Section 65 of GST – Audit by tax authorities – CGST Section

Section 65 of GST – Audit by tax authorities. Check Details for GST Section 65. In this section you may find all details for “Audit by tax authorities” as per GST Act 2017. Detailed Analysis of GST Section 65 of GST Act 2017. 

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Section 65 of GST – 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 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 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 74.

Related provisions of the Statute

Section or Rule	Description
Section 2(13)	Definition of the term Audit
Section 73	Determination of tax not paid, short paid, erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any wilful misstatement or suppression of facts.
Section 74	Determination of tax not paid, short paid, erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any wilful misstatement or suppression of facts.

Introduction

(a) Audit of records of tax payers is the bed rock for the proper functioning of a self-assessment-based tax system. This provision provides for audit of the business transactions of any registered person. It is an important tool in the tax administration to ensure compliance of law and prevent revenue leakage.
(b) In terms of Section 2(13) of the CGST Act, 2017, “audit” means 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.
(c) The following three types of audits are envisaged under the GST laws:

• The first type of audit is to be done by a chartered accountant or a cost accountant u/s 35(5) where turnover exceeds certain threshold as specified in Rule 80(3) of CGST Rules, 2017 i.e. Rs. 5 Crores of Aggregate Turnover for FY 2018-19 vide Notf no. 16/2024-CT dt. 23.03.2024. It was Rs.2 Crores for FY 2017-18);
• Second type of audit is to be done by the commissioner or any officer authorised by him in terms of Section 65 of the CGST Act, 2017 read with Section 20(xiv) of the IGST Act, 2017 and Section 21(xv) of UTGST Act, 2017.
• The third type of audit is called the Special Audit and is to be conducted under the mandate of Section 66 of CGST Act, 2017 read with Rule 102 of CGST Rules, 2017.

Analysis

This is probably for the first time in the history of an indirect tax statute that the term audit has been defined. Audit means examination of records, returns and other documents maintained or furnished by registered person. Hence audit cannot be conducted in case of unregistered person even if he was required to be registered. In the process of Audit records, returns and other documents to be examined, may be maintained or furnished under this Act or Rules or any other law for the time being in force.

In audit, examination is done to verify the correctness of;

• Turnover declared by the Supplier,
• Taxes Paid by the Supplier,
• Refund claimed by the Supplier
• Input Tax credit availed by the Supplier, and
• Classification of Goods or Service by the Supplier.

In audit examination is also done to assess the compliance with the provisions of this Act or rules. While this chapter discusses about section 65 and section 66, the audit to be conducted by a chartered accountant under section 35 has been dealt with in Chapter 8 of this background material.

• Section 65 authorizes conduct of audit by the Commissioner or any other officer authorized by him of the transactions of the registered persons only. The Commissioner may issue a general order or a specific order, to authorize officers to conduct such audit. As per Rule 101(1) the period of audit under sub-section (1) of Section 65 shall be a financial year (or part thereof) or multiples thereof. The frequency and manner for conducting such audit are yet to be prescribed. Normally, such issues could have been dealt with by way of issue of Office orders or circular instructions. It is important to note that the said order of Commissioner must be specific to the auditee and the tax period selected for audit. Absence, error and deficiency in such orders abort any preparatory step taken by the audit officer and preparation to respond taken by the auditee.

• Section 65 authorizes conduct of audit by the Commissioner or any other officer authorized by him of the transactions of the registered persons only. The Commissioner may issue a general order or a specific order, to authorize officers to conduct such audit. As per Rule 101(1) the period of audit under sub-section (1) of Section 65 shall be a financial year (or part thereof) or multiples thereof. The frequency and manner for conducting such audit are yet to be prescribed. Normally, such issues could have been dealt with by way of issue of Office orders or circular instructions. It is important to note that the said order of Commissioner must be specific to the auditee and the tax period selected for audit. Absence, error and deficiency in such orders abort any preparatory step taken by the audit officer and preparation to respond taken by the auditee.

• The Commissioner needs to record reasons in writing for grant of any such extension.
• During the course of audit, the authorized officer may require the registered person to afford him the necessary facility to verify the books of account and also to furnish the required information and render assistance for timely completion of the audit.
• As per Rule 101(4), Proper Officer may inform discrepancies noticed during audit to registered person. Registered Person shall reply to discrepancies. Proper Officer shall finalize findings only after due consideration of reply
• Some of the best practices to be adopted for GST audit among others could be: The evaluation of the internal control viz-a-viz GST would indicate the area to be focused. This could be done by verifying:
  1. The Statutory Audit report which has specific disclosure in regard to maintenance of record, stock and fixed assets.
  2. The Information System Audit report and the internal audit report.
  3. Internal Control questionnaire designed for GST compliance.
     • The use of generalised audit software to aid the GST audit would ensure modern practice of risk-based audit are adopted.
     • The reconciliation of the books of account or reports from the ERP’s to the return is imperative.
     • The review of the gross trial balance for detecting any incomes being set off with expenses.
     • Review of purchases/expenses to examine applicability of reverse charge applicable to goods/services. The foreign exchange outgo reconciliation would also be necessary for identifying the liability of import of services.
     • Quantitative reconciliation of stock transfer within the State or for supplies to job workers under exemption.
     • Ratio analysis could provide vital clues on areas of non-compliance.

• On audit completion, information is required to be provided to the registered person including the findings during the audit as per section 65(6) read with Rule 101(5) in FORM GST ADT-02 within thirty days (not mentioned in s. 65(6)). In cases where tax liability is identified during the audit or input tax credit wrongly availed or utilized by the auditee, the procedure laid down under Section 73 or 74 is to be followed. Audit cannot conclude automatically resulting in a demand. Independent application of mind is necessary for a valid demand to be raised.
• It is important to identify that audit under section 65 can commence in a routine manner although 100 per cent audit of given taxpayer or all taxpayers in same industry would not be feasible. Unlike scope and limits to powers under section 61 to 64, scope and coverage under section 65 can extend from scrutiny all the way to investigation. New discoveries may be made but not make ‘spot recovery’. Show cause notice under section 73 or 74 or 76 is a must for any demand to be entertained by taxpayer.

65.3 Comparative Review

1. The Central Excise law empowers the Central Government to make provision for verification of records of assessee. However, the GST Act itself specifically provides for audit of the registered person. In EA 2000, the Director General of Audit supervises the audit functions. Separate Audit Commissionerates have been constituted with effect from 15.10.2014 which will plan, delegate and administer the audit. The audit of the assessee is carried out through visits by ‘audit groups’ which consist of Superintendents and Inspectors.
2. The audit groups shall prepare the assessee master file, collect the relevant information and documents. Desk review shall be done before forming the audit plan. As planned, audit will be conducted and corrections and improvements shall be suggested to the assessee.
3. The draft audit report would be discussed and communicated to the assessee and with the details of spot recoveries and willingness of the assessee to accept the demand etc. the same shall be placed before monitoring committee. If the assessee does not accept the audit para, adjudication process will be initiated by the Jurisdictional GST Officer.

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