What is the scope of GST audits?

The scope of GST audits is to ensure that taxpayers comply with the provisions of the Goods and Services Tax (GST) law, identify discrepancies, and detect tax evasion. Audits are conducted by either the taxpayer themselves, a professional auditor, or tax authorities, depending on the type of audit. These audits are critical for maintaining the integrity of the GST system.

1. Scope of GST Audits

A. Key Areas Covered in GST Audits

1. Verification of Records
   • Examining invoices, purchase orders, e-way bills, and other documents.
   • Verifying the accuracy of GST returns (GSTR-1, GSTR-3B, GSTR-9, GSTR-9C).
2. Input Tax Credit (ITC) Claims
   • Scrutinizing the eligibility and accuracy of ITC claims.
   • Checking for ITC availed without actual receipt of goods/services.
3. Turnover Reconciliation
   • Matching declared turnover with financial statements and GST returns.
4. Tax Classification
   • Ensuring the correct classification of goods/services and the applicable tax rate.
5. E-Way Bills and Goods Movement
   • Verifying compliance with e-way bill requirements and matching them with invoices.
6. GST Refunds
   • Validating refund claims for exports or inverted duty structures.
7. Compliance with Notifications
   • Ensuring adherence to GST notifications, circulars, and procedural guidelines.

B. Types of GST Audits

1. Self-Audit
   • Conducted by taxpayers as part of annual return filing under Section 44.
   • Submission of GSTR-9 and GSTR-9C for taxpayers above the prescribed turnover limit.
2. Audit by Tax Authorities (Section 65, CGST Act, 2017)
   • Conducted by GST officials to verify records and returns.
   • Covers:
     • Payment of taxes.
     • Correctness of ITC claims.
     • Compliance with procedural requirements.
3. Special Audit (Section 66, CGST Act, 2017)
   • Directed by GST authorities if discrepancies are suspected.
   • Conducted by a chartered accountant (CA) or cost accountant nominated by the commissioner.
4. Departmental Audit
   • Conducted to identify and recover unpaid taxes and penalize non-compliance.

2. Provisions in the CGST Act, 2017

A. Section 65: Audit by Tax Authorities

• Authorities can initiate an audit of any registered person by issuing prior notice.
• The audit should be completed within three months, extendable by six months.

B. Section 66: Special Audit

• Ordered when complexity or discrepancies are found in a taxpayer’s records.
• Requires taxpayers to cooperate with the nominated auditor.

C. Section 68: Inspection and Verification of Goods in Transit

• Includes audits of goods movement to check for under-invoicing or tax evasion.

D. Rule 101: Audit Procedure

• Details the steps for conducting audits, including notice issuance, document verification, and report submission.

3. Constitutional Framework

1. Article 265:
   • “No tax shall be levied or collected except by authority of law.”
   • Audits ensure tax compliance in line with this principle.
2. Article 246A:
   • Empowers the Union and States to legislate on GST, enabling audit mechanisms to enforce tax laws.
3. Article 14:
   • Guarantees equal treatment and procedural fairness during audits.
4. Article 19(1)(g):
   • Allows lawful trade, subject to reasonable restrictions, including tax audits.

4. Landmark Cases on GST Audits

A. M/s Ketan V. Parekh vs. State of Gujarat (2020)

• Issue: Challenge to the legality of an audit conducted without sufficient notice.
• Outcome: The Gujarat High Court held that authorities must adhere to procedural requirements and provide reasonable notice.

B. Larsen & Toubro Ltd. vs. Union of India (2021)

• Issue: Excessive scrutiny during audits causing business disruptions.
• Outcome: The court ruled that audits must balance thoroughness with minimal disruption to businesses.

C. DLF Limited vs. Assistant Commissioner of GST (2022)

• Issue: Use of special audit provisions to target specific taxpayers.
• Outcome: The court emphasized that special audits must be used judiciously and based on substantive grounds.

D. M/s Megha Engineering & Infrastructure Ltd. vs. GST Council (2022)

• Issue: Errors identified in ITC claims during audits.
• Outcome: The court ruled that genuine errors in ITC claims should be corrected without punitive actions unless fraudulent intent is proven.

5. Penalties for Non-Compliance Detected During Audits

1. Section 122: Penalties for Non-Compliance
   • Penalty up to ₹10,000 or the tax amount evaded, whichever is higher.
2. Section 73 and 74: Recovery Provisions
   • Recovery of unpaid taxes along with 18% interest.
   • Fraudulent evasion may attract penalties up to 100% of the tax amount.
3. Section 132: Criminal Penalties
   • For serious offenses like fraudulent invoicing, imprisonment of up to 5 years.

6. Measures to Ensure Smooth Audits

For Taxpayers:

1. Maintain Accurate Records
   • Keep all invoices, e-way bills, and returns updated.
2. Reconcile Accounts
   • Match GST returns with financial statements and e-way bills.
3. Regular Self-Audits
   • Identify discrepancies early and rectify them promptly.
4. Cooperate with Authorities
   • Provide all requested documents and explanations during audits.

For Authorities:

1. Fair Audits
   • Conduct audits transparently and ensure taxpayers’ rights are respected.
2. Minimal Disruption
   • Ensure that audits do not unduly disrupt business operations.

7. Key Takeaways

Proactive Measures: Taxpayers should conduct regular self-audits and maintain accurate records to ensure smooth audits.

Comprehensive Review: GST audits scrutinize all aspects of compliance, including records, ITC claims, and tax payments.

Legal Backing: Sections 65 and 66 of the CGST Act govern audits, with safeguards against misuse.

Judicial Oversight: Courts have emphasized procedural fairness and minimal disruption during audits.