How to Handle Section 65 CGST Audit Notice? Step by Step Guide

Complying with GST (goods and services tax) regulation is much essential for businesses to keep running their operations smoothly. As per the Section 65 of the CGST Act there is a procedures and requirement of the GST audits. Through this article, you will understand that how GST audits under Section 65 of the CGST helps businesses understand their obligations. We will also discover that what actions can be taken under GST law when you receive a Section 65 CGST Audit Notice, also this includes practical implications for taxpayers.

GST audit under the Section 65 of the CGST Act goes through examination of records, returns and other related documents, which are maintained by the GST-registered person. Any authorized officer conducts the audit in order to ensure the compliance with the GST Act. This audit plays an essential role for verifying and marketing corrected in the declared turnover, taxes paid, refund claimed and input tax credit availed by a business.

Required Documents During Audit (Officer May Ask)

During the GST audit, officer may ask you to represent some documents, these documents and books of accounts are to be maintained under the GST law. We have listed below the documents that can be inspected and verified by the officers during the GST Audit under Section 65:-

• Sales/Purchase invoice

• Debit/Credit Note

• Stock Registers

• ITC and Output Tax Registers

• Advance Receipts and Payments

These are the common documents, that can be asked by the officer, but these documents are not specific, apart from them other documents can be asked too, as per the requirement. Any failure to maintain these documents can lead to penalties under Section 122 and 125, it also includes fines and legal proceedings.

Areas Covered Under GST Audit

1. Turnover Verification: - The declared turnover in the GST returns is compared with financial records like profit and loss statement and annual reports. Additional discrepancies can arise because of unreported sales, that means additional liabilities.

2. Input Tax Credit: - In order to ensure compliances with the Section 16 and 17 of the CGST Act, ITC claims are scrutinized. For example, there is always a possibility you have claimed ITC on ineligible expenses like personal expenditures, you should know that are disallowed and will result in penalties. 

3. Tax Payments and Refunds: - This audit also ensures that all the taxes are paid accurately and refund claims are valid, if anything is found mismatch or disallowed, it will result in penalties for non-compliances.

4. Anti-Profiteering Compliance: - Business has to comply with Section 171 to ensure the business pass on the benefits of the tax rate reduction to consumers.

5. Record Reconciliation: - Records are to be maintained under the Section 35 because they are compared with returns filed and e-bay bill generated. Mismatches between the records, in order to identify unreported sales or supply.

6. GST Rate and Classification: - Making sure that correct classification of the GST rates, so that appropriate GST rates can be applied. For example, if it luxury item is found under lower tax slab, in that case it will result in penalties.

Audit Process

Handling a GST audit under Section 65 of the CGST Act involves a systematic approach, as it requires comprehensive compliance with the GST provisions and the ability to deal with audits by tax authorities. Section 65 deals with the power of tax authorities to conduct audits of businesses registered under GST. 

Under Section 65, the proper officer (usually from the GST department) may conduct an audit of any taxpayer's records and accounts. The purpose is to ensure compliance with GST provisions and to verify the correctness of tax payments, input tax credits, and other statutory obligations. Below are the key steps and best practices to manage and prepare for the GST audit:

1. Pre-Audit Preparation:

Preparation is key to ensuring a smooth audit process. Consider the following steps:-

• Maintain Proper Records: Make sure that your records, returns and books of accounts are well maintained and in order, including:

1. Sales and Purchase Invoices

2. GST Returns

3. Input Tax Credit (ITC) Registers

4. Books of Accounts

5. Bank Statements and Other Supporting Documents

• Reconcile GST Returns with Books: Conduct an internal reconciliation between your GST returns (GSTR-1, GSTR-3B) and the books of accounts. Ensure that sales, purchases, ITC claims, and tax liabilities are properly reflected.

• Verify ITC: Audit and verify the input tax credit claimed. Cross-check purchases and verify that the credits are valid, supported by valid invoices and reflected in the seller’s GSTR-1.

• Ensure Tax Payments: Make sure all GST liabilities are paid within the due date. If any discrepancies are found, it’s better to settle them before the audit.

2. During the Audit:

Once the audit starts, you must be ready to provide the authorities with the required documents. Here’s how to handle the audit:-

• Cooperation with Authorities: Ensure your team is responsive and cooperative. Provide them with all documents and explanations, which is required.

• Designation of a Point of Contact: Assign a person (often a senior finance or tax officer) who understands the GST laws to interact with the audit team. This person should be prepared to answer questions, provide documents, and explain accounting methods.

• Clarify Discrepancies: If the auditors raise any issues or discrepancies, address them properly. Explain any areas where there may have been errors due to technicalities or misunderstandings.

• Request for Extension if Required: If you require more time to gather additional documents or if there is a genuine reason for a delay, you can request an extension of the audit period.

3. Post-Audit Compliance:

Once the audit is completed, there are several steps to follow:-

• Audit Report: After the audit, the tax authorities will issue an audit report with their findings. This report will highlight any discrepancies or non-compliance discovered during the audit.

• Show Cause Notice (SCN): If the auditors find any irregularities, they may issue a Show Cause Notice under Section 73 or 74, seeking an explanation and demanding payment of the additional tax along with penalties.

• Payment of Dues: If you owe any additional tax, penalties, or interest as determined by the audit, settle them promptly. Failure to comply may result in further legal action.

• File the Response: If you disagree with the findings, you can respond to the Show Cause Notice (SCN). You may also appeal the decision to higher authorities if needed.

Key Considerations from CRSPL Experts

• Timeliness: Always comply with GST return filing deadlines and payment deadlines. Delays can trigger additional scrutiny during the audit.

• GST Audit under Other Provisions: Be aware that Section 65 audit is separate from Section 66 (Special Audit), which is typically invoked when the tax authorities suspect a taxpayer is evading taxes or has provided false information.

• Digital Records: Keep digital copies of all records and returns as they are often requested during audits.