GST Audit — Scope, Process, and Common Issues

Learning Objectives

• Understand when and who triggers a GST audit
• Know the scope of a GST audit — what the auditor examines
• Identify the most common issues found during GST audits
• Apply penalty provisions under Sections 73 and 74
• Walk through an auditor's review of Sunrise Retail's records

Types of GST Audit

There are three types of audit/scrutiny under GST law:

Audit by Taxpayer (GSTR-9C)

This is the most common "audit" for compliant businesses. The CA/CMA appointed by the taxpayer:

1. Audits the taxpayer's books of accounts
2. Reconciles GST turnover (GSTR-9) with audited turnover
3. Certifies the GSTR-9C form

Sunrise Retail's position: Turnover ~₹1.2 Crore → below ₹5 Crore → GSTR-9C not required. If they cross ₹5 Crore in a future year, GSTR-9C becomes mandatory.

Audit by Tax Officers (Section 65)

A GST officer may audit any taxpayer. Notice issued in Form GST ADT-01 with 15 days' notice. Audit must be completed within 3 months (extendable to 6 months).

Officers examine:

• Physical records (invoices, account books, stock registers)
• Electronic records (Tally data, GST portal filings)
• Third-party data (supplier GSTR-1 vs buyer's ITC claims)

Scope of GST Audit — What Gets Examined

1. Turnover Verification

Auditors compare:

• Sales as per books (P&L)
• Sales as per GSTR-1
• Sales as per GSTR-3B
• Bank statement credits (unexplained credits = potential unrecorded sales)

Any significant discrepancy triggers further inquiry.

2. ITC Verification

This is where most adjustments happen:

• Is every ITC claim backed by a valid tax invoice?
• Do all invoices appear in GSTR-2B?
• Is the supplier GST-registered?
• Were goods/services actually received?
• Any blocked ITC under Section 17(5) was wrongly claimed?

3. Tax Rate Correctness

• Are HSN codes correct for the goods sold?
• Is the correct GST rate applied to each HSN?
• Are composite/mixed supplies handled correctly?

4. Reverse Charge Compliance

• Did the taxpayer pay RCM on all notified services received from unregistered suppliers?
• Freight from unregistered goods transport agency → RCM applicable

5. Refund Claims Verification

• Are export/refund claims supported by valid shipping bills and foreign currency remittances?
• Is the zero-rating applied correctly?

Common Issues Found in GST Audits

Penalty Provisions — Sections 73 and 74

Section 73 — Non-Fraud Cases

Applies when there is a genuine mistake or difference of interpretation — no fraud or wilful misstatement.

Limitation period: 3 years from the due date of annual return.

Section 74 — Fraud Cases

Applies when tax was evaded by fraud, wilful misstatement, or suppression of facts.

Limitation period: 5 years from the due date of annual return.

Key difference: Section 73 is for honest errors. Section 74 is for deliberate evasion. The burden of proof is on the department to establish fraud for Section 74.

Sunrise Retail — Auditor's Review (April 2025)

💼 CA Priya Nair, Chartered Accountant, reviewing Sunrise Retail's records for April 2025

Sneha Reddy hands over the books. CA Priya runs through each audit area:

Checkpoint 1 — Supplier Registration

Are all purchases from registered dealers?

Result: All purchases from registered dealers. No RCM exposure.

Checkpoint 2 — Section 17(5) Blocked ITC

Does Sunrise Retail have any purchases from the blocked list?

Result: Zero blocked ITC in April. All ITC claimed is eligible.

Checkpoint 3 — HSN Code Verification

Result: All HSN codes correct. No rate mismatches.

Checkpoint 4 — ITC Reconciliation with GSTR-2B

Result: ITC fully reconciled. TechWorld filed GSTR-1 on time; Landlord's invoice appears correctly.

Checkpoint 5 — Turnover Reconciliation

Result: No discrepancy. Note: Credit sales may not appear as bank credits immediately — confirmed these are outstanding in Debtors ledger (Digital Hub + CloudStore both in receivables).

Checkpoint 6 — Advance Receipts

No advance receipts in April → no advance tax to account for.

CA Priya's Audit Summary

Audit Opinion: Clean — No Discrepancies Found
ITC eligible: ₹2,10,600 (as claimed)
Tax paid: ₹0 (NIL — ITC exceeds output)
Blocked ITC: ₹0
Carry forward ITC: ₹70,560

Observation: Sunrise Retail's April GST compliance is exemplary.
Recommendation: Automate GSTR-2B reconciliation monthly via Tally 
to catch supplier-side discrepancies early.

GSTR-9 Late-Fee Tiered Structure (FY 22-23 Onwards)

The CBIC rationalised GSTR-9 late fees from FY 2022-23 onwards into a turnover-based tier system, replacing the earlier flat ₹200/day for everyone. Smaller taxpayers now pay materially lower late fees if they miss the December deadline — which is consistent with how the law has progressively reduced the compliance burden on small businesses.

Worked Example — Three Different Filers, Same 30-Day Delay

GSTR-9 for FY 2025-26 is due 31-Dec-2026. Three sample taxpayers file on 30-Jan-2027 (30 days late):

The cap is rarely hit for short delays — at 0.04% of turnover for the lower bands, you'd need to be over 6 months late on a ₹2 Cr turnover before the cap binds. For very large taxpayers at 0.5%, the cap is more easily hit but still requires significant delay.

Practical takeaway: Late fees on GSTR-9 are now meaningfully lower than late fees on monthly GSTR-3B / GSTR-1 in absolute terms — because they're computed once per year, not 12 times. But interest on tax payable (if any GSTR-9-revealed shortfall exists) continues at 18% p.a. and IS material. The late fee is the smaller of the two penalties for a late-filed GSTR-9 with payable tax.

Section 35(5) — The Removed Audit Requirement

A historically important change: until FY 2019-20, Section 35(5) of the CGST Act mandated audit by a CA or CMA for taxpayers with turnover above ₹2 Crore (later ₹5 Crore). The CA/CMA had to:

• Audit the books and certify the GSTR-9C reconciliation statement
• Sign as the auditor with their membership number
• Examine the reconciliation between audited financials and the annual GST return

From FY 2020-21 onwards (notified in 2021), Section 35(5) was REMOVED. Two key consequences:

1. GSTR-9C is now self-certified by the taxpayer, not by a CA/CMA. The taxpayer's authorised signatory simply attests the reconciliation. The CA/CMA stamp is no longer mandatory.
2. The Section 35(5) audit requirement is GONE — there is no longer any statutory GST audit obligation on the taxpayer. (Section 65 — departmental audit by GST officers — remains intact, as does Section 66 — special audit by Commissioner-appointed CA in fraud cases.)

Why this matters for CA practice:

• The "GST audit" service that was a revenue line for CAs (one audit per client per year) effectively ended with this change
• CAs are now engaged on a voluntary / advisory basis to help with GSTR-9C accuracy — but the engagement is contractual, not statutory
• The GSTR-9C form itself still exists and is still required for taxpayers above ₹5 Cr; only the auditor signature requirement was dropped
• Many large taxpayers still engage a CA for 9C preparation as risk-management — self-certification doesn't mean self-audit, and a self-certified 9C with errors carries the same penalty exposure as before

Pre-FY 2020-21 (old rule):
  Taxpayer >₹2 Cr / ₹5 Cr → CA/CMA audit → Form GSTR-9C certified by CA → File

Post-FY 2020-21 (current):
  Taxpayer >₹5 Cr → CA/CMA voluntary engagement → Form GSTR-9C self-certified by taxpayer → File

Always check current FY notifications — the threshold for GSTR-9C applicability and any restoration of audit requirements may shift via Finance Act amendments. The current position has held since 2021 but is policy-dependent.

Practical Audit Checklist for Every Month

Before filing GSTR-3B, run through these checks:

1. Reconcile GSTR-1 with sales ledger — every invoice accounted for?
2. Reconcile GSTR-2B with purchase ledger — every purchase ITC supported?
3. Check Section 17(5) — any blocked ITC inadvertently claimed?
4. Verify HSN codes — correct classification and rate?
5. Verify RCM — any services from unregistered parties attracting reverse charge?
6. Reconcile bank deposits — unexplained credits = potential unrecorded sales?
7. Check credit notes — issued within time limit, properly linked to original invoice?

Practice Exercise

Exercise 1: Sunrise Retail's next-door office has a gym. Kiran decides to use it as an employee wellness perk and pays ₹50,000 + GST ₹9,000 for annual corporate membership. Can the ITC of ₹9,000 be claimed?

Exercise 2: During a Section 65 audit, the GST officer finds that Sunrise Retail charged 12% GST on laptops (HSN 8471) instead of the correct 18% in June 2025. Sales of laptops: ₹5,00,000. What is the underpaid tax and penalty under Section 73?

Key Terms

Module Summary

• GST audit exists in three forms: taxpayer-appointed (GSTR-9C for >₹5 Cr), department audit (Section 65), special audit (Section 66)
• Sunrise Retail (₹1.2 Cr) is not required to file GSTR-9C — but must maintain records for potential Section 65 audit
• Key audit areas: turnover reconciliation, ITC eligibility, HSN correctness, RCM compliance, advance receipts
• Section 73 (honest error): penalty 10%–50% of tax. Section 74 (fraud): penalty 15%–100% of tax
• Sunrise Retail's April audit shows clean records — all ITC eligible, HSN codes correct, turnover reconciled

Checklist — what you should now be able to do:

• Distinguish the three types of GST audit and know which threshold triggers GSTR-9C
• Run a pre-filing audit checklist (the seven-point monthly checklist) before filing GSTR-3B
• Calculate penalties under Section 73 and Section 74 for a given underpayment scenario
• Verify HSN code correctness against the applicable GST rate for common goods
• Prepare for a Section 65 department audit by knowing what records will be examined

Quick Quiz

1. GSTR-9C is required for which category of taxpayers?

• a) All registered taxpayers
• b) Turnover > ₹2 Crore
• c) Turnover > ₹5 Crore
• d) Composition dealers

2. Under Section 74 (fraud), if tax is paid after adjudication, the penalty is:

• a) 10% of tax
• b) 25% of tax
• c) 50% of tax
• d) 100% of tax

3. An auditor notices CGST ₹5,000 ITC was claimed for a club membership. This is:

• a) Valid — it's a business expense
• b) Invalid — Section 17(5) blocks club membership ITC
• c) Valid if director approved it
• d) Valid if turnover < ₹2 Crore

4. The limitation period for Section 73 (non-fraud) demand is:

• a) 1 year from annual return due date
• b) 3 years from annual return due date
• c) 5 years from annual return due date
• d) 7 years from annual return due date

5. Which document does an auditor compare against Sunrise Retail's ITC ledger to verify eligibility?

• a) GSTR-1
• b) GSTR-3B
• c) GSTR-2B
• d) GSTR-9