GST Department Audit under Section 65 of CGST Act 2017

Background

In terms of section 65 of the CGST Act, the Commissioner or any officer authorized by him may undertake audit of any registered person for such period and frequency, in the manner to be prescribed. The selection of taxable persons for audit is done based on factors such as risk element, total tax payment, turnover, business segment,

Audit initiated by Commissioner or officer authorized by him:

• Section 65 authorizes conduct of audit by the Commissioner or any other officer authorized by him of the transactions of the registered persons Madras High Court in Tvl Raja Store Vs Asst Commr [W.P.(MD). NO.15291 OF 2023] Single Judge  holds GST audit u/s 65 cannot be conducted after cancellation of registration. HC quashed the notice for conducting audit. High Court clarified that this will not preclude the Department from initiating assessment proceedings under Sections 73 and 74.
• In contrary view, Bombay High Court in Victoria Properties Private Limited v. Union of India [WP L.No.34267 of 2024] held Provisions of section 65 of SGST Act would be applicable for conducting audit of a financial year when a person was registered, although, on the date of ordering the audit, such person ceases to be registered, voluntarily or otherwise. Similarly held by Rajasthan High Court in Ashoka Fabricast Pvt Ltd vs UOI [WP no. 2859 of 2024].
• The Commissioner may issue a general order or a specific order, to authorize officers to conduct such audit.
• Such general or specific order must be specific to the auditee and for a selected tax period and the absence or error or any deficiency in such order may invalidate any step taken thereunder. As per rule 101(1), the period of audit under section 65(1) shall be a financial year or part thereof or multiples thereof.

Place to conduct audit:

• The Commissioner or any officer authorized by him, may conduct audit at the place of business of the registered person or in their office.
• In other words, the authorised officer may visit the place of business of registered person to carry out the audit or he may ask registered person to submit relevant documents, books, records to his office for conducting audit.

Notice for conduct of audit:

• When 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-01 not less than 15 working days prior to the conduct of audit.
• The advance notice of 15 days may seem to be less especially when the information is being sought for the past multiple years. Compiling and collating the information/documents for assessee would take a longer time.

Commencement of audit:

• 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. Thus, if the information or documents are furnished belatedly to the audit team, the time limit to conclude the audit would automatically get extended.
  • In Rajiv and Company v. Deputy Commissioner (Audit) WP(C) NO. 39222 OF 2024, the Kerala High Court examined section 65(4) and held that “commencement of audit” is to be reckoned from the date on which the requisite books and documents are made available by the registered person, in terms of the Explanation.

Completion of audit:

• The audit shall be completed within 3 months from the date of commencement of audit.
• Where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within 3 months, he may, for the reason to be recorded in writing, extend the period by a further period not exceeding 6 months.

 Powers of Authorised Officer

During the course of audit, the authorized officer may require the taxable person:

a. To afford him the necessary facility to verify the books of account or other documents as he may require.

b. To furnish such information as he may require and render assistance for timely completion of the audit.

Report of Audit

• The proper officer should inform the registered person of the discrepancies, if any, noticed as observations of the audit and the said person can file his reply and the proper officer shall finalize the findings of the audit only after due consideration of the reply furnished.
• On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, and the reasons for such findings, his rights and obligations in FORM GST ADT-02.
• The auditee should make use of this opportunity to provide a proper explanation with supporting evidence. This process if followed scrupulously would avoid frivolous demands and avoid unnecessary litigation.

Demand Recovery

In case where any tax liability is detected to be unpaid/short paid or erroneous refund or input tax credit wrongly availed/utilised is discovered during the audit, it will not result in spot recovery unless the auditee accepts the audit observation and pays the amount. However show cause notice under section 73 or 74/74A or 76 would be issued in case the audit observation is not dropped and the audit team would proceed to raise such demand notice towards such not paid/short paid amount.

 Effective practices to handle department audit:

• In self assessment regime of GST law, Department Audit is a source of communication by department.
• In order to undertake Audit a prior notice of 15 days is to be given.
• Competent Professional can be involved as an authorized representative to handle the audit and represent the taxpayer;
• Get pre-audit done internally / externally prior to department audit. If any genuine short payment/non payment of taxes is there, can voluntarily discharge prior to department audit. Ensures no penalty imposed thereafter.
• Cooperate with the audit team and provide the necessary information & documents called for;
• Do not ignore, give importance provide documents called for in writing, to extent applicable to auditee. Make submissions as scanned signed set with covering letter on letter head of auditee entity and annexures [of relevant documents to be submitted] to official mail of officer.
• Provide documents/information to extent readily available. Seek extension of time if information/ documents not ready. If audit covers multiple years[3-5 years], then time maybe sought to provide documents, information. Also supported by MH Trade Circular;
• While there is a time limit of 3 months for concluding audit  it maybe extended by department.
• Findings, basis of findings and his rights and obligations to be communicated to tax payer by officer within 30 days of conclusion of audit.
• Additional time to be requested to make submissions against objections raised, if not clear/ not sure about any facts or law;
• Payment can be made under protest or under the right to contest. Wherever there are areas of interpretation  to ensure keeping the issue alive;
• Type of replies given during the audit would help to make the foundation strong for future SCN/ litigation[if any]; Explained below.
• It may also be noted that the Calcutta High Court in the case OF ABDUR ROUF KHAN V. SUPERIENTENDENT OF CENTRAL TAX & ORS. Vide WPA 3987 of 2025 dated 09.07.2025, held that impugned audit under Section 65of the CGST Act by the CGST authorities was not legally sustainable for the tax periods already adjudicated by the State GST authorities under Section 73.

 Drafting reply to audit objections raised

• Understand the issue: Is it reconciliation issue between books and returns, GST demand being made on few revenue items such as on discounts/incentives linked to purchases made from manufacturer by dealer auditee; Interpretation issue. Eg: Classification in 28%[supply of air conditioner] vs 18%[Works contract of supply and installation of air conditioner].
• Facts to be drafted correctly: Putting across facts in correct perspective(including correction of department’s erroneous recording). Eg: Dept objects to credit availed on warehouse alleging it is immovable property meant for use on own account by auditee. In draft of reply establish how the credit availed is eligible since the credit was related to warehouse, which is not immovable but movable, attached based on screw driver technology, can be moved to other location. Can substantiate by blue prints, certificate of site engineer with reasons why it is movable property and not immovable in nature. Therefore eligible credit.
• Drafting reply to observations with relevant reference of GST provisions, judgements of High Court/Supreme Court, supporting documents/workings:
• Ensure that strong reply is drafted, which can be substantiated with workings, agreement copies, proper submissions to contain reference  of relevant provisions of Act, rules, circulars, clarifications, landmark decisions favourable directly applicable to issue at hand.
  • For reconciliation related observations raised: Example: Provide workings of reconciliation of tax liability as per GSTR 1 vs 3B vs annual return and GSTR 9C, ITC availment in GSTR 1/3B vs 2A/2B/annual return;
  • Interpretational issue: Example: Demand of tax on market research done under agreement with US client, alleging place of supply of service is India, not export. This is treated to be export of service by auditee. In responding to such objection, explaining of the facts basis the agreements, quoting of relevant provisions, circulars, favourable decisions; Also to provide samples of monthly report containing demand of specific product in India, projected sales data, given by Indian body corporate supplier to foreign entity customer to establish nature of services being market research done to foreign client company, and satisfaction of all conditions of export of services.
  • Give specific answers, spell out broad defence
  • Incorrect observations of department corrected in reply made.
• Submit to official mail id of concerned officer, submit by speed post- keep on file communication proof. If no response- send confirmation letter after 1 month, with reference to earlier communication hoping matter resolved/dropped.

Relevance of making strong submissions at pre-SCN stage: If the audit observations are not dropped, leading to SCN being issued, with outcome being unfavourable adjudication order. Then auditee has to appeal to first stage appellate authority, wherein 10% of disputed tax demand to be paid as pre-deposit for appealing at this stage. If not favourable at first appellate level, matter may reach even to Tribunal, where another 10% of disputed tax demand to be given as pre-deposit to appeal thereat.

When reply containing facts, referring to relevant provisions of law/circulars/relevant favourable decisions is done, workings submitted, adequate documents provided,  at the audit stage to observations raised, would ensure that the submissions can be accepted and the objections dropped. When the matter is closed without SCN, it ensures upfront relief from 10%+10% pre-deposit.

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For any queries mail to roopa@hnaindia.com