Key Takeaways
- GST departmental audit (Section 65 CGST Act) can be initiated against any registered person by the Commissioner or authorized officer. You get a minimum 15 working days notice in Form GST ADT-01.
- The audit must be completed within 3 months, extendable by 6 months with written reasons from the Commissioner. Total maximum: 9 months.
- Section 66 allows a special audit by a CA or cost accountant (nominated by the Commissioner) when values appear incorrectly declared or ITC claimed beyond normal limits. Completion deadline: 90 days (extendable by 90 more).
- The government pays all special audit costs, including the auditor's fees. You bear zero audit expense under Section 66.
- Audit findings do not automatically mean a tax demand. The officer must issue a separate show cause notice under Section 73 (no fraud) or Section 74 (fraud/suppression) before raising any demand.
- You have the right to be heard before any adverse action based on audit observations.
What happens during a GST audit by the department? Under Section 65 of the CGST Act, the Commissioner or authorized officer audits your GST records at your premises or their office after serving 15 working days notice (Form GST ADT-01). They verify turnover, tax rates, ITC claims, and refunds against your books. The audit must conclude within 3-9 months, and findings are communicated in Form GST ADT-02 within 30 days of completion.
Getting a GST audit notice rattles most business owners. The mental image is of officers camping at your office, rifling through every invoice. The reality is more structured than that, but preparation makes the difference between a smooth closure in 60 days and a drawn-out 9-month ordeal.
Two separate provisions govern departmental audits under the CGST Act: Section 65 (general audit by the department's own officers) and Section 66 (special audit conducted by an external CA/cost accountant appointed by the department). They differ in who conducts the audit, why it's triggered, timelines, and cost. This guide covers both, including exactly what documents to keep ready and what happens after findings are communicated.
Looking for expert help with GST compliance and audit preparation? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.
How Section 65 Audit Works: The Standard Departmental Audit
Section 65 is the department's routine audit power. Think of it as the GST equivalent of an income tax scrutiny assessment, but focused on indirect tax compliance.
Who can order it: The Commissioner or any officer authorized by a general or specific order (Section 65(1), CGST Act 2017).
Who gets selected: Any registered person. There's no statutory turnover threshold. In practice, the department uses risk-based parameters: high ITC as a percentage of output tax, frequent filing amendments, turnover spikes without proportional tax, GSTR-1 vs GSTR-3B mismatches, and sector-specific risk scores.
What they verify (Section 65(4)):
- Correctness of turnover declared
- Exemptions and deductions claimed
- Rate of tax applied in each supply category
- Input tax credit availed and utilised
- Refunds claimed
- Any other issues relevant to compliance
Step-by-Step Guide
GST Audit Process Under Section 65
From notice to findings communication
Notice in ADT-01
Officer serves Form GST ADT-01 at least 15 working days before audit commencement. States the audit period (FY or part thereof).
Audit Begins
Conducted at your place of business or the officer's office. You must provide access to books, records, and computer systems.
Document Verification
Officer cross-checks returns filed on the GST portal with original invoices, purchase registers, bank statements, and ITC claims.
Clarifications Sought
You may receive queries during audit. Respond within the timeframe given. Cooperation speeds up closure.
Audit Conclusion
Must complete within 3 months from commencement (extendable to 9 months by Commissioner with written reasons).
Findings in ADT-02
Officer communicates findings, your rights, obligations, and reasons within 30 days of audit conclusion.
Source: Section 65, CGST Act 2017; Rule 101, CGST Rules 2017
What Documents to Keep Ready for a Section 65 Audit
Don't wait for ADT-01 to start organising. If you maintain these records throughout the year, you'll respond to any audit notice within days instead of scrambling for weeks.
Mandatory records (Section 35 read with Rule 56):
| Category | Documents |
|---|---|
| Sales/Output | GSTR-1 filed copies, all tax invoices, debit/credit notes, e-invoices (if applicable), export invoices with shipping bills |
| Purchases/Input | Purchase invoices (B2B), import bills of entry, GSTR-2B auto-populated ITC statements, ITC reconciliation workings |
| Returns | GSTR-3B filed copies (all months), GSTR-9 annual return, GSTR-9C reconciliation (if turnover exceeds Rs 5 crore) |
| Financial | Trial balance, P&L account, balance sheet, bank statements, cash book |
| Registration | GST registration certificate, any amendments filed, list of additional places of business |
| ITC Specifics | ITC register (input, input services, capital goods separately), reversal calculations under Rule 42/43, blocked credit list under Section 17(5) |
| E-way Bills | E-way bill register, cancelled e-way bills with reasons |
Pro tip: Reconcile GSTR-2B ITC with your purchase register monthly, not at year-end. Most audit observations stem from ITC mismatches that the business never noticed because nobody was comparing the auto-populated data with actual books.
Section 66: When the Department Orders a Special Audit
A special audit is more serious than a routine Section 65 audit. It means the department believes something is materially wrong with your declared values or ITC claims, and wants an independent professional to verify it.
Trigger conditions (Section 66(1)):
- Value of supply has not been correctly declared, OR
- Credit availed is not within normal limits
Who decides: An officer not below the rank of Assistant Commissioner, with prior approval of the Commissioner.
Who conducts it: A chartered accountant or cost accountant nominated by the Commissioner. This is not your regular auditor. The department picks the professional.
Key difference from Section 65: You don't interact with the tax officer during the audit itself. The nominated CA/cost accountant examines your records and submits their report to the department.
Comparison
Section 65 vs Section 66: Key Differences
General audit vs special audit under the CGST Act
| Parameter | Section 65 (General Audit) | Section 66 (Special Audit) |
|---|---|---|
| Conducted by | Department's own officers (Commissioner or authorized officer) | External CA or cost accountant nominated by Commissioner |
| Trigger | Routine; risk-based selection by the department | Suspicion of incorrect value declaration or abnormal ITC claims |
| Approval needed | Commissioner or authorized officer's general/specific order | Prior approval of Commissioner (requested by Asst. Commissioner or above) |
| Time limit | 3 months (extendable by 6 months) = max 9 months | 90 days (extendable by 90 days) = max 180 days |
| Notice form | GST ADT-01 (15 working days before) | GST ADT-03 (direction to get records audited) |
| Findings form | GST ADT-02 (within 30 days of conclusion) | GST ADT-04 (after special audit report received) |
| Who bears cost | No separate cost (department's internal resources) | Government pays all expenses including auditor remuneration |
| Right to be heard | Implicit in Section 65(6) findings process | Explicitly stated in Section 66(4) before any adverse use of findings |
Source: Sections 65-66, CGST Act 2017; Rules 101-102, CGST Rules
What Happens After the Audit? Demand and Recovery
Audit findings alone don't create a tax liability. The officer must follow the demand procedure separately.
If no discrepancy found: The audit closes. You get ADT-02 (or ADT-04 for special audit) stating "no discrepancy." No further action.
If discrepancy found: The officer issues a show cause notice under:
-
Section 73 (no fraud/suppression): Notice must be issued at least 3 months before the time limit for passing the order (which is 3 years from the due date of the annual return). Penalty: 10% of tax or Rs 10,000, whichever is higher. Pay within 30 days of the SCN and penalty drops to zero.
-
Section 74 (fraud, wilful misstatement, suppression of facts): Time limit for order is 5 years from due date of annual return. Penalty: 100% of tax. Pay within 30 days of SCN and penalty reduces to 15% of tax.
Voluntary payment before SCN: Under both Sections 73(5) and 74(5), if you pay the tax with interest before the SCN is issued, the officer shall not serve any notice for the amount so paid. This is your best exit path if audit observations are legitimate.
Common Mistakes That Trigger Adverse Audit Findings
Most audit demands stem from a handful of recurring errors. Fix these proactively and you significantly reduce your audit risk:
-
ITC claimed on blocked items (Section 17(5)): Food and beverages, club memberships, personal vehicles, outdoor catering (unless provided to all employees). Many businesses claim ITC on canteen expenses without realizing the restriction.
-
ITC on invoices not reflected in GSTR-2B: You claimed credit based on the supplier's invoice, but the supplier never filed their GSTR-1. After January 2022, Rule 36(4) restricts ITC to what appears in GSTR-2B plus 5% additional.
-
Turnover mismatch between GSTR-1 and GSTR-3B: Happens when amendments in GSTR-1 aren't reflected in the corresponding GSTR-3B period. The audit compares both filings and the books of account.
-
Non-reversal of ITC on non-payment within 180 days: Under Section 16(2), read with the second proviso, if you don't pay the supplier within 180 days from invoice date, ITC already claimed must be reversed with interest.
-
Wrong HSN classification leading to rate difference: Classifying goods under a lower-rate HSN code (say 12% instead of 18%) is a common "optimization" that the audit team specifically looks for.
Say you've been claiming ITC on employee group health insurance premiums (which many businesses do). Under Section 17(5)(b), life and health insurance is blocked credit unless provided to all employees as a statutory obligation. If you claimed Rs 4 lakh in ITC over three years on this, the audit will reverse it with 18% interest from the date of wrong availment.
How to Prepare When You Receive ADT-01
Here's what to do in those 15 working days between notice and the audit team's arrival:
-
Read the notice carefully. It specifies the audit period (which financial year or years). Don't prepare documents for years not covered.
-
Run your own reconciliation. Compare GSTR-3B output tax with GSTR-1 values month by month. Identify and document any differences with explanations.
-
Reconcile ITC. Match your purchase register with GSTR-2B for each month of the audit period. List ITC claimed but not in GSTR-2B, with supplier follow-up status.
-
Check Section 17(5) compliance. Review whether any blocked credit was inadvertently claimed. If yes, consider voluntary reversal with interest before the audit begins.
-
Prepare a summary note. A one-page summary of your business operations, supply categories, HSN codes used, and any unusual transactions during the period. Officers appreciate businesses that make their job easier.
-
Appoint a liaison person. Designate one person (your accountant or a CA) who will interact with the audit team, provide documents, and respond to queries. Avoid multiple contact points.
Frequently Asked Questions
How much notice do I get before a GST audit?
The department must serve Form GST ADT-01 at least 15 working days before the audit begins. This is a statutory minimum under Section 65(3) of the CGST Act. If the notice period is shorter, the audit proceedings can be challenged.
Can the GST department audit me at their office instead of my premises?
Yes. Section 65(2) allows the audit to be conducted at the place of business of the registered person OR in the office of the tax authority. However, desktop audits (at their office) are typically limited to data verification. Physical premise audits happen when they need to inspect stock, assets, or original documents.
What happens if I don't cooperate with a GST audit?
Failure to provide documents or access can attract a penalty of Rs 25,000 under Section 122(3)(d) of the CGST Act. Beyond the penalty, the officer may estimate your liability based on available information, which is usually worse than providing actual records.
Who pays for the special audit under Section 66?
The government bears the entire cost. Section 66(5) states that expenses of the special audit, including the CA or cost accountant's remuneration, shall be determined and paid by the Commissioner. You do not pay the auditor.
Can a GST audit lead to prosecution?
Not directly. A Section 65 audit leads to findings, which may lead to demand under Section 73 or 74. Prosecution under Section 132 applies only when the tax evaded exceeds Rs 5 crore and involves fraud, suppression, or wilful misstatement. Honest errors detected in audit do not attract prosecution.
Is there any turnover threshold below which I won't get audited?
No. Section 65 does not prescribe a minimum turnover for selection. Any registered person can be audited. However, the department's internal risk parameters tend to prioritise taxpayers with turnover above Rs 5 crore, large ITC claims relative to output, frequent amendments, or mismatch between GSTR-1 and GSTR-3B.
Let Tax Garden Handle Your GST Audit Preparation
Responding to a GST audit notice requires accurate reconciliations, proper document organization, and clear communication with the audit team. Tax Garden's GST compliance plans include audit support: we maintain your ITC reconciliation monthly, flag blocked credit before you claim it, and coordinate with audit officers when ADT-01 arrives. No last-minute scrambles.
This article is for educational purposes. For specific advice on a GST audit notice you've received, consult a practicing chartered accountant or your Tax Garden compliance team.
Source attribution: All statutory provisions cited in this article are from the Central Goods and Services Tax Act, 2017 and Central Goods and Services Tax Rules, 2017 as available on the CBIC Tax Information Portal. Sections 65, 66, 73, 74 of the CGST Act; Rules 101, 102 of the CGST Rules; Forms GST ADT-01 through ADT-04.
