GST Audit: Applicability, Limit & Compliance Guide

Understand GST audits, limits, types & compliance steps. Learn how to file GSTR-9 & GSTR-9C, avoid penalties & stay GST-compliant.

Around fourteen million people pay GST annually. And this number is only expected to go up, from new businesses being registered every year. Apart from that, several small businesses that were exempt from GST grow in revenue every year to become GST compliant.  So it is only natural that the government will want to ensure that the monies being collected are as per regulation and of the correct amount. And this has led to the introduction of a GST audit. 

But there are several questions surrounding this concept even now. What does audit under GST comprise? How does one go about doing a GST audit? Is there a GST audit limit? What is a special audit and who can order it?

In this article, we shall aim to explain the idea of a GST audit and answer the questions that are surrounding its introduction. Let us take a look.

What is GST Audit?

Audit under GST is the process of making a detailed examination of a taxpayer’s financial records, returns, and compliance with Goods and Services Tax (GST) laws. Here the auditor first takes a look at the transactions and ensures that they are all genuine transactions. 

Then they check if the manner of classification of all transactions is correct and within the meaning of the updated definitions and classifications issued by the GST council. Finally, they check if the amount paid by the person on these transactions has been calculated correctly.

Why is GST Audit Important?

A GST audit is essential for ensuring transparency, accuracy, and compliance with Goods and Services Tax (GST) laws. It helps businesses verify whether their tax liabilities, input tax credit (ITC) claims, and GST payments are correctly recorded and reported. By reviewing correctness of financial records, an audit ensures that businesses adhere to GST compliances and avoid miscalculations or fraudulent practices.

One of the key purposes of a GST audit is to detect and prevent tax evasion. Through systematic examination, au ditors can identify discrepancies, such as under-reporting of turnover, excess input tax credit (ITC) claims, excess refund claims, incorrect tax provisions, or incorrect tax classifications. This helps the government in ensuring proper tax collection and maintaining fairness in the taxation system.

For businesses, a GST audit provides early detection of errors, reducing the risk of penalties and interest charges. Regular audits also improve financial discipline, helping businesses maintain accurate records and prepare for any official inspections.

Additionally, GST audits help in reconciling tax records with financial statements, ensuring that transactions are correctly reported. A well-conducted audit strengthens a company’s financial credibility and fosters trust with tax authorities.

Overall, GST audits play a crucial role in ensuring legal compliance, preventing financial risks, and maintaining a smooth taxation process for businesses and the government.

GST Audit Applicability and Limit

The applicability of GST audit is based on their turnover threshold and certain compliance requirements. Initially, a mandatory GST audit was required for taxpayers with an annual aggregate turnover exceeding ₹2 crore in a financial year.

This audit had to be conducted by a Chartered Accountant (CA) or Cost Management Accountant (CMA), who would certify the GST reconciliation statement in Form GSTR-9C. However, this requirement was removed in the Finance Act 2021, making self-certification sufficient.

Circumstances When GST Audit Becomes Mandatory

Despite the removal of mandatory audits for high-turnover businesses, GST audits may still be required under the following circumstances:

1. Departmental Audit: The GST department may conduct an audit under Section 65 of the CGST Act for any taxpayer to ensure compliance.
2. Special Audit: Under Section 66, if tax authorities suspect incorrect tax declarations, excessive ITC claims, or revenue suppression, they may order a special audit by a CA/CMA.
3. Investigation or Scrutiny: If discrepancies are found during GST return scrutiny, an audit may be mandated.

Maintaining proper records and reconciling GST returns with financial statements is crucial to comply with GST audit applicability and avoid penalties.

Types of GST Audits

GST audits are conducted to ensure compliance with Goods and Services Tax (GST) laws. Based on different circumstances, GST audits can be classified into the following types:

1. Turnover-Based GST Audit (Previously Statutory): Earlier, businesses with an annual turnover exceeding ₹2 crore were required to get their accounts audited by a Chartered Accountant (CA) or Cost & Management Accountant (CMA). They had to file GSTR-9C, a reconciliation statement. However, this mandatory audit requirement was removed in 2021, and now businesses must self-certify their compliance.
2. Departmental Audit (Section 65 of CGST Act): The GST department may conduct an audit of any registered taxpayer based on risk parameters or random selection. Authorities review financial records, tax invoices, and ITC claims to ensure proper GST compliance.
3. Special Audit (Section 66 of CGST Act): If the tax officer suspects incorrect tax reporting, excessive ITC claims, or tax evasion, they may order a special audit by a CA/CMA. This is usually done when complex financial transactions need further examination.
4. Investigation or Enforcement Audit: This audit occurs when fraud, tax evasion, or major discrepancies are detected. It may lead to penalties and legal action.
5. Limited Scrutiny in GST Audit: Limited Scrutiny in the context of GST audit refers to a focused review of specific issues in a taxpayer’s records rather than a full-fledged audit. The GST department may conduct limited scrutiny if discrepancies are detected in GST returns, mismatched Input Tax Credit (ITC) claims, or inconsistencies in turnover declarations.
6. Taxpayer-Initiated Audit: A Taxpayer-Initiated Audit refers to an internal review conducted by businesses to ensure GST compliance before an official audit occurs. Businesses often engage Chartered Accountants (CAs) or Cost Accountants (CMAs) to conduct internal audits, ensuring smooth compliance and minimizing risks of scrutiny from tax

Documents Required for GST Audit

A GST audit requires businesses to maintain and present various supporting documents to verify tax compliance. Below is a comprehensive GST audit checklist:

1. Financial Statements

• Balance Sheet
• Profit & Loss Statement
• Trial Balance
• Cash Flow Statement

2. GST Returns

• GSTR-1 (Details of outward supplies)
• GSTR-3B (Summary return for tax payment)
• GSTR-9 (Annual return)
• GSTR-9C (Reconciliation statement, if applicable)

3. Invoices and Supporting Documents

• Sales and purchase invoices
• Debit and credit notes
• E-way bills for goods transportation
• Import/export documentation

4. Input Tax Credit (ITC) Records

• ITC ledger and reconciliation with GSTR-2A/GSTR-2B
• Purchase register with ITC claims

5. Ledgers and Other Records

• GST payment challans
• Stock register
• Expense invoices with GST details

Maintaining proper financial statements and GST records ensures compliance, reduces errors, and prevents penalties. Well-organized records help businesses avoid scrutiny, defend ITC claims, and streamline tax assessments during audits.

What are the Steps Involved in the GST Audit Process?

A GST audit is a systematic process that ensures compliance with GST laws. It involves verifying tax records, identifying discrepancies, and certifying accurate tax reporting. Below are the key steps involved:

1. Preparing for the Audit

Proper audit preparation is essential to ensure compliance and avoid penalties. Businesses must follow a structured approach, including Reconciliation, account verification, and reviewing GSTR-9 and GSTR-9C filings.

Reconciliation of Accounts with GSTR Filings

• Match GSTR-3B (summary return) with GSTR-1 (outward supplies) and GSTR-2A/2B (ITC claims) to identify discrepancies.
• Reconcile purchase records with ITC claimed to avoid incorrect tax credits.
• Verify tax payments and ensure they align with financial statements.

Review GSTR-9 (Annual Return) and GSTR-9C (Reconciliation Statement)

• GSTR-9 provides a summary of annual transactions, and businesses must ensure accurate reporting.
• GSTR-9C, applicable for businesses above the audit threshold, is a reconciliation statement certified by a Chartered Accountant (CA) or Cost Accountant (CMA).
• Verify whether taxable turnover, ITC, and tax payments are accurately reflected in these reports.

Account Verification and Record Maintenance

• Maintain proper records of sales invoices, purchase registers, ITC claims, and stock details.
• Ensure all GST payments, challans, and ledgers are up to date.

2. Filing GSTR-9 and GSTR-9C

Filing GSTR-9 (Annual Return) and GSTR-9C (Audit Certification) is crucial for businesses to maintain GST compliance and avoid penalties. These forms provide a detailed summary of a taxpayer’s annual financial transactions.

Filing GSTR-9 (Annual Return)

All regular GST-registered businesses must file GSTR-9 annually, except for composition taxpayers and casual taxable persons.

• Steps to File:
  1. Log in to the GST portal
  2. Navigate to ‘Annual Return’ and select the relevant financial year.
  3. Fill in details of outward and inward supplies, tax payments, and ITC claimed.
  4. Verify and submit using Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).

Filing GSTR-9C (Audit Certification)

• Businesses with an annual turnover exceeding ₹5 crore must file GSTR-9C, which includes a reconciliation statement and audit certification by a Chartered Accountant (CA) or Cost Accountant (CMA).
• Steps to File:
  1. Prepare a reconciliation statement matching books of accounts with GST returns.
  2. Obtain audit certification from a CA/CMA.
  3. Upload GSTR-9C through the GST portal.

Filing Deadlines and Penalties

• The filing deadline for GSTR-9 and GSTR-9C is December 31 of the following financial year.
• Penalties for Late Filing: ₹200 per day (₹100 CGST + ₹100 SGST) up to 0.5% of turnover.

Timely filing of GSTR-9 and GSTR-9C ensures compliance and prevents unnecessary penalties.

3. Submission of Audit Reports

Submitting an audit report on the GST portal is a crucial step in ensuring compliance with GST regulations. Businesses that meet the audit criteria must file the necessary reports, including audit certification by a Chartered Accountant (CA) or Cost Accountant (CMA). Below is a step-by-step guide for submission:

Step 1: Log in to the GST Portal

• Visit www.gst.gov.in and log in using your GSTIN, username, and password.

Step 2: Navigate to the Annual Return Section

• Go to the ‘Services’ tab → ‘Returns’ → ‘Annual Return’.
• Select the relevant financial year for which the audit report is being submitted.

Step 3: File GSTR-9 (Annual Return)

• Click on ‘Prepare Online’ under GSTR-9.
• Fill in details related to taxable turnover, ITC, and tax payments.
• Save and submit the return after verification.

Step 4: Upload GSTR-9C (Reconciliation Statement & Audit Report)

• If applicable (for turnover above ₹5 crore), select ‘GSTR-9C’.
• Upload the audit report and certification signed by a CA/CMA in the required format.

Step 5: Verification and Submission

• Cross-check all details and ensure there are no discrepancies.
• Submit using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).

Step 6: Acknowledgment and Confirmation

• After successful submission, the system generates an Acknowledgment Reference Number (ARN) as proof of filing.

Consequences of Non-Compliance in GST Audit

Failure to comply with GST audit requirements can lead to severe consequences, including penalties, interest on late payment, and GST notices from tax authorities. Businesses must ensure timely and accurate reporting to avoid legal and financial repercussions.

Penalties for Non-Compliance

• If a taxpayer fails to file GSTR-9 (Annual Return) or GSTR-9C (Reconciliation Statement), a penalty of ₹200 per day (₹100 CGST + ₹100 SGST) is levied, subject to a maximum of 0.5% of the turnover.
• Misreporting or incorrect filing during a GST audit may attract a penalty of 10% of tax due or ₹10,000 (whichever is higher) under Section 122 of the CGST Act.

Interest on Late Payment of GST

• Any delay in tax payment results in an interest charge of 18% per annum on the outstanding amount.
• Incorrect ITC claims or under-reporting of tax liability can also lead to interest payments.

GST Notices and Legal Action

• Tax authorities may issue GST notices for discrepancies found during audits.
• Failure to respond may result in further investigation, blocking of ITC, or suspension of GST registration.

Common Mistakes Leading to Non-Compliance

• Mismatch in ITC claims between GSTR-3B and GSTR-2A/2B.
• Errors in taxable turnover calculation.
• Failure to maintain proper records and invoices.

Common Issues Identified During GST Audits

GST audits help identify discrepancies in tax filings and ensure compliance with GST regulations. Some of the most common issues found during audits include ITC mismatches, unreported transactions, and tax shortfalls.

1. ITC Mismatches

• One of the major issues is Input Tax Credit (ITC) mismatches between GSTR-3B (summary return) and GSTR-2A/2B (auto-generated supplier data).
• Businesses may claim ITC that is not reflected in GSTR-2A/2B, leading to potential reversals and penalties.
• Incorrectly availed ITC due to missing invoices or ineligible claims is a common non-compliance issue.

2. Unreported Transactions

• Certain sales, purchases, or adjustments may be missed or incorrectly recorded, leading to underreporting of turnover.
• Supplies made without issuing proper invoices or recording exports improperly can result in tax liabilities and penalties.
• Unaccounted transactions, such as free supplies, discounts, or barter deals, may lead to non-compliance.

3. Tax Shortfalls

• Errors in tax rate application can lead to underpayment or overpayment of GST.
• Incorrect classification of goods and services under different GST slab rates results in tax shortfalls.
• Non-payment of reverse charge mechanism (RCM) liabilities for certain services is another frequent issue.

To avoid these problems, businesses should conduct regular reconciliations, maintain proper records, and review GST returns carefully before filing.

Recent Updates on GST Audits

Staying informed about the latest GST amendments, audit timelines, and policy updates is crucial for businesses to ensure compliance. Here are some recent developments:

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Conclusion on Audit under GST

A GST audit is essential for ensuring GST compliance and preventing errors that could lead to penalties. It helps businesses verify tax payments, reconcile Input Tax Credit (ITC), and detect discrepancies in tax filings. Regular audits improve taxpayer awareness, ensuring accurate reporting and adherence to GST laws.

Non-compliance can result in penalties, interest on unpaid tax, and legal action. A well-conducted audit ensures that financial records, tax returns (GSTR-9, GSTR-9C), and invoices are accurate and aligned with GST regulations.

Further one can avoid unnecessary issues in the audit by simply maintaining proper records, monitoring GST notices and regularly conducting internal audits. Proper audit preparation minimizes risks and ensures a smooth process. If required, businesses should seek professional help from Chartered Accountants (CAs) or Cost Accountants (CMAs) to ensure compliance and avoid penalties.

FAQs on GST Audit 

What is the due date for filing GSTR-9C for GST audit?

The due date for filing GSTR-9C for GST audit is 31st December of next financial year.

What is the time limit for responding to a GST audit notice?

Any taxpayer who receives a notice from the GSt authorities is required to respond or comply with its instructions within 30 days from the date of issue, or request for an extension which if granted may not exceed more than 15 days. So on the whole, a person has up to forty five days to respond or comply.

Who can conduct a GST statutory audit?

Only certified Chartered Accountants (CA) and Cost Accountants (CMA) are qualified to conduct a statutory GST audit.

What happens if discrepancies are found during a GST audit?

The nature of the consequences of discrepancies depends on the magnitude of the discrepancies. The GST authorities can take action that can vary from simply seeking clarification and rectification to charging penalties and additional taxes to conducting a full fledged enquiry depending on the facts of the case.

How is a special GST audit initiated?

A special GST audit is initiated by an officer of the GSt authority on finding unusual or unclear transactions that require further scrutiny.

What is the penalty for non-compliance in a GST audit?

If a taxpayer fails to file GSTR-9 (Annual Return) or GSTR-9C (Reconciliation Statement), a penalty of ₹200 per day (₹100 CGST + ₹100 SGST) is levied, subject to a maximum of 0.5% of the turnover. Misreporting or incorrect filing during a GST audit may attract a penalty of 10% of tax due or ₹10,000 (whichever is higher) under Section 122 of the CGST Act.