Departmental Audit – Only Audit in GST: A Detailed Analysis

Departmental Audit: After abolition of Audit under section – by a Cost Accountant and other professionals, the only way to check correctness of GST provisions remaining is GST Audit under Section 65 and 66 of CGST Act. The below are provisions of the respective sections in GST Act which will help to know more about this audit

Departmental Audit

Section 2(13) of the CGST Act, 2017 (hereinafter referred to as the ‘Act’) defines “Audit” as the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made thereunder or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of this Act or the rules made thereunder

Section 65

Section 65 of Central Goods and Services Act 2017 – Audit by Tax Authorities

  • 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.
  • The officers referred to in sub-section (1) may conduct audit at the place of business of the registered person or in their office.
  • 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.
  • 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
  • During the course of audit, the authorised officer may require the registered person,-
    1. to afford him the necessary facility to verify the books of account or other documents as he may require;
    2. to furnish such information as he may require and render assistance for timely completion of the audit.
  • 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.
  • 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.

Section 66

Whereas Section 66 of the CGST Act also has a provision of GST Audit under special circumstances

  • If at any stage of scrutiny, inquiry, investigation or any other proceedings before him, any officer not below the rank of Assistant Commissioner, having regard to the nature and complexity of the case and the interest of revenue, is of the opinion that the value has not been correctly declared or the credit availed is not within the normal limits, he may, with the prior approval of the Commissioner, direct such registered person by a communication in writing to get his records including books of account examined and audited by a chartered accountant or a cost accountant as may be nominated by the Commissioner.
  • The chartered accountant or cost accountant so nominated shall, within the period of ninety days, submit a report of such audit duly signed and certified by him to the said Assistant Commissioner mentioning therein such other particulars as may be specified: Provided that the Assistant Commissioner may, on an application made to him in this behalf by the registered person or the chartered accountant or cost accountant or for any material and sufficient reason, extend the said period by a further period of ninety days.
  • The provisions of sub-section (1) shall have effect notwithstanding that the accounts of the registered person have been audited under any other provisions of this Act or any other law for the time being in force.
  • The registered person shall be given an opportunity of being heard in respect of any material gathered on the basis of special audit under sub-section (1) which is proposed to be used in any proceedings against him under this Act or the rules made thereunder.
  • The expenses of the examination and audit of records under sub-section (1), including the remuneration of such chartered accountant or cost accountant, shall be determined and paid by the Commissioner and such determination shall be final.
  • Where the special 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.

17. From the above provisions it is very clear that section 65 and 66 are independent of any other section and any other procedure under any other section has no bearing on Audits under Section 65 and 66. In the case of Suresh Kumar PP v/s Deputy Director DGGI before Hon. Kerala High Court and further decision is upheld by Hon Supreme Court Para 17 says that Here the challenge is to simultaneous proceedings of investigation having been commenced when already an audit was in progress.

Audit under section 65 is a routine procedure to be carried out by the Commissioner in such frequency and in such manner as prescribed in the rules; which is independent of an investigation under section 67.

Section 67 is a more onerous procedure which can be initiated only on the satisfaction of an Officer not below the rank of a Joint Commissioner of, suppression of taxable transactions, excess claim of input tax credit, contravention of the provisions of the Act and Rules, keeping of goods and accounts in contravention of the provisions, escapement of tax, secreting of goods or material liable to confiscation or relevant or useful in any proceedings under the Act and any act leading to evasion of tax. Investigation under section 67 is no routine procedure as is an audit under section 65.

In this context we cannot but observe that the appellants, on their own admission, were issued with notice dated 17-3-2024, Exhibit P2, calling for details of the LCOs. There is nothing stated in the writ petition as to how and in what manner the appellants responded to the said notice. Then by Exhibit P5 dated 15-5-2024 an audit under section 65 was initiated and later in June the investigation under section 67. Though we are not going into the merits of the suppression alleged, the appellants themselves say that it is with respect to the quantum on which GST is payable; whether it should be on the gross amounts collected by the LCO.

Looking at the various proceedings it cannot be, for a moment, believed that the appellants were taken off guard by the abrupt proceedings taken under section 67 as they would allege. We do not find any infirmity in the audit and investigation proceeding being continued simultaneously. But the learned Standing Counsel informs us that in the wake of the investigation commenced, the audit would not be proceeded with.”

The point of above Para is very clear that Investigation and Inspection are independent of Section 65 and 66 Audits. Hence we can conclude that Assesse is suppose to be ready for all types of Audits, Inspections, Investigations and Special Audits all the times. One burden of Audit under Section – is removed from the year 20-21 but all time preparing for Departmental Audit and Special Audit is needed.

A trade circular issued by the department under MCGST Act dated 21st December 2024 also speaks about indicative list of documents to be submitted or to be kept ready for departmental audit. These documents show most of the records needed under the Act to be maintained and updated by the tax payer. The indicative list is given as below:

  • Financial statements and reports- Balance Sheet, Tax Audit Report, Annual Financial Statement, Cost Audit Report, Trial Balance
  • Inward -Outward supply summary statement
  • RCM ledger and supportive documents
  • Inward -Outward supply invoices
  • Cancelled invoices due to any reason
  • Goods return (inward and outward supply) register along with credit note/debit note details 7.
  • Inward supply Register (soft copy)
  • Outward Supply register (soft copy)
  • Zero rated supply register and supportive documents ( commercial invoice, shipping bill, bill of lading, EGM , Bank realization certificate or Inward remittance certificate etc.)
  • Details of Exempted supply/Supply to SEZ dealer
  • Refund claim/availment details if any (export of good and services, inverted duty structure etc. any type of refund claimed by dealer)
  • TDS payment transactions if any
  • TRAN-1 details ( details regarding credit carried forwarded from previous Act to GST Act)
  • GSTR 2A-Mismatch, unmatched transactions details
  • E-way bill transactions month wise summary statement and corresponding register
  • In case of services, FIRC (Foreign Inward Remittances), corresponding agreements, invoices, Annual Maintenance Contract copies and corresponding invoices if any
  • Details of advances received and tax payment for the same
  • Other Income/misc. income
  • Reversal/reduction of ITC
  • Scrap sales
  • Details of exempted outward supply
  • Details of zero rated supply
  • Non-GST supply
  • Job work details (inward and outward side)
  • Credit ledger Input tax credit availment summary (for Capital asset, liability. Refund claim, any other deduction
  • Cash ledger availment summary (for liability, RCM, any other deduction)
  • Reversal of ITC within 180 days due to non-payment in 180 days

The above documents may vary from case to case depending on the volume, gravity, complexity, etc of the each individual case.

From the above list and case law which was quoted show that lot of records needs to be maintained which are not mentioned elsewhere as a list but the indicative list is given and Inspections and Investigation is independent of Audit hence all records must be maintained all the time.