GST audits are essential to ensure that businesses comply with tax regulations. Especially with evolving rules for FY 2024-25, it’s important for all important stakeholders to understand every aspect of the audit process. Here, we have compiled frequently asked questions about GST audit helping business owners, GST practitioners, and tax professionals who need a better understanding of GST audits.
1. What Is a GST Audit and Why Is It Important?
A GST audit is a detailed verification of a taxpayer’s financial records; including his books, GST returns, and other supporting documents to confirm the accuracy of turnover, ITC claims, and tax payments.
It is important because:
- It ensures correct computation and payment of taxes.
- It helps identify errors, mismatches, or even fraudulent activity.
- It prevents penalties and interest charges.
- It builds transparency and trust between businesses and tax authorities.
2. Who Undergoes a GST Audit?
Recent changes have altered the requirements for GST audit. The previous mandatory audit requirement under Section 35(5) applied to taxpayers with turnovers above ₹2 crores. But it has now been removed. Now, only taxpayers with an annual aggregate turnover exceeding ₹5 crores must file a self-certified reconciliation statement using Form GSTR-9C along with their annual GSTR-9 return.
For businesses below the ₹5 crore threshold, the formal audit isn’t mandatory. However, tax authorities can select any taxpayer for an audit based on certain red flags like unusually high ITC claims, frequent return amendments, or a history of non-compliance. Such audits are scrutiny audits.
3. Who Conducts the GST Audit?
Following professionals conduct GST audits:
- Chartered Accountants (CAs) or Cost Accountants.
- Tax Authorities, who carry out departmental audits.
- Special Appointed Auditors (CAs or CMAs assigned by commissioners) in cases of suspected discrepancies or fraud during scrutiny audits.
4. What Are the Different Types of GST Audits?
There are several audit types, each with its specific purpose and procedure:
- Departmental Audit (Section 65): Conducted by tax authorities as part of routine compliance checks. A notice (FORM GST ADT-01) is typically issued 15 days prior. The department needs to complete it within 3 months from the date of commencement, but the commissioner can extend it for further six months citing a relevant reason in writing.
- Special Audit: Initiated by assistant commissioner with FORM GST ADT-03 when he suspects major discrepancies or evidence of fraudulent activity. IA professional appointed by the commissioner under Sections 66 and Rule 102 conducts special audits. The report for the same must be submitted to the assistant commissioner by the professional within 90 days. Moreover, the department can conduct a special audit even when they’ve already audited taxpayers’ records.
- Limited Scrutiny Audit: A focused audit for specific compliance checks.
5. How Does a Special Audit Differ from a Routine Departmental Audit?
A routine departmental audit is a standard procedure for tax authorities to ensure a business’s compliance with GST regulations. Taxpayers receive a 15-day prior notice. The audit should complete within three months, extendable by another six months if necessary.
On the other hand, a special audit is initiated under Section 66 of the CGST Act when tax authorities suspect certain discrepancies, such as incorrect valuation or ineligible input tax credit claims. A Chartered Accountant or Cost Accountant nominated by the Commissioner conducts this audit. The auditor must submit their report within 90 days, with a possible extension of an additional 90 days. Moreover, the department decides and pays for the expenses for a special audit, including the auditor’s remuneration and not the taxpayer.
6. How Long Does the GST Audit Process Typically Take?
Once an audit is initiated:
- Notice Period: A 15-day notice is given to the taxpayer.
- Audit Duration: The audit is generally expected to be completed within three months from the commencement date.
- Extensions: In complex cases, extensions of up to an additional three months may be granted.
7. What Documents Must a Business Maintain for a GST Audit?
For smooth GST audits, businesses should maintain:
- GST Returns: Copies of GSTR-1, GSTR-3B, and GSTR-9/9C filings, along with any amendments.
- Invoices and Receipts: All sales, purchase, and expense invoices.
- Bank Statements and Payment Challans: Evidence of tax payments and refund claims.
- Ledger Accounts and ITC Registers: Detailed records that track ITC claims, their reconciliation, and utilization.
- Reconciliation Statements: Documentation aligning the data on the GST portal (e.g., GSTR-2B) with internal accounting records.
8. What Are Some Common Discrepancies Identified During GST Audits?
Auditors often find the following issues during audits:
- Mismatches in Returns: Differences between GSTR-1 and GSTR-3B data.
- Overclaimed or Underclaimed ITC: ITC claims that don’t align with actual purchase records.
- E-Invoicing Errors: Incorrect or missing details in the e-invoicing system.
- Incorrect Turnover Reporting: Errors in the calculation of taxable supplies versus exempt supplies.
- Issues with Reverse Charge Mechanism (RCM): Improper recording of RCM transactions.
9. What Are the Penalties for Non-Compliance Identified During a GST Audit?
Penalties depend on the severity and nature of the non-compliance:
For Non-Fraudulent Errors:
- Additional Tax: You need to pay the shortfall.
- Interest: Typically charged at 18% per annum on the under-reported tax amount.
- Penalty: As per Section 73, a penalty of 10% of the tax shortfall or a minimum of ₹10,000, whichever is higher may be imposed.
Fraudulent or Intentional Misreporting:
As per Section 74, penalties for fraud can reach up to 100% of the tax shortfall, along with interest, and may also lead to prosecution.
Incorrect Self-Certification in GSTR-9C:
Penalty for discrepancies in GSTR-9C can be up to ₹50,000.
Other Violations:
Non-filing or late filing of returns, or failure to maintain proper records, can incur further fines and interest.
10. What Should a Business Do Upon Receiving an Audit Notice?
When a business receives an audit notice, it should:
- Gather all relevant documents and records, ensuring proper updates and accurate maintainance.
- Designate a CA or in-house finance expert to communicate with auditors.
- Perform an internal review to identify any discrepancies before the auditors arrive.
- Respond promptly to any queries from auditors and provide clear, documented explanations for any identified issues.
11. How To Calculate Turnover for Audit Purposes?
Calculate the turnover comprehensively, including:
- Taxable Supplies: All sales that attract GST.
- Exempt Supplies: Even if these are not taxable, report them accurately.
- Exports and RCM Transactions: You need to account them separately and reconcile with corresponding GST filings.
12. How Does a Taxpayer Know the Outcome of a GST Audit?
After a GST audit concludes, the tax authorities must inform the taxpayer of their findings within 30 days. This communication details any discrepancies or issues identified during the audit. Typically, this information is present in Form GST ADT-02.
Taxpayers can access this form by logging into the GST portal and checking the ‘Notices’ section. If the audit reveals unpaid taxes or incorrect input tax credits, the taxpayer may need to take corrective actions, such as paying additional taxes or penalties.
13. What Should a Business Do If Errors in Tax Payments Are Detected During GST Audit?
When you identify errors:
- Assess the Shortfall: Determine the additional tax liability resulting from underpayment.
- File Corrective Returns: Amend the errors in returns under the provisions of the GST law.
- Settle Outstanding Amounts: Pay the shortfall along with the applicable interest (typically at 18% per annum).
- Consult Experts: Engage a GST professional to ensure proper documentation of corrections and compliance with all regulatory requirements.
14. How Is Compliance with the RCM Verified During an Audit?
Check compliance with RCM in following ways:
- Ensure that all RCM transactions are accurate in the GST returns.
- Confirm payment of tax under RCM within the prescribed period (usually within 180 days).
- Verify correct adjustment of any ITC on reverse charge transactions in the returns.
15. Is It Beneficial for a Business to Conduct a Self-Audit?
Absolutely. A self-audit is a necessary, internal review process that helps:
- Identify Discrepancies Early: Catch and correct errors before they attract external audit scrutiny.
- Improve Record-Keeping: Streamline documentation and reconciliation processes.
- Reduce Penalty Risk: Addressing issues internally can prevent costly penalties and interest later.
16. How Can Technology and Accounting Software Help in GST Audit Preparedness?
Modern technology like GSTrobo® simplifies audit preparation through:
- Automating Reconciliations: Automatically matches transactions across your internal records and GST returns.
- Centralized Documentation: Keeps all required documents, such as invoices, bank statements, and audit trails, in one secure location.
- Real-Time Dashboards: Provides an up-to-date snapshot of compliance status, highlighting discrepancies immediately.
- Audit Tracking: Logs communications, audit notices, and responses to ensure not missing out on anything during the process.
