Yash Aggarwal, Advocate
Introduction:
The Goods and Services Tax (GST) framework is founded upon the principle of trust-based taxation, wherein the registered person is entrusted with the responsibility of self-assessing returns and independently determining the applicable tax liability, without routine intervention from tax authorities. Given that the regime operates substantially on voluntary compliance and self-declaration, it necessarily mandates the establishment of a comprehensive and effective audit mechanism to evaluate adherence to statutory provisions and to safeguard the integrity of the tax system. The audit mechanism under the Goods and Services Tax regime constitutes an essential instrument of fiscal oversight and regulatory compliance.
Meaning of ‘Audit’
The term ‘Audit’ is defined u/s2(13) of the CGST Act, 2017 which reads as follows: –
“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 rules made thereunder;”
The term ‘audit’ has been defined in exhaustive manner because the definition starts from the term ‘means.’ Therefore, scope of audit needs to be within the scope of as per given definition.
Audit by Tax Authorities- Statutory Provision
Section 65 of the Central Goods and Services Tax Act, 2017 provides the statutory framework for audit of registered persons by the tax authorities. The provision is a critical component of the compliance architecture under the Goods and Services Tax regime, enabling the administration to verify the correctness of tax declarations while ensuring procedural safeguards for taxpayers. Section 65 reads as under: –
65. Audit by tax authorities
(1) The Commissioner or any officer authorised by him, by way of a general or a specific order, may undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed.
(2) The officers referred to in sub-section (1) may conduct audit at the place of business of the registered person or in their office.
(3) The registered person shall be informed by way of a notice not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.
(4) The audit under sub-section (1) shall be completed within a period of three months from the date of commencement of the audit:
Provided that where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within three months, he may, for the reasons to be recorded in writing, extend the period by a further period not exceeding six months.
Explanation. – For the purposes of this sub-section, the expression ―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.
(5) During the course of audit, the authorised officer may require the registered person, —
i. to afford him the necessary facility to verify the books of account or other documents as he may require;
ii. to furnish such information as he may require and render assistance for timely completion of the audit.
(6) On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings.
(7) Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, the proper officer may initiate action under section 73 or section 74. Or section 74A*1
The underlying objective of Section 65 is to empower the department to examine whether a registered person has accurately declared turnover, correctly discharged tax liability, lawfully availed input tax credit, and properly claimed refunds. The provision seeks to strike a balance between revenue protection and fairness in administration.
An audit under this section is a departmental exercise undertaken by officers authorized by the Commissioner. It is distinct from investigative proceedings such as inspection, search, or seizure, and is intended primarily as a verification mechanism.
Procedure of conducting Audit
Rule 101 of the CGST Rules, 2017 lays down the procedure which is to be followed while conducting an Audit.
101. Audit
(1) The period of audit to be conducted under sub-section (1) of section 65 shall be a financial year [or part thereof] or multiples thereof.
(2) Where it is decided to undertake the audit of a registered person in accordance with the provisions of section 65, the proper officer shall issue a notice in FORM GST ADT-01in accordance with the provisions of sub-section (3) of the said section.
(3) The proper officer authorised to conduct audit of the records and the books of account of the registered person shall, with the assistance of the team of officers and officials accompanying him, verify the documents on the basis of which the books of account are maintained and the returns and statements furnished under the provisions of the Act and the rules made thereunder, the correctness of the turnover, exemptions and deductions claimed, the rate of tax applied in respect of the supply of goods or services or both, the input tax credit availed and utilised, refund claimed, and other relevant issues and record the observations in his audit notes.
(4) The proper officer may inform the registered person of the discrepancies noticed, if any, as observed in the audit and the said person may file his reply and the proper officer shall finalise the findings of the audit after due consideration of the reply furnished.
(5) On conclusion of the audit, the proper officer shall inform the findings of audit to the registered person in accordance with the provisions of sub-section (6) of section 65 in FORM GST ADT-02.
Judicial Pronouncements
1. Time Barred Audit
Huber group India Pvt. Ltd. vs. Union of India2
Where show cause notices were issued under Section 65(7) read with Section 74 of CGST Act for raising demand after audit while assessee submitted that audit was concluded beyond period prescribed under Section 65(4) of CGST Act and, hence, impugned notices were without jurisdiction, proceedings pursuant to impugned notices were to continue but no final order was not to be passed without permission of Court.
2. Proper officer shall finalise the findings of the Audit after due consideration of the reply furnished
PBL Transport Corporation Pvt. Ltd. vs. Assistant Commissioner (ST)3 In the present case assessee had filed reply to discrepancy notice served on assessee in respect of audit but same was not considered while finalizing findings of audit. The Hon’ble Court held that final Audit Report was in violation of principles of natural justice and, hence, to be quashed.
3. Parallel Audit cannot be conducted by two agencies.
Abdur Rouf Khan vs. Superintendent of Central Tax, Kolkata4
In the present case audit had already been conducted in respect of tax period 2018-19 to 2021-22 and orders under Section 73 had been passed against assessee by state authorities, therefore, the Hon’ble Court held that there was no scope for central authority to carry out any further audit under section 65 for same period and audit was to be restricted to period 2017-18 and 2022-23 only.
Conclusion
Section 65 of the CGST Act, 2017 embodies a structured and time-bound mechanism for departmental audit. While it equips the tax administration with authority to scrutinize compliance, it simultaneously incorporates safeguards such as prior notice, defined timelines, and communication of findings.
A sound understanding of this provision is indispensable for registered persons and practitioners alike, as it enables effective compliance management and informed response to audit proceedings within the GST framework.
Notes:
1 Inserted vide the Finance (No. 2) Act, 2024 w.e.f. 01.11.2024
2 (2024) 24 Centax 56 (Guj.)
3 (2024) 14 Centax 303 (A.P.)
4 (2025) 34 Centax 137 (Cal.)
