What is a GST Audit?

A GST audit examines a taxpayer's records, returns, and documents to verify GST paid, collected, and claimed legally. GST authorities can verify the business's compliance. It also builds confidence among authorities that the business is compliant. Audits go well when businesses have accurate records and file returns on schedule. This blog will include types of GST audits, how to prepare for audits, legal framework, common mistakes, and how experts like thegstco can help.

Importance of GST Compliance

• Avoids Penalties and Legal Action: Early GST compliance helps firms avoid interest, penalties, and tax letters.
  
  
• Builds Business Reputation: Regular and correct filings build trust among customers, suppliers, banks, and investors.
  
  
• Ensures Smooth Tax Credit Flow: Proper compliance ensures uninterrupted Input Tax Credit (ITC) claims and avoids blocking of working capital.
  
  
• Reduces Audit and Scrutiny Risks: Accurate records and return filings lower the chances of being selected for audits or investigations.

Objectives of Conducting GST Audits

• Accuracy Verification: Verify that the business transactions are appropriately reflected in the financial records and GST reports.
  
  
• Error Detection: Find any errors or omissions in tax returns.
  
  
• Compliance Assurance: Verify that GST laws and regulations are being followed.
  
  
• Fraud Prevention: Find and stop fraudulent activity or tax avoidance.

Types of GST Audits

The GST statute includes audit measures to ensure tax reporting transparency and correctness. Tax authorities conduct these audits to ensure taxpayer compliance with GST laws and return submission. The main GST audit types are detailed below:

1. Turnover-Based Audit – Section 35(5)

This audit was required for businesses with annual turnovers over ₹2 crore. Under this provision, the taxpayer had to get their accounts audited by a Chartered Accountant or Cost Accountant. The reconciliation statement GSTR-9C was included with the yearly return GSTR-9 to document this audit. From August 1, 2021, the Finance Act, 2021, eliminated this requirement.

2. General Audit by Tax Authorities – Section 65

This audit involves a GST officer authorized by the Commissioner thoroughly reviewing a taxpayer's records. At least 15 working days are given notice. The audit must be completed within three months from the commencement date, which may be extended by another six months with approval. After the audit, the officer communicates findings and may issue a demand notice if discrepancies are found.

3. Special Audit – Section 66

When the Commissioner feels that the declared value or claimed ITC is incorrect or suspicious, a special audit can be ordered. An external Chartered Accountant or Cost Accountant chosen by the Commissioner does this. The audit must be completed in 90 days, extendable by 90. Department receives the report directly.

4. Departmental Audit

This is conducted by GST officials for selected taxpayers based on risk parameters. Businesses with large turnovers, irregular filings, or previous issues are often selected. The audit includes checking books of accounts, returns, tax payments, and invoices.

5. Forensic Audit under GST

Forensic audits are used in cases where fraud, fake invoicing, or large-scale evasion is suspected. These audits are detailed and involve tracking unusual or suspicious financial activity. Though not directly defined under GST law, they are used by investigative agencies.

GST Audit Preparation: A Step-by Step Guide

Prepare for a GST audit to prevent penalties, delays, and legal issues. A well-prepared business may confidently answer GST officer questions. A step-by-step guide to audit readiness is below:

1. Organize Financial Records

Account books should be thorough, precise, and current. Correctly record sales invoices, purchase bills, payment vouchers, and journal entries. These should match the details filed in GST returns.

2. Reconcile GST Returns with Books

Reconcile GST returns (GSTR-1, GSTR-3B, and GSTR-9) with accounting records regularly. Differences between returns and books are a major cause of audit notices. Focus on ITC and external supply.

3. Review Input Tax Credit (ITC)

Compare ITC claimed in GSTR-3B to GSTR-2B (auto-drafted from supplier data). Disallow ineligible credits and reverse wrong claims. Keep all related documents like tax invoices, debit notes, and proof of receipt of goods/services.

4. Check Compliance Timelines

Make sure that all GST returns, annual returns, and tax payments have been filed within the due dates. Delays or non-filing can trigger audits or penalties.

5. Maintain E-Way Bills and Stock Records

Keep accurate records of stock movement and match them with e-way bills. A mismatch between e-way invoices and goods transportation may be questioned during an audit.

Common Mistakes to Avoid During Preparation

• Mismatch Between Returns and Books: Not reconciling GST returns with accounting records can lead to discrepancies and audit issues.
  
  
• Incorrect Input Tax Credit (ITC) Claims: ITC claims on invalid items or without adequate documentation can be reversed and penalized.
  
  
• Late Filing of Returns: Delayed submission of GSTR-1, GSTR-3B, or annual returns increases the risk of notices and audits.
  
  
• Missing E-Way Bills or Stock Records: Failing to maintain proper records of goods movement and matching e-way bills may lead to suspicion during audits.

Key Areas of Focus During GST Audits

• Input Tax Credit (ITC) Verification: The auditor checks if the ITC claimed is genuine, supported by valid tax invoices, and matches the supplier data (GSTR-2B).
  
  
• Turnover and Tax Liability Review: They verify whether the total turnover reported in returns matches the books of accounts, and that tax has been paid correctly.
  
  
• Matching GSTR Filings with Books: We check to make sure that there are no inconsistencies between GSTR-1, GSTR-3B, and the accounting records.
  
  
• E-Way Bill Compliance: E-way bills are matched with invoices and transport documents to confirm that goods movement is properly documented.
  
  
• Reverse Charge Transactions: Any tax payable under the Reverse Charge Mechanism (RCM) is checked for correct payment and reporting.

Key Areas of Focus During GST Audits

The GST audit process is in effect under the CGST Act, 2017 and Rules. They define audit procedures, tax officer authority, and taxpayer rights. If a business knows this regulatory structure, it can remain in compliance and ready for anything. Companies with annual income over ₹2 crore were previously required to hire a chartered or cost accountant for account review under Section 35(5). The 2021 Finance Act removed this provision.

• Section 65: Permits tax officers to perform audits at the department's office or on the company's property. At least fifteen working days must pass before the audit begins.
  
  
• Section 66: Permits a Special Audit by a Cost Accountant or Chartered Accountant designated by the Commissioner, typically in cases where there is a suspicion of excessive Input Tax Credit (ITC) or undervaluation.
  
  
• Section 71: This gives the officer permission to enter the company's building and go through the books of accounts and other documents.

Rules and Regulations Pertaining to GST Audits

• Rule 101: Describes the procedure for conducting a regular GST audit by tax authorities.
  
  
• Rule 102: Explains the procedure and reporting method for special audits.

Rights and Responsibilities of Taxpayers During Audits

The audit’s purpose and its scope should be explained to taxpayers by the auditor. They are in charge of giving out important documents, sharing access to case records and addressing any questions that come up. The company may also ask for a representative and be sent a copy of what was found in the audit.

Post-Audit Procedures and Compliance

After a GST audit is completed, certain follow-up steps must be taken by the taxpayer. These steps ensure proper closure of the audit and help avoid penalties or legal action. Below is a summary of post-audit procedures in simple points:

• Receipt of Audit Findings: The GST officer shares a report detailing any errors, mismatches, or non-compliance found during the audit.
  
  
• Payment of Tax, Interest, or Penalty: If any liability is identified, the taxpayer must pay the additional tax, interest, or penalty within the allowed timeframe.
  
  
• Right to Appeal: If the taxpayer disagrees with the audit outcome or demand, they can appeal to higher authorities under GST law. These steps help maintain compliance and build trust with GST authorities.

Benefits of Regular GST Audits for Businesses

Regular GST audits help businesses stay compliant and financially sound. Even when not mandated by law, conducting periodic internal or voluntary audits offers several advantages that go beyond just tax savings.

• Improves GST Compliance: Regular audits ensure that returns are filed correctly and all GST provisions are followed. This helps avoid future notices, penalties, and interest.
  
  
• Identifies Errors and Gaps: Audits help detect incorrect Input Tax Credit (ITC) claims, mismatches in returns, or missed liabilities. Early detection helps in timely correction and avoids legal issues.
  
  
• Ensures Better Documentation: A routine audit keeps the business records up to date. It encourages proper maintenance of invoices, e-way bills, and accounting entries.
  
  
• Strengthens Internal Controls: Regular reviews improve financial discipline and reduce the chances of fraud or mismanagement.

Common Challenges and Solutions in GST Audits

• Dealing with Complex Transactions and Classifications: Engage tax professionals to navigate complex GST classifications and ensure accurate tax treatment.
  
  
• Managing Incomplete or Inaccurate Documentation: Implement robust record-keeping practices and regular internal reviews to maintain accurate documentation.
  
  
• Leveraging Professional Expertise for Audit Readiness: Consulting with GST experts and firms like thegstco. can provide valuable insights and assistance in preparing for audits.

Role of Professional Firms in GST Compliance

How thegstco. Assists in GST Audit Preparation

thegstco. offers comprehensive services, including:

• GST returns and financial records review
  
  
• Assistance in preparing reconciliation statements
  
  
• Guidance on compliance with GST laws

Services Offered by Tax Consultants for Compliance

• GST registration and return filing
  
  
• Advisory on GST implications for transactions
  
  
• Representation during audits and assessments

Choosing the Right Partner for GST Audit Support

Select a firm with:

• Expertise in GST laws and regulations
  
  
• Experience in handling audits and assessments
  
  
• Proven success in customer engagements

Frequently Asked Questions

1. What is a GST audit and who does it?
   GST officers or Chartered Accountants audit returns and records to verify tax compliance.
   
   
2. Who is liable for a GST audit under Section 65?
   Any registered taxpayer can be audited by GST authorities under Section 65 based on risk parameters and turnover.
   
   
3. Is it still required for every business to file GSTR-9C?
   No, now businesses with turnover not exceeding ₹5 crore are not required to submit GSTR-9C.
   
   
4. Which documents should you have ready when a GST audit takes place?
   Businesses must provide invoices, GST returns, books of accounts, e-way bills, and ITC records during audits.
   
   
5. How can my business prepare for GST audit?
   Keep correct records, file taxes on schedule, reconcile periodically, and consult thegstco. if needed.
   
   
6. What do you do if some discrepancies are identified in the audit?
   If there are mistakes in the return, the taxpayer could have to pay more tax, extra interest or get fines based on the situation.
   
   
7. Is it possible to argue against the findings given in my GST audit?
   If someone is not happy with the findings in the GST audit report or demand notice, they may write a reply or lodge an appeal.