Audit by departmental authority is not new concept. It was already in existing in the existing laws. GST tax regime relies on self assessment and self compliance. In order to promote and ensure compliance  of law by taxable person, Audit Mechanism has been introduced  under GST act. There are three types of audit. First audit is to be conducted u/s 35(5) of the act  by Chartered Accountant or by Cost Accountant, of registered person whose aggregate turnover has exceeded prescribed limit. Second audit, special audit has been provided u/s 66. This audit is to be conducted by nominated Chartered Accountant or Cost accountant, on direction of Assistant Commissioner  in a cases, where he is  of opinion that value has not been correctly declared or credit availed is not within normal limit. Special audit provides lawful and legal way for Departmental authorities to take assistance of Chartered accountant or Cost accountant to determine tax liability in complex cases. Third and most important audit is audit by tax authorities u/s 65 of the act .


Main objectives of audit are as under

a) to increase and measure the level of compliance of taxable person in the light of provision of the act and rules .

b) to discover under declared liabilities by omission , error or deliberate deception.

c) to increase taxpayers voluntary compliance and facilitates tax administration’s aim getting “ the right tax at right time “


As per section 2(13) of the act, audit means detailed examination of record, returns and other documents maintained or furnished by registered person, under the provisions of act and rules or any other laws, for verification of correctness of turnover declared, taxes paid, refund claimed, ITC availed and assessment of compliance with the provision of act and rules .


section 65 of the act and rule 101 prescribe procedure of conducting audit, audit authorities, powers of proper officer, responsibilities of registered person , corrective actions and consequential actions after completion of an audit.


Department, on the basis of revenue risk and other parameter select registered person for audit. It is not mandatory to conduct audit of every registered person for each and every tax period. Few cases originate for audit from other proceeding initiated under the act like scrutiny of returns. Commissioner or any Proper Officer authorised by him, is competent authority to conduct said audit. Accordingly, department authorise proper officer to conduct audit of selected registered person .

Audit by Tax Authorities


As per provision of section of 65(3) and rule 101(2), authorised proper officer  shall issue notice for conducting audit in FORM GST ADT 01 and intimate period covered under audit, date of audit and books of accounts,documents required for audit. The notice should be issued at least 15 working days prior to conduct audit. It is important to note that non compliance of notice may be presumed that tax payer are not in possession of books of accounts and record . Moreover, he liable for the penal action u/s 122 and 125 of the act .


During the course of audit, registered person is required to afford the necessary facility to proper officer, to verify the books of accounts or other required documents. It is also obligatory to such person to furnish such required information and render assistance for timely completion of  the audit.


As per section 65(4) audit shall be complted within three month from the date of commencement  of audit. Howeve, where Commissioner is satisfied that audit can not be completed within three month, he may for reason to be recorded in writing, extend  further the period not exceeding six month. Thus, audit must be completed within six month.


Rule 101(1) states that the period of audit shall be financial year or part thereof or multiple thereof. Thus audit may be conducted for any tax period mentioned in  the notice .


It is made clear in the section 65(2) of the act that  audit may be conducted either at he place of business of the such registered person or in the office of proper officer .


As  per provision of section 71 of the act, authorised proper officer shall have access to the place of business of registered person to inspect books of accounts, documents, computer for the purpose of carrying out audit u/s 65 of the act .


Considering scope of audit, after receipt of notice for audit, such person has to keep available books of accounts, documents statements ready. Section 35 prescribe record which is required to be maintained by registered person. Secondly, as per section 71 registered person is required to make available prescribed report for the audit.  It is expected that these are likely to be demanded for verification . In view of above , following  true and correct account of

a) production or manufacture of goods

b) inward and outward supply

c) stock of goods

d) ITC availed

e) output tax payable and paid .

f) such other applicable record as prescribed in rule 56, 57, and 58.

required to be keep ready  along with other  relevant statements and documents, return copies, annual return and audit report.

 As  per provision of section 71(2), it is obligatory  to registered person  to produce following record and reports to the authorised proper officer  for audit  .

a) such record prepared and maintained by the registered person and declared to proper officer in such manner as may be prescribed.

b) trial balance and its equivalent

c) statement of annual financial accounts , duly audited , wherever required

d) cost audit report , if any under section 148 of companies act 2013

e) the income tax audit report if any under section 144AB of Income tax act 1961

f) any other relevant record


During the course of audit, proper officer examine aforesaid  records,  books of accounts and various reports. Rule 100(3) prescribe the procedure to conduct audit. Accordingly, authorised proper officer has to verify

a) the documents on the basis of which books of are maintained and returns and statements furnished under the provisions of the act and rules .

b) correctness of turnover , exemption and deductions claimed

c) rate of tax applicable on supply

d) ITC availed and utilised

e) refund claimed

f) tax paid

g) other relevant issues

He has to also assess taxpayers compliance with provision of act and rules. During the course of audit, said officer always make through scrutiny with intention to detect, short payment of taxes, refund erroneously granted and wrong availment of ITC.


During the course of audit, proper officer may notice certain discrepancies. As per Rule 101(4) proper officer has to intimate discrepancies observed in the audit, to the registered person  and after considering his reply and corrective measure taken  finalise finding of audit .


It is provided in the section 65(6) of the act and rule 101(5) that on conclusion of audit proper officer should inform the registered person within 30 days, findings of audit, his obligation and responsibility and reason for each finding in form FORM GST ADT 02. This is audit report u/s 65. It includes details of short payment of tax, interest and penalty which is to be be discharge by the said person. However, if registered person failed to take corrective action as per notice and audit resulted into detection of tax not paid or short paid or erroneously refund or ITC wrongly availed or utilised  then proper officer may initiate proceeding u/s 73 or 74  of the act for passing  adjudication order.


No time limit has been prescribed in the section for conducting audit of registered person. However, this audit may result into short payment of tax,  wrongful availment of ITC  by such person or erroneous grant of refund to him. In this situation, adjudication proceeding u/s 73 or 74 required to be initiate. Therefore, time limit prescribed under said sections will automatically applicable to the audit proceeding .


Audit by tax authorities is one of the important instrument for verification of correctness of returns furnished and to promote self tax compliance by the registered person. It is reassessment of self assessment done by taxpayers. Effective audit mechanism has its own preventive and deterant effects. All other audit reports are reviewed  during the course of this audit. The ultimate aim of this audit is to increase level of tax compliance by registered person Therefore it has great significance in the implementation of GST laws .

Author – M M Kanadje  is Retired Joint Commissioner Of State Tax.

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March 2021