GST Audit

What is a GST audit?

A GST audit is the examination of a registered taxpayer's books of account, records, GST returns and other relevant documents to verify whether the Goods and Services Tax (GST) has been correctly assessed, collected, paid and reported in accordance with the Central Goods and Services Tax (CGST) Act, 2017 and the applicable provisions. 

A GST audit also verifies the correctness of tax liability, the eligibility of Input Tax Credit (ITC) claims, and, where applicable, the classification, valuation and tax treatment of supplies.

Why is a GST audit important?

A GST audit helps businesses maintain accurate tax records and demonstrate compliance with the GST Act, 2017. It verifies the correctness of tax payments, GST return filings, ITC claims and supporting documentation. Depending on the nature of the business, an audit may also examine the classification of goods and services, valuation of taxable supplies, exemption claims, reverse charge liabilities and place of supply.

Regular internal GST compliance reviews can help businesses identify discrepancies early, strengthen internal controls, reduce the risk of disputes and improve the accuracy of financial reporting.

How does a GST audit work?

1. Maintaining books of account

Registered taxpayers maintain books of account, tax invoices, purchase and sales registers, e-way bills, ITC records and other documents as per the provisions of the GST ACT, 2017.

2. Filing GST returns

The taxpayer files the applicable GST returns and pays the tax due within the prescribed timelines while maintaining supporting records for verification and reconciliation.

3. Initiating the audit

Where considered necessary, GST authorities may initiate a departmental audit under Section 65 of the CGST Act by issuing the prescribed notice. 

4. Verifying compliance

During the audit, GST authorities examine books of account, GST returns and supporting documents to verify the accuracy of tax liability, ITC claims, classification of supplies, valuation, exemptions, place of supply and compliance with other applicable examination under GST provisions.

5. Identifying discrepancies

If discrepancies such as underpaid tax, excess or ineligible ITC claims, incorrect tax rates, valuation errors or mismatches between GST returns and financial records are identified, the taxpayer may be asked to provide explanations or supporting documents.

6. Concluding the audit

After completing the verification, GST authorities issue their audit findings. Where discrepancies are identified, the audit itself does not automatically create a tax demand. Instead, the findings may result in further proceedings. If a tax liability is subsequently determined, the taxpayer may be required to pay the applicable tax along with interest and penalties, where prescribed.

Example of a GST audit

XYZ Enterprises files its GST returns regularly throughout the financial year. During a departmental audit conducted under Section 65 of the CGST Act, GST authorities compare the company's books of account, tax invoices, purchase records, e-way bills and GST returns. They identify certain ITC claims that are not supported by valid tax invoices and detect differences between the purchase register and the ITC claimed in the returns.

The company submits additional documentation to substantiate eligible ITC claims and reverses the ineligible credit. After completing the verification, the authorities finalise the audit. Where applicable, any further proceedings relating to tax recovery or adjudication are initiated in accordance with the provisions of the GST Act, 2017.

Key Points

• A GST audit verifies whether a registered taxpayer has complied with the provisions of the GST Act, 2017.
• It involves examining books of account, GST returns, tax invoices and other supporting records to verify tax liability, ITC claims and overall GST compliance.
• A GST audit may also verify the classification, valuation, place of supply and tax treatment of transactions.
• Maintaining accurate books of account and performing regular GST reconciliations can help businesses prepare for audits and minimise compliance risks.