What a departmental audit covers
A departmental audit under section 65 of the Central Goods and Services Tax Act, 2017 examines a registered person’s records and GST compliance. It is distinct from return scrutiny under section 61, a special audit under section 66 and inspection or search under section 67. Form GST ADT-01 gives advance notice. It does not by itself start the statutory completion clock or establish a liability.
Section 65 and Rule 101: statutory steps
| Step | Requirement | What to retain |
|---|---|---|
| Authority and period | The Commissioner or an officer authorised by a general or specific order can audit a registered person. Rule 101(1) provides for a financial year, part of one, or multiples thereof. | The notice, GSTIN, audit period and authorisation details. |
| Advance notice | ADT-01 at least 15 working days before conduct of the audit. | Service date and the scheduled audit date. |
| Venue and cooperation | Audit may be at the registered person’s place of business or in the officer’s office. Section 65(5) requires necessary facilities to verify records, information and assistance. | Requests, records made available and meeting notes. |
| Commencement | Under the explanation to section 65(4), use the later of the date the records called for are made available and the date the audit is actually instituted at the place of business. | The events and dates applicable to the audit venue. |
| Completion | Three months from commencement. If needed, the Commissioner may extend by up to a further six months for reasons recorded in writing. | Evidence of commencement, conclusion and any extension. |
| Findings and response | Rule 101 provides for verification and consideration of the taxpayer’s reply to discrepancies. Within 30 days of conclusion, section 65(6) and Rule 101(5) require communication of findings, reasons, rights and obligations in ADT-02. | Discrepancy replies, supporting evidence and the issued findings. |
ADT-02 records findings. Where the audit detects unpaid or short-paid tax, an erroneous refund or ITC wrongly availed or utilised, section 65(7) permits separate proceedings. For periods through FY 2023–24, check sections 73 or 74 and their applicable conditions; for FY 2024–25 onward, check section 74A. Apply the demand and limitation provisions for the actual period. Reconcile any voluntary payment separately from the audit report.
Five areas to reconcile
- Outward supplies. Bridge books and financial statements to GSTR-1 and GSTR-3B, with explanations for distinct-person transfers, exempt supplies, advances, credit notes and cutoffs. Where relevant, cross-check IRNs, e-way bills, income-tax information and export documents. Such datasets measure different things and a mismatch alone does not establish tax due.
- Input tax credit. Test invoices, receipt, applicable supplier reporting and credit communication, other section 16 conditions and section 17 exclusions. Apply section 16(2)(aa) and GSTR-2B matching for periods and invoice types to which those rules apply; do not treat a 2B entry as sufficient evidence by itself. Test Rule 37 proportionately under the applicable version, and Rules 42 and 43 for relevant exempt or non-business use and common credit.
- Reverse charge. Identify notified supplies and recipients under section 9(3), and any applicable notified class and supply under section 9(4). For GTA, establish consignment-note status, recipient category, exemption and any valid supplier forward-charge option. The recipient does not choose between the supplier’s forward-charge rates. For legal services, directors’ services and service imports, check the actual notification and transaction facts. Reconcile tax paid in cash and any separate eligible ITC.
- E-invoicing and e-way bills. Check applicability for the invoice date and taxpayer category. Notification 10/2023 reduced the notified aggregate-turnover threshold to more than ₹5 crore from 1 August 2023, measured under the underlying notification for any preceding financial year from 2017–18 onward. Check exclusions and covered documents. Rule 48(5) governs the invoice consequence if a notified person does not issue it under Rule 48(4); assess supplier compliance and recipient documentation or ITC separately.
- Distinct persons. Reconcile inter-registration supplies and apply the Rule 28 valuation rules. For periods from 1 April 2025, check the amended ISD requirements for covered third-party input services received for or on behalf of distinct persons. Keep that distribution distinct from internally generated services. Apply Circular 199/11/2023-GST to the issues and periods it addresses, including full ITC eligibility under Rule 28.
Six suggested workpapers
These are practical reconciliations, not six separately prescribed statutory dossiers. Tailor them to the notice and records requested.
| Workpaper | Compare | Explain |
|---|---|---|
| Turnover | Books, GSTR-1 and GSTR-3B | Classification, exemptions, period and inter-branch differences. |
| ITC | Invoice register, applicable GSTR-2B data, GSTR-3B and ledger | Eligibility, timing differences, reversals and eligible reclaim. |
| Reverse charge | Expenses, GSTR-3B Table 3.1(d) and cash payments | Notified transactions, exemptions and payment allocation. |
| Vendor ageing | Invoice dates, payments and supplier adjustments | Unpaid portions, Rule 37 reversal and subsequent payment. |
| Blocked credit | Asset and expense records and GSTR-3B Table 4(B)(1), where applicable | Identify permanently ineligible credits, including statutory exceptions, and reconcile their reporting. |
| Movement of goods | E-way bills and invoice, dispatch and receipt records | Cancelled or replaced bills, movement without supply and export movements. |
Seven worked illustrations
The businesses, amounts and outcomes below are hypothetical. The examples show what the evidence and calculation support.
1. A ₹65 lakh turnover bridge
For FY 2022–23, assume financial-statement income of ₹48.50 crore includes ₹20 lakh of exempt bank deposit interest. Add ₹85 lakh of taxable distinct-person transfers excluded from the consolidated financial statement and remove ₹20 lakh to match the taxable GSTR-1 subtotal: ₹49.15 crore. Reconcile the exempt interest separately in the applicable reporting fields. The apparent difference of ₹65 lakh multiplied by an assumed 18% is ₹11.70 lakh, but the bridge identifies classification and consolidation differences rather than establishing additional tax. Verify branch tax invoices and movement records.
2. Goods vehicles and ₹14.50 lakh of credit
Assume three vehicles are actually designed and registered for transporting goods, with two seats in the cab. Verify the registration, technical characteristics and business use. Section 17(5)(a) concerns vehicles for transportation of persons with approved seating capacity of no more than 13 including the driver, subject to specified exceptions. Cab seats do not turn a genuine goods vehicle into a passenger vehicle. A proposed 100% reversal of the ₹14.50 lakh on this ground is unsupported on the stated facts; other eligibility conditions still apply.
3. Director payroll and sitting fees
Assume ₹72 lakh is employment salary to a managing director, supported by the contract, payroll and salary withholding records for the applicable period. Employee services in the course of employment fall within Schedule III. Another ₹6 lakh is independent directors’ sitting fees. Under the director reverse-charge entry and at an assumed 18% GST, the sitting-fee tax is ₹1.08 lakh. Applying 18% to the entire ₹78 lakh gives ₹14.04 lakh and overstates the amount by ₹12.96 lakh on these facts. Review non-salary remuneration separately; the director’s title alone is insufficient.
4. Retention money beyond 180 days
Assume the unpaid portion is ₹85 lakh before GST, comprising 10% retention on invoices with a 24-month contractual release period, and the other 90% plus its corresponding GST has been paid. Under the applicable post-October 2022 Rule 37 text, the statutory clock runs from invoice issue, not the contract’s payment due date. Subject to statutory exceptions and proper invoice-level allocation, at an assumed 18% the corresponding credit is ₹15.30 lakh if fully availed. Check the applicable interest basis, and reclaim the credit on qualifying payment. A contractual retention clause alone does not defer the statutory clock.
5. A pre-notice correction for FY 2021–22
Assume ₹4.20 lakh of ITC on air conditioners used exclusively for staff’s private consumption is inadmissible and was fully wrongly utilised. Identify the actual utilisation and reversal dates under section 50(3) and Rule 88B. For an assumed 555 days of full utilisation at 18% a year using a 365-day calculation, interest is approximately ₹1,14,953 (about ₹1.15 lakh). Check the statutory payment and intimation requirements, including DRC-03 as applicable, and reconcile the principal so it is not paid twice. For a qualifying non-fraud case, sections 73(5)–(7) provide a pre-notice route for the amount properly paid, subject to short-payment and statutory exceptions including section 73(11). ADT-02 is not itself the notice or settlement order.
6. Export receipts and the LUT clock
Assume FY 2022–23 software exports of ₹18 crore under LUT, with ₹2.40 crore realised ten months after invoice, within a documented authorised extension of the then applicable nine-month FEMA period. Separately test Rule 96A(1)(b): for services it uses one year from invoice or a further period allowed by the Commissioner, with the specified 15-day period for paying tax and interest after expiry if payment is not received as required. An AD bank’s FEMA extension does not itself extend the GST clock. At the assumed 18% rate, ₹2.40 crore would correspond to ₹43.20 lakh tax; on the stated assumptions, delay alone does not establish that demand. Verify all export-of-services conditions and permitted currency and keep the receipt evidence.
7. Reading the final report
Assume officers examine records for four days, record no adverse findings and communicate ADT-02 21 days after conclusion. This falls within the 30-day reporting period. A clean report on those facts does not establish a guaranteed outcome or approval time for another audit. Retain the report and the evidence supplied.
Frequently asked questions
1. How long can the audit take?
Three months from statutory commencement, plus up to six more if the Commissioner extends it for recorded reasons. The 30-day findings deadline is measured separately from conclusion.
2. May officers audit at a factory or warehouse?
Section 65 permits audit at the place of business or the officer’s office. Assist with verification and distinguish audit powers from a separate inspection or search under section 67.
3. What if records cannot be produced on time?
Respond promptly, explain the missing records, offer a timetable and keep an acknowledgment. Special audit, search and demand each have separate conditions. Under section 66(5) the Commissioner determines and pays the special audit expenses, including the professional’s remuneration.
4. Does a supplier dispute stop Rule 37?
A dispute does not automatically stop the 180-day clock. Reconcile any valid credit note, underlying ITC adjustment and amount still unpaid rather than assuming a reversal disappears.
5. Is ADT-02 a tax demand?
No. Check the separate notice and adjudication process under sections 73, 74 or 74A as applicable. Section 75(4) requires a hearing where requested in writing or where an adverse decision is contemplated.
6. Can software prepare the evidence?
Reconciliation tools can trace entries and flag differences. Verify every adjustment against the actual return, invoice, ledger and statutory period.
Sources
- CGST Act, sections 16–17, 25, 50, 61, 65–67, 73–75 and Schedules I and III; read with amendments
- CGST Rule 101, departmental audits and Forms GST ADT-01 and ADT-02
- Finance (No. 2) Act, 2024, including section 74A
- Notification 16/2024–Central Tax, including the 1 April 2025 ISD commencement
- Notification 19/2022–Central Tax, substituted Rule 37
- Notification 26/2022–Central Tax, amendment to Rule 37
- Notification 14/2022–Central Tax, Rule 88B
- CBIC Circular 170/02/2022-GST, reporting in GSTR-3B
- CBIC Circular 140/10/2020-GST, directors’ remuneration
- Notification 05/2022–Central Tax (Rate), GTA reverse-charge amendment
- Notification 10/2023–Central Tax, e-invoicing threshold
- CBIC Circular 199/11/2023-GST, head office and branch valuation and the earlier ISD position
- CGST Rules, including Rules 28, 42, 43 and 96A; read with amendments
- IGST Act, sections 2(6) and 16; read with amendments
- RBI A.P. (DIR Series) Circular 27, historical export-realisation baseline and specified COVID extension