effect that tax has not been paid or short paid or erroneously refunded or input tax credit has been wrongly availed or utilized. However, the registered person may accept any liability as pointed by audit party on his own volition and decide to pay tax voluntarily without waiting for show cause notice.
The findings are required to be shared with the taxpayer within 30 days of completion of audit in the form of Audit Report in Form GST ADT-02.
1.7 C&AG Not Empowered to Audit Private Entities for GST Purpose
As per Article 149 of the Constitution of India, Comptroller & Auditor General of India (C&AG) shall perform duties and exercise powers as prescribed in relation to accounts of the Union and the States or other authority/body established by law. Such duties and powers are prescribed under C&AG (Duties, Powers and Conditions of Service) Act, 1971 and it covers conduct of audit of expenditure from Consolidated Fund of India, transactions in respect of Contingency Fund and Public Accounts and accounts of public sector undertakings.
The GST department entertained the view that since the above Act confers power to audit all receipts of the government, the officers of C&AG who are part of CERA audit (Central Excise Receipts Audit) are empowered to audit private taxpayers for compliance with GST law.
The Bombay High Court in the case of Kiran Gems (P.) Ltd. v. Union of India1 held that such officers are not empowered to audit private entities both in the pre-GST as well as GST regimes as there is no provision in the CGST Act to empower them to conduct such audit of taxpayers. It held that CERA audit cannot be extended to private entities in view of the provisions contained in Section 16 of C&AG (Duties, Powers and Conditions of Service) Act, 1971. According to the Court, C&AG is empowered to audit receipts which are payable into the Consolidated Fund of India and not receivables and the database with respect to receipts which are payable into such Fund are available with the respective departments and such statutory scheme points to absence of jurisdiction to C&AG to audit accounts of private entity directly. It further said that the only exception carved out is the request by the President or Governor to undertake audit of any authority or body but even such power is available to such body or authority performing governmental functions. The communication from the department calling for records for CERA audit was held as without jurisdiction and unconstitutional.
Final audit report issued by the tax authorities was held as not sustainable when the time period of 30 days to file reply to draft audit report was not given. This indicates that the provisions on sharing of draft audit report and seeking reply from the taxpayer are mandatory in nature [Simon India Ltd. v. CT & GST Officer2]. In this case both the draft audit report and the final audit report were issued on the same day.
2. Access to Business Premises
Section 71 empowering the authorised officer to have access to any place of business of a registered person for the purpose of inspection of books of account, documents, etc., includes the purpose of carrying out audit. Therefore, inspection as understood or used in Section 67 is not only for the purpose of investigations but also for conducting audit. This is to provide statutory backing to the power to visit business premises by audit officers.
Section 67, as discussed in the previous portion, provides for inspection of business premises of taxable person and also the premises of transporter or godown or warehouse where goods are kept when there is a suspicion of suppression of taxable supplies and when storage is in such a manner as to cause evasion of tax. In the normal course also i.e. even without such suspicion the departmental officers are empowered to have access to any business premises of registered person for various purposes like audit, scrutiny, verification and checks as per Section 71. Such exercise may be, in the opinion of the department, necessary to safeguard revenue. The law uses the expression “to safeguard the interest of revenue” which is omnibus and wide in scope. The purpose may not be only for audit but also for any verification.
2.1 Section 67 Versus Section 71
Since Section 67 has been drafted for the specific purpose of inquiry/investigation, in particular situations, it can be said that Section 71 caters to requirements/situations excluding them. Also, purpose of Section 67 is to search and if necessary, seize goods, documents and things whereas Section 71 is restricted to inspection of books and records not involving search or seizure. Section 71 has been included more particularly for audit purpose as sub-section (2) uses “audit party”.
The inspecting officers shall have access to books of account, documents, computers, computer programs, computer software (installed in the computer or otherwise) and such other things available in the premises and as required for inspection. The officer authorized by officer of the rank of Joint Commissioner and above is empowered to undertake such inspection under Section 71.
In Suresh Kumar P.P. v. Dy. Dir., Directorate General of GST Intelligence (DGGI)3 the Kerala High Court held that audit and investigation proceedings could be simultaneous as they are independent procedures. The assessee was aggrieved by seizure of books pursuant to investigation without DIN and initiation of search when audit was pending. The High Court held that when documents were seized in presence of the assessee, DIN was not required to be recorded on the order. As regards the charge of harassment and parallel proceedings it was held that the same is not defective and so long as search was carried out as per procedure with “reason to believe” that investigation is to be undertaken, it could not be interfered with. The department nevertheless, submitted that once investigation proceeding took over, audit proceedings would be discontinued.
2.2 Person in Charge to “Make Available”
Besides providing access to records, returns and documents maintained or furnished under GST law or any other law, Section 71(2) lists the documents to be provided during audit. These are to be provided by the person in charge of place of business premises. These are to be made available by the person in charge which means even if the records are not under his control, it is his obligation to take efforts to provide the same. The law casts statutory obligation on such person since he is required to make available the records on demand by the officer. The expression “person in charge” has been used to indicate that such person has authority to take out and provide the records/books as demanded by the officer. “Make available” means the officer should be given complete access instead of merely showing without parting with the record. The person having full control over the premises and knowledge of the operations is required to take measures and efforts to produce the records.
2.3 Documents to Be Provided to Audit Party
The records to be provided are –
- Such records prepared or maintained and declared to the proper officer
- Trial balance
- Statement of annual financial accounts duly audited (wherever required)
- Cost audit report, if any, under Section 148 of Companies Act
- Income Tax Audit Report under Section 44AB of IT Act, if any
- Any other relevant record.
The above are required to be provided within fifteen working days from the date when they are sought or the time period as allowed by the audit officer. As to the question whether any particular record is relevant, the judgment of the officer will be final as it is he who seeks such record for examination.
2.4 Records to Be Produced to Certain Other Persons
Besides the authorized officer, certain other persons are also mentioned to whom the specified records shall be produced or given. Audit party comprising officers from the department visiting the premises in connection with audit as per Section 65 shall have access to all the specified records. Chartered Accountant or Cost Accountant appointed to conduct special audit under Section 66 by the Commissioner will also have such access. The records specified in sub-section (2) are the records prepared and maintained and declared to the department through returns, etc., trial balance, statements of annual financial accounts, cost audit report and income tax audit report. The person in charge will have to produce any other record also which is considered as relevant by the officer. The time period provided by law is 15 working days and such period may be extended by the officer or audit party or Chartered Accountant or Cost Accountant.
Failure to furnish information or documents as demanded by an officer is liable to penalty of ` 10,000. If due to failure in sharing information tax payable is found out, then penalty can be equivalent to tax amount.
2.5 SOP Issued by A.P. Government for Accessing Business Premises
The Andhra Pradesh GST Department in Standard Operating Procedure (SOP) issued for accessing business premises under Section 71 of APGST Act, 2017 issued from File No. REV03-12039/39/2020-GST SEC-CCT dated 15-9-20204 requires that if any officer subordinate to proper officer him has reasons that it is necessary to have access to any place of business of a registered person to inspect books of account or documents or computers, etc., for audit, scrutiny, verification and checks then such officer shall move the note file to the proper officer clearly indicating the reasons for such necessity and only upon examination of the contents of the note file submitted by such subordinate officer, and after satisfying himself that the conditions specified under Section 71 are satisfied, the proper officer shall issue the authorisation by duly recording such reasons to believe in the note file for such access to the business premises of registered person in each case.
- [2021] 124 taxmann.com 4/46 GSTL 14 (Bom.)
- [2022] 145 taxmann.com 485/[2023] 95 GST 563/(69) G.S.T.L. 149 (Orissa)
- [2020] 120 taxmann.com 173/82 GST 734/(41) G.S.T.L. 17 (Ker.)
- For full text, see Part II.
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