Section 65 of the CGST Act: A Comprehensive Guide to GST Audits by Tax Authorities

Under Goods & Services Tax (GST), audit is defined under Section 2(13). Today, we will analyze one of the actions under GST Law; Section 65-where audits are carried out by tax authorities as mentioned in Section 61.

This article provides a detailed exploration of Section 65, including its text, key provisions, and practical implications for taxpayers.

Audit is unlike assessment; not all assessees are covered under audit. There are a few specified cases, based on various factors, wherein the department selects a case for the audit. These factors will be discussed later in this article

Let us first look at the original text of the section.

Key Provisions of Section 65 of the CGST Act

Let first look at Original Text of the Section:

"Section 65. Audit by tax authorities.-

(1) The Commissioner or any officer authorised by him, by way of a general or a specific order, may undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed.

(2) The officers referred to in sub-section (1) may conduct audit at the place of business of the registered person or in their office.

(3) The registered person shall be informed by way of a notice not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.

(4) The audit under sub-section (1) shall be completed within a period of three months from the date of commencement of the audit:

Provided that where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within three months, he may, for the reasons to be recorded in writing, extend the period by a further period not exceeding six months.

Explanation.- For the purposes of this sub-section, the expression "commencement of audit" shall mean the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later.

(5) During the course of audit, the authorised officer may require the registered person, -

(i) to afford him the necessary facility to verify the books of account or other documents as he may require;

(ii) to furnish such information as he may require and render assistance for timely completion of the audit.

(6) On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings.

(7) Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, the proper officer may initiate action under section 73 or section 74 1[or section 74A]."

Section 65 gives the power to Commissioner or any authorized officer to conduct an audit of a registered person's records to verify turnover declared, taxes paid, refunds claimed, input tax credit (ITC) availed, and compliance with GST provisions. The audit process involves the following:

1. Communication of Initiation of Audit: Where any case is selected for audit, the assessee is communicated 15 days before commencement of the audit in Form GST ADT-01.

For example, if an audit is planned for March 15, the registered person must receive the notice by March 1. This enables assessee to prepare and gather documents for purpose of audit during those 15 days.

2. Time Limit for Completing the Audit : The audit should be completed within three months from the date of commencement. However, if necessary, the Commissioner can extend this period by six months with proper justification and recording of reasons.

For purpose of considering "Date of Commencement", the date should be considered as date on which the records and other documents were made available to the officer,

OR actual institution of audit at the place of business.

3. Scope of Audit: The audit covers various factors mainly verification of records, returns, ITC claims, tax payments and examining refund claims and ITC utilization to ensure compliance with Sections 16 and 17 of the CGST Act.

For example, the officer may review the turnover declared in GST returns and cross-check it with the financial statements to identify any discrepancies.

4. Communication of Audit Findings: Once the audit is concluded, the findings are shared with the registered person in Form GST ADT-02 within 30 days.

For example, if the audit reveals underreported turnover, the registered person is informed about the additional tax liability, including applicable interest and penalties.

5. Actions after conclusion of Audit: If the audit findings result in any short-paid tax, unpaid tax, wrongly claimed ITC, or erroneous tax refunds, then a notice under Section 73 or 74 may be initiated by the officer

What documents can an officer request during an audit?

So to answer the above question will have to refer Section 35 i.e. section which mandates documents & books of accounts to be maintained under GST Law. For purpose of GST Law, the following documents can be verified or inspected during an audit under Section 65

• Sales/Purchase Invoices and Debit/Credit Notes
• Stock Registers
• ITC and Output Tax Registers:
• Advance Receipts and Payments

Above list of documents is not exhaustive; additional documents may be required as prescribed by the relevant authorities. Failure to maintain these records may result in penalties under Sections 122 and 125, including fines or legal proceedings.

Areas Covered Under GST Audit

GST audits assess compliance across multiple areas, including:

1. Turnover Verification: The declared turnover in GST returns is compared with financial records like profit and loss statements and annual reports. For instance, discrepancies in turnover reporting may arise due to unreported sales, which can lead to additional tax liabilities.
2. Input Tax Credit (ITC): ITC claims are scrutinized to ensure compliance with Sections 16 and 17 of the CGST Act. For example, ITC claimed on ineligible expenses like personal expenditures may be disallowed, resulting in penalties.
3. Tax Payment and Refunds: The audit verifies that taxes are paid accurately and refunds claimed are legitimate. For instance, an exporter's refund claim must align with the invoices and shipping documents submitted.
4. Anti-Profiteering Compliance: Adherence to Section 171 is checked to ensure businesses pass on the benefits of tax rate reductions to consumers. For instance, failure to reduce prices after a GST rate cut may result in penalties.
5. Record Reconciliation: Records maintained under Section 35 are compared with returns filed and e-way bills generated. For example, mismatches between stock records and outward supply reports can indicate underreported sales.
6. GST Rate and Classification: Correct classification of goods and services is verified to ensure appropriate GST rates are applied. For example, classifying a luxury item under a lower tax slab may lead to penalties and back taxes.

Conclusion

Section 65 of the CGST Act, read with Rule 101, ensures robust tax compliance and prevents revenue leakage. By maintaining proper records as per Section 35 and adhering to GST provisions, taxpayers can mitigate risks and avoid penalties.

Disclaimer: We request readers to seek professional advice before arriving at any decision/conclusion after reading. We are not responsible for any loss arising to anyone after referring and relying on this article. Above views are based on our understanding of the provisions

The author can also be reached at office.bhavikco@gmail.com