GST Audit and Scrutiny: What to Expect Under Sections 65 and 61

GST audit and scrutiny are mechanisms used by tax authorities to ensure compliance. Scrutiny under Section 61 involves a preliminary examination of returns for discrepancies, while an audit under Section 65 is a more detailed verification of records. Both processes can lead to demands for tax, interest, and penalties if discrepancies are found, potentially culminating in adjudication under Sections 73 or 74.

What is the difference between GST scrutiny and GST audit?

GST scrutiny is a preliminary examination of GST returns and related information by tax authorities to identify discrepancies, whereas a GST audit is a more comprehensive verification of a taxpayer's records, accounts, and other documents. Scrutiny is typically initiated based on data analytics flagging potential issues, while an audit can be routine or triggered by specific risk parameters.

GST Scrutiny (Section 61 of CGST Act, 2017): This process involves the proper officer scrutinising the return and connected particulars furnished by the registered person to verify the correctness of the return and to identify any discrepancies.

Initiation: The officer may, based on information available with him, scrutinise the returns and related particulars.
Procedure: If any discrepancies are noticed, the officer will inform the registered person of the discrepancies and seek an explanation. This communication is typically done through Form ASMT-10.
Response: The registered person must provide an explanation within the specified period (usually 30 days) in Form ASMT-11.
Outcome:
- If the explanation is satisfactory, the registered person is informed in Form ASMT-12, and no further action is taken.
- If the explanation is not satisfactory, or no explanation is furnished, the officer may proceed to initiate other actions, such as:
  - Conducting an audit (Section 65 or 66).
  - Conducting a special audit (Section 66).
  - Initiating an inspection and search (Section 67).
  - Initiating demand and recovery proceedings (Section 73 or 74).

GST Audit (Section 65 of CGST Act, 2017): This is a more in-depth examination of records, accounts, and other documents maintained by a registered person.

Initiation: The Commissioner or any officer authorised by him, by way of a general or specific order, may undertake an audit of any registered person for such period or periods as may be specified in the order.
Notice: The registered person will be informed at least fifteen working days prior to the commencement of the audit in Form ADT-01.
Conduct: The audit is conducted at the place of business of the registered person or in the office of the tax authorities. It must be completed within three months from the date of commencement, extendable by a further six months by the Commissioner for reasons recorded in writing.
Outcome:
- Upon conclusion, the proper officer will inform the registered person of the findings, their rights, and obligations, and the reasons for such findings in Form ADT-02.
- If the audit reveals any tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, demand and recovery proceedings under Section 73 or 74 will be initiated.

How does Section 66 (Special Audit) differ from Section 65 (General Audit)?

Section 66 (Special Audit) is initiated under specific circumstances where the complexity of the case or the value of transactions warrants an expert review, unlike Section 65 (General Audit) which is a routine departmental audit. A Special Audit is conducted by a Chartered Accountant or Cost Accountant nominated by the Commissioner, whereas a General Audit is conducted by GST officers.

Special Audit (Section 66 of CGST Act, 2017):

Initiation: If at any stage of scrutiny, inquiry, investigation, or any other proceedings before him, any officer not below the rank of Assistant Commissioner is of the opinion that the value has not been correctly declared or the credit availed is not within the normal limits, and it is necessary to have the accounts examined and audited by a Chartered Accountant or a Cost Accountant, he may, with the prior approval of the Commissioner, direct the registered person to get his records audited.
Direction: The direction for a special audit is issued in Form ADT-03.
Auditor: The audit is conducted by a Chartered Accountant or a Cost Accountant nominated by the Commissioner.
Report: The auditor submits a report of the special audit within ninety days to the Assistant Commissioner, extendable by another ninety days.
Cost: The expenses of the special audit, including the remuneration of the auditor, are determined and borne by the Commissioner.
Outcome: Similar to a general audit, if the special audit reveals any tax discrepancies, demand and recovery proceedings under Section 73 or 74 will be initiated.

Here's a comparison of the three types of examinations:

Feature	Scrutiny (Section 61)	General Audit (Section 65)	Special Audit (Section 66)
Purpose	Preliminary examination of returns for discrepancies	Comprehensive verification of records and accounts	Expert review due to complexity or valuation/ITC issues
Initiating Authority	Proper Officer	Commissioner or authorised officer	Officer not below Assistant Commissioner (with Commissioner's approval)
Notice Form	ASMT-10 (for discrepancies)	ADT-01 (at least 15 working days prior)	ADT-03
Conducted By	GST Officer	GST Officer	Chartered Accountant or Cost Accountant (nominated by Commissioner)
Location	Office of the proper officer	Taxpayer's business premises or tax office	Taxpayer's business premises or tax office
Time Limit	No specific time limit for completion	3 months (extendable by 6 months)	90 days (extendable by 90 days)
Cost	No direct cost to taxpayer	No direct cost to taxpayer	Borne by the Commissioner
Outcome	Explanation sought; can lead to audit/demand	Findings reported in ADT-02; can lead to demand	Findings reported; can lead to demand

What books and records should I keep ready for a GST audit or scrutiny?

For a GST audit or scrutiny, you should keep all financial records, GST returns, and supporting documents ready to substantiate your reported transactions and tax positions. This includes sales and purchase registers, bank statements, and reconciliation statements.

Specifically, the following documents are typically requested:

Financial Statements: Audited financial statements (Balance Sheet, Profit & Loss Account), trial balance.
GST Returns: GSTR-1, GSTR-3B, GSTR-2A/2B, GSTR-9, GSTR-9C for the relevant period.
Sales/Outward Supplies Records:
- Sales invoices, credit notes, debit notes.
- E-way bills for outward supplies.
- Export documents (shipping bills, BRCs).
- Records of exempt, zero-rated, and non-GST supplies.
Purchase/Inward Supplies Records:
- Purchase invoices, credit notes, debit notes.
- E-way bills for inward supplies.
- Import documents (Bills of Entry).
- Records of RCM (Reverse Charge Mechanism) transactions.
Input Tax Credit (ITC) Records:
- ITC ledger.
- Reconciliation of ITC claimed in GSTR-3B with GSTR-2A/2B.
- Documents supporting ITC reversals (e.g., for exempt supplies, personal use).
Bank Statements: All bank statements for the audit period.
Ledgers: General Ledger, Sales Ledger, Purchase Ledger, ITC Ledger, Cash Book.
Stock Records: Stock registers, physical stock verification reports.
Agreements/Contracts: Relevant agreements with suppliers, customers, and service providers.
Other Documents:
- E-invoices and IRN details (if applicable).
- Details of advances received and adjusted.
- Records of HSN/SAC codes used.
- Any other documents or explanations requested by the auditing officer.

Maintaining these records systematically and ensuring they reconcile with your GST returns is crucial for a smooth audit or scrutiny process.

What happens if discrepancies are found during GST scrutiny or audit?

If discrepancies are found during GST scrutiny or audit, the tax authorities will communicate these findings to the taxpayer, seeking explanations or demanding payment of tax, interest, and penalties. The specific course of action depends on the nature and magnitude of the discrepancy.

During Scrutiny (Section 61):

Communication of Discrepancies: The proper officer issues a notice in Form ASMT-10, detailing the discrepancies and requesting an explanation within 30 days.
Taxpayer's Response: The taxpayer must furnish an explanation in Form ASMT-11. If the explanation is satisfactory, the officer informs the taxpayer in Form ASMT-12, and the matter is closed.
Unsatisfactory Response/No Response: If the explanation is not satisfactory, or no explanation is provided, the officer may initiate further actions, including:
- Conducting an audit (Section 65 or 66).
- Initiating inspection and search (Section 67).
- Initiating demand and recovery proceedings under Section 73 or 74.

During Audit (Section 65 or 66):

Audit Findings Report: Upon conclusion of the audit, the proper officer informs the registered person of the findings, their rights, and obligations, and the reasons for such findings in Form ADT-02.
Demand and Recovery Proceedings: If the audit reveals any tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, the officer will initiate proceedings under Section 73 or 74 of the CGST Act, 2017.

What are Sections 73 and 74, and how do they relate to GST audit and scrutiny?

Sections 73 and 74 of the CGST Act, 2017, are the statutory provisions for the determination of tax not paid, short paid, erroneously refunded, or input tax credit wrongly availed or utilised, and they are the primary mechanisms through which demands arise from GST audit and scrutiny findings. Section 73 deals with cases where there is no fraud or wilful misstatement, while Section 74 applies to cases involving fraud, suppression, or wilful misstatement.

Section 73: Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for reasons other than fraud or any wilful misstatement or suppression of facts.

Applicability: This section applies when discrepancies are found due to genuine errors, oversight, or differing interpretations of the law, without any intent to evade tax.
Procedure:
- Show Cause Notice (SCN): The proper officer issues a Show Cause Notice (SCN) in Form DRC-01, detailing the amount of tax, interest, and penalty payable. The SCN must be issued at least three months prior to the time limit for issuing the order.
- Payment before SCN: The taxpayer can pay the tax, interest, and a reduced penalty (15% of tax) before the SCN is issued, and no SCN will be issued.
- Payment after SCN but before Order: If payment is made after the SCN but within 30 days of its issue, along with interest and a 15% penalty, all proceedings in respect of the SCN are deemed to be concluded.
- Order: If the SCN is not settled, the proper officer, after considering the taxpayer's representation, issues an order in Form DRC-07 within three years from the due date of the annual return for the financial year to which the tax relates or from the date of erroneous refund.
Penalty: A penalty equivalent to 10% of the tax due or ₹10,000, whichever is higher, is imposed if the tax, interest, and penalty are not paid within 30 days of the order.

Section 74: Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.

Applicability: This section applies when discrepancies are found due to deliberate actions to evade tax, involving fraud, suppression of facts, or wilful misstatement.
Procedure:
- Show Cause Notice (SCN): The proper officer issues an SCN in Form DRC-01, detailing the amount of tax, interest, and penalty. The SCN must be issued at least six months prior to the time limit for issuing the order.
- Payment before SCN: The taxpayer can pay the tax, interest, and a reduced penalty (50% of tax) before the SCN is issued, and no SCN will be issued.
- Payment after SCN but before Order: If payment is made after the SCN but within 30 days of its issue, along with interest and a 50% penalty, all proceedings in respect of the SCN are deemed to be concluded.
- Order: If the SCN is not settled, the proper officer, after considering the taxpayer's representation, issues an order in Form DRC-07 within five years from the due date of the annual return for the financial year to which the tax relates or from the date of erroneous refund.
Penalty: A penalty equivalent to 100% of the tax due is imposed if the tax, interest, and penalty are not paid within 30 days of the order.

In essence, GST audit and scrutiny are the investigative stages, while Sections 73 and 74 are the adjudicatory stages where the final demand for tax, interest, and penalties is determined and enforced.

How SP & SC helps

Navigating GST audits and scrutinies can be complex and time-consuming. SP & SC Legal and Taxation Services offers expert assistance in preparing for and responding to GST notices, ensuring all documentation is in order, and representing your case effectively before tax authorities. Our services help minimise your tax liabilities and ensure compliance. Learn more about our GST compliance services at /services/compliance/gst-return-filing.

Frequently asked questions

What is the time limit for completing a GST audit?

A GST audit under Section 65 must be completed within three months from the date of commencement of the audit. This period can be extended by a further six months by the Commissioner for reasons recorded in writing.

Can I appeal against an audit or scrutiny order?

Yes, if you are aggrieved by any order passed by the proper officer under Sections 73 or 74 (which typically follow an audit or scrutiny), you can file an appeal with the First Appellate Authority within three months from the date on which the order was communicated to you. Further appeals can be made to the Appellate Tribunal, High Court, and Supreme Court.

What are the consequences of not responding to a GST scrutiny notice (ASMT-10)?

If you do not respond to a GST scrutiny notice (ASMT-10) or provide an unsatisfactory explanation, the proper officer may initiate further actions. These can include conducting a full audit (Section 65 or 66), initiating inspection and search (Section 67), or directly proceeding with demand and recovery proceedings under Section 73 or 74, which can lead to significant tax, interest, and penalties.

Is a physical visit by a GST officer mandatory for an audit?

While GST audits under Section 65 can be conducted at the place of business of the registered person, they can also be conducted at the office of the tax authorities. The decision rests with the auditing officer. However, for a special audit under Section 66, the nominated auditor may visit the business premises.

What is the role of GSTR-2A/2B in GST audits?

GSTR-2A and GSTR-2B are crucial for reconciling input tax credit (ITC) claimed in GSTR-3B. During an audit, officers meticulously compare the ITC claimed by the taxpayer with the ITC reflected in GSTR-2A/2B to identify any mismatches. Discrepancies can lead to disallowance of ITC and subsequent demand for tax, interest, and penalties.

Can a GST audit be initiated without any specific reason?

Yes, a GST audit under Section 65 can be initiated by the Commissioner or any officer authorised by him, by way of a general or specific order, for any registered person. While often triggered by risk parameters or data analytics, it doesn't always require a specific, publicly disclosed reason beyond the general objective of ensuring compliance.