Preparing for a GST Audit: detailed guidelines and documentation checklist

Goods and Services Tax (GST), since its implementation in India, has transformed the indirect tax landscape. However, with its dynamic framework comes the obligation of robust compliance and audit preparedness. A GST audit, whether by tax authorities or internal/external auditors, aims to ensure the correctness of tax paid, ITC claimed, and returns filed. This article provides a step-by-step guide on how businesses can prepare effectively and present their case with confidence during a GST audit.

What Is a GST Audit?

A GST audit involves examination of records, returns, and other documents maintained by a registered person to verify the correctness of turnover declared, taxes paid, refund claimed, and input tax credit availed.

In this discussion, we are primarily talking about Departmental Audit under Section 65 of the CGST Act

 A taxpayer registered under GST may be selected for an audit, typically, audits focus on:

• Businesses with large turnover
• Mismatches in GSTR-1, GSTR-3B, and GSTR-9/9C
• High refund claims
• Abnormal Input Tax Credit (ITC) claims
• Risk-based assessments

Guidelines for GST Audit preparation

 Understand the Scope and Timeline and do the following due diligence :  

• Read the audit notice carefully (Form ADT-01 or other formats).
• Identify the audit period.
• Designate a nodal officer/point of contact from your team.
• Prepare a Gantt chart for completing reconciliation, documentation, and submissions within time.

 Perform Internal GST Reconciliation : Reconcile the following:

• GSTR-3B vs GSTR-1: Outward supplies
• GSTR-3B vs GSTR-2A/2B: Input tax credit
• Books of accounts vs GSTR-9 and GSTR-9C
• Cross-check E-way bill data, if applicable.

 Downloading the periodic tax liability statement from the GST portal will help you identify any discrepancies between the amounts reported in GSTR-1 and GSTR-3B, as well as between the ITC claimed in GSTR-3B and the ITC appearing in GSTR-2A/2B

 Reconciling the differences reported in Column 8D of GSTR-9 and Columns 7G and 12F of GSTR-9C is crucial for audit finalization. These specific differences are often closely scrutinized by tax auditors and are commonly the basis for audit queries or even potential tax demands

 Prepare the Document Docket

Create a complete set of soft and physical files (as required by the department) containing all relevant documents categorized year-wise or period-wise. Here is the suggested comprehensive list of Information and documents required to be submitted during Audit

 Company & Registration Details

• GSTIN registration certificates
• A brief note on nature of business activities carried out by the taxpayer
• Copies of Authorization for attending the Audit hearing

 Returns and Reconciliation

• Filed copies of GSTR-1, GSTR-3B, GSTR-9, GSTR-9C
• GSTR-2A/2B downloads
• Annual financial statements (Audited Balance Sheet, P&L)
• Reconciliation statements between GST returns and books
• Trial balance of GSTIN

GST Auditors generally start the Audit scrutiny reviewing Trial Balance and mismatch between GSTR-1 and GSTR-3B, ITC claimed in GSTR-3B vs ITC appearing in GSTR-2A/2B

Outward Supplies details 

• Tax invoices, debit/credit notes
• Sales register
• Sample copies of B2B/B2C invoices
• Export invoices, LUT/Bond copies
• Summary of exempted and non-GST outward supplies

 Inward Supplies & ITC details 

• Purchase register
• Copies of invoices from suppliers
• Expense ledger
• Reverse charge payment records
• ITC ledger and reconciliation with 2A/2B

Stock and Inventory

• Opening and closing stock details
• Stock registers
• Movement of goods reports
• Job work challans and ITC on job work

E-Way Bills and Transport Documentation

• Sample e-way bills
• Logbooks/Transporters invoices
• Delivery challans

Refunds & Adjustments

• Refund applications filed
• Sanction orders
• Interest/penalty payment details

 Ledgers & Bank Statements

• Electronic credit and liability ledger
• Cash ledger
• Trial balance and bank statements for audit period

Others

• Notices and replies under GST, if any
• Details of input service distributor (ISD), if applicable
• Any legal opinion, advance rulings, etc.

Proactive Measures & Best Practices

1.Digital Documentation: Maintain a well-organized folder structure for each GSTIN and financial year.

2. Internal GST Audit: Conduct periodic reviews before being selected for an audit.

3. Training for Teams: Keep your accounts and finance team updated on GST rules.

4. Communication: Maintain proper coordination with your GST consultant/Chartered Accountant.

5. Reply to queries promptly: Respond to notices or deficiency memos (if any) within stipulated timelines.

Grey areas in GST Audit that require special attention

These are the areas where GST auditors tend to focus the most and where there is maximum potential for raising demands. Therefore, it is essential to prepare yourself in advance, even before the commencement of the audit:

a. Import of Services under RCM: Check whether you have made any payments in foreign currency that could be classified as ‘Import of Services’ and attract GST under Reverse Charge Mechanism (RCM). If missed, this can lead to significant tax liability along with interest.

b. Cancelled Supplier GSTINs: Scrutinize your inward supply register and identify suppliers whose GST registrations have been cancelled suo motu—especially with retrospective effect up to the audit date. Also, check how many of them have filed GSTR-1 but not GSTR-3B. GST auditors are likely to disallow ITC claimed on such suppliers. While judicial precedents exist in favour of the assessee, availing such credit often results in further litigation and associated costs.

c. RCM Reconciliation: Ensure that all sales, purchases, and expense items attracting reverse charge are reconciled as per the Trial Balance and GST returns. Any mismatch or omission can trigger audit queries.

d. 180-Day Rule for payment to suppliers: Prepare a proper creditors’ ageing report to verify whether payments to suppliers have been made within 180 days. If not, ensure that the proportionate Input Tax Credit (ITC) has been reversed in accordance with GST law.

 Implications of Section 73 and 74 During GST Audit

During the course of a GST audit, if discrepancies are identified in tax payment, input tax credit availment, or returns filed, the provisions of Section 73 and Section 74 of the CGST Act, 2017 become highly relevant.

Section 73 deals with cases where tax has not been paid or has been short-paid, or input tax credit has been wrongly availed or utilized, without any intention to evade tax. In such cases, the taxpayer is liable to pay the differential tax amount along with interest under Section 50, and a penalty of 10% of the tax or Rs. 10,000, whichever is higher, may be levied.

On the other hand, Section 74 applies when the same defaults are found with an intention to evade tax, willful misstatement, or suppression of facts. Here, the penalty imposed can be 100% of the tax amount. Therefore, audit findings can trigger proceedings under either section based on the nature and intent of the default. To avoid such consequences, taxpayers should ensure proper documentation, reconciliations, and voluntary corrections before or during the audit process.

Best planning strategy for payment under Section 73 and 74

When the audit findings lead to potential tax liability under Section 73 (no fraud, no willful misstatement) or Section 74 (with fraud or suppression), timing and mode of payment play a crucial role in minimizing penalty exposure and avoiding litigation. Here’s how you can approach it smartly:

When Section 73 Is Invoked (No Fraud or Suppression)

Best Planning Strategy:

1.Voluntary Payment Before Show Cause Notice (SCN):

• Benefit: No penalty is payable if full tax and interest are paid before the issuance of SCN.
• Action: File Form DRC-03 for payment of tax and interest.
• Penalty Saved: 10% of tax or ₹10,000, whichever is higher.

2. Payment Within 30 Days of SCN:

• Benefit: A reduced penalty of 10% of tax or ₹10,000 is applicable.
• Action: Pay the demand and respond to SCN with payment proof via DRC-03 or DRC-06.

3. Post 30 Days from SCN:

• Action: The full penalty becomes payable, and adjudication follows.
• Advice: Avoid delay beyond this period to reduce litigation risk.

When Section 74 Is Invoked (Fraud, Suppression, or Willful Misstatement)

Best Planning Strategy:

1.Voluntary payment before SCN:

• Benefit: Reduced penalty of 15% of tax amount.
• Action: Pay full tax, interest, and 15% penalty using Form DRC-03.
• Recommendation: Avail this option to avoid lengthy litigation and higher penalties.

2. Payment within 30 Days of SCN:

• Penalty: 25% of the tax amount.
• Action: Pay tax + interest + 25% penalty within 30 days and inform the department via DRC-03.

3. Payment Within 30 Days of Order:

• Penalty: 50% of tax.
• Action: Pay tax + interest + 50% penalty within 30 days of adjudication order (Form DRC-07).

4. Post 30 Days from Order:

• Penalty: Full 100% of tax becomes payable.
• Action: Avoid this situation unless the case is being contested legally.

Practical tips for Audit-triggered demand management

• Start internal reconciliation early, even before receiving an audit notice.
• If liability appears likely, pay voluntarily under DRC-03 to take advantage of reduced or no penalty.
• Consult your GST consultant or legal advisor to draft a brief justification note along with payment if making a voluntary payment.
• Maintain documentary evidence of good faith and absence of intent to evade taxes to avoid invocation of Section 74.
• If facing Section 74, try to settle before SCN or at least within 30 days of SCN to limit penalties.
• Always respond to notices formally via DRC-06, even if you’ve paid voluntarily.

Summary Table:

Conclusion

GST audits are not merely regulatory formalities; they are a mirror of your internal tax governance. Timely preparation, disciplined documentation, and accurate reconciliation are keys to a smooth audit experience. In an increasingly data-driven GST environment, aligning your systems and teams proactively ensures minimal exposure to penalties and litigation. By embedding compliance into your business DNA, you not only meet audit expectations but also unlock peace of mind.