GST Audit Under Sections 65 & 66: What CAs Must Know

The Two Types of GST Audits You Need to Know

Under the GST framework, there are two statutory audit types that a CA must be prepared for: Section 65 (audit by tax authorities) and Section 66 (special audit by a CA/CMA directed by the Commissioner). Both can result in demand notices, interest, and penalties — but they follow different procedures and require different responses.

Section 65 — Audit by GST Authorities

A proper officer not below the rank of Superintendent of GST can conduct an audit of a registered taxpayer at their business premises or at the GST office. This is a routine departmental audit.

Process:

1. Notice of Audit: The taxpayer receives a notice (FORM GST ADT-01) at least 15 days before the audit date, specifying the date, time, place, and period of audit.
2. Conduct of Audit: The officer examines records — GSTR-1, GSTR-3B, purchase register, sale register, ITC utilisation, stock records, bank statements.
3. Audit Findings: If discrepancies are found, the officer informs the taxpayer (Form GST ADT-02). The taxpayer has 30 days to respond.
4. Rectification: If the taxpayer agrees, they can pay the differential tax with interest (18% p.a.) and a reduced penalty.
5. Demand: If the taxpayer disagrees or doesn't respond, the AO issues a Show Cause Notice and then an Order.

What Officers Typically Look For:

• ITC claimed in GSTR-3B vs ITC eligible as per GSTR-2B — excess ITC claims are a top finding
• Turnover reported in GSTR-1/GSTR-3B vs books of accounts and financial statements
• Output tax liability on advances received but not reported
• RCM liability on import of services, legal fees, GTA, unregistered vendors — not discharged
• ITC on capital goods — whether proportionate reversal done for personal/exempt use
• Branch transfers — whether IGST charged on stock transferred between states

Section 66 — Special Audit Directed by Commissioner

If the Commissioner believes that ITC availed is not within normal limits, or that turnover has not been correctly declared, they can order a Special Audit by a CA or CMA nominated by them. This is the more serious of the two — it implies the Department has specific concerns about the taxpayer's returns.

Key Features of Section 66:

• The nominated CA/CMA has 90 days to complete the audit (extendable by 90 more days)
• The cost of the audit is borne by the Government, not the taxpayer
• The CA/CMA submits a report in FORM GST ADT-04
• The taxpayer gets an opportunity to respond before any demand is raised

GSTR-9C — The Reconciliation Statement

While not a "department audit," GSTR-9C (the reconciliation statement certified by a CA/CMA) is the taxpayer's own audit requirement for those with turnover above ₹5 crore. As the certifying CA, you must reconcile:

• Turnover as per audited financial statements vs GSTR-9 (annual return)
• ITC as per books vs GSTR-3B filings for the year
• Tax paid vs tax payable as per reconciliation

A well-prepared GSTR-9C significantly reduces the risk of a Section 65 audit being initiated, as it demonstrates proactive reconciliation and voluntary corrections.

How to Prepare Clients for GST Audits

1. Monthly reconciliation habit: Reconcile GSTR-2B with purchase register every month. Don't let mismatches accumulate for a year.
2. Maintain an ITC register: Track every credit availed, the supplier's GSTIN, invoice details, and GSTR-2B status.
3. Respond to GSTR-1A mismatches promptly: When suppliers amend their GSTR-1 and it affects your GSTR-2B, account for it immediately.
4. Keep all supporting documents: Tax invoices, e-Way bills, bank statements, contracts, inward freight records — for at least 6 years.
5. Voluntary compliance: If your review reveals errors in past returns, voluntarily pay the differential tax with interest before the audit. Penalty under Section 73 is Nil if paid before SCN; 15% if paid within 30 days of SCN; 25% otherwise.