GST Audit Process Guide 2026 - Preparation & Compliance

What is GST Audit?

GST Audit is an examination of records, returns, and accounts by tax authorities to verify accuracy of information furnished under GST law.

Types of GST Audits

1. Annual Audit (Section 35(5))

• Who: Businesses with turnover > ₹2 Crore
• By whom: Chartered Accountant or Cost Accountant
• File: GSTR-9C (Reconciliation Statement)
• Deadline: December 31st of next financial year
• Nature: Self-audit by your CA

2. Departmental Audit (Section 65)

• Who: Any registered person (selected by department)
• By whom: GST Officer
• Trigger: Notice in Form GST ADT-01
• Timeline: Must complete within 3 months (extendable to 6 months)
• Nature: Official government audit

3. Special Audit (Section 66)

• Who: Complex cases requiring expert opinion
• By whom: CA/Cost Accountant nominated by Commissioner
• Trigger: Suspected tax evasion, complex transactions
• Rare: Only in exceptional cases

Who Gets Audited & Why?

Mandatory Annual Audit

If your turnover > ₹2 Crore, you MUST get audited by a CA and file GSTR-9C.

Departmental Audit - Selection Criteria

Department selects taxpayers based on:

Random Selection

• Percentage of total registered persons
• Computer-generated random list
• No specific reason needed

Risk-Based Selection

Red flags that trigger audit:

• High ITC claims: ITC > 90% of output tax
• Mismatches: Supplier's GSTR-1 ≠ Your GSTR-2B
• Negative tax liability: Consistently high refund claims
• Late filing pattern: Regular delays with high turnover
• Sector-specific scrutiny: Industries known for evasion
• Anonymous complaints: Customer/competitor reports
• E-way bill mismatches: Goods value ≠ invoice value

The Audit Process - Step by Step

Stage 1: Audit Notice (Form GST ADT-01)

You receive: Notice via email/post with 15-day advance notice

Notice contains:

• Period to be audited (usually 1 financial year)
• Place of audit (usually your business premises)
• Date and time
• Documents required
• Authorized officer details

Your immediate actions:

• Acknowledge receipt on GST portal
• Inform your CA immediately
• Start document compilation
• Review that year's returns and books

Stage 2: Document Submission

Officer may request documents before or during audit

Commonly requested:

• All GST returns (GSTR-1, 3B, 9)
• Purchase register and sales register
• Bank statements for the period
• All tax invoices (purchase and sales)
• ITC reconciliation with GSTR-2B
• Stock register (opening, purchases, sales, closing)
• E-way bills generated
• Payment challans
• Balance sheet and P&L account

Stage 3: Physical Verification

Officer visits your premises to:

• Verify physical stock vs books
• Check accounting software and data
• Interview key personnel
• Examine invoice formats
• Check place of business

Stage 4: Findings & Discussion

Officer prepares observations and discusses with you:

• Discrepancies found
• Questions on specific transactions
• Your explanation requested
• Opportunity to submit clarifications

Stage 5: Audit Report (Form GST ADT-02)

Officer submits audit findings:

• Confirmed discrepancies
• Tax short-paid or excess ITC claimed
• Recommendations for further action
• You receive copy of report

Stage 6: Post-Audit Assessment

Based on audit report, department may:

• Issue demand notice (if tax short-paid)
• Initiate penalty proceedings
• Allow voluntary payment with reduced penalty
• Close case if no major issues

What Auditors Focus On - Top 10 Areas

1. ITC Claims Validity

They check:

• Did supplier file return? (GSTR-2B verification)
• Are invoices genuine?
• Were payments made within 180 days? (Rule 37)
• Was ITC claimed on blocked items? (Section 17(5))

2. GSTR-2B Reconciliation

Common issues found:

• ITC claimed > Available in GSTR-2B
• Invoices not reflected in supplier's GSTR-1
• Manual entries without proper documentation

3. Invoice Compliance

Checked elements:

• Sequential numbering
• All mandatory fields present
• Correct GSTIN
• Proper tax calculation
• HSN codes accuracy

4. Place of Supply Rules

Verification:

• IGST vs CGST/SGST correctness
• Location of supply properly determined
• RCM correctly applied

5. Taxable Value Determination

Scrutiny of:

• Discounts shown properly
• Related party transactions at arm's length
• Freight and other charges included correctly

6. Reverse Charge Mechanism

Verification:

• RCM applicable services identified
• Tax paid under RCM
• ITC claimed correctly

7. Classification of Goods/Services

Check for:

• Correct HSN/SAC codes
• Appropriate tax rate applied
• No classification misuse to pay lower tax

8. Stock Register Matching

Formula check:

Opening Stock + Purchases - Sales = Closing Stock

Physical stock verification vs books

9. E-way Bills vs Invoices

Match:

• E-way bill value = Invoice value
• All required e-way bills generated
• Validity period not expired

10. Composition Scheme Compliance

If under composition:

• Turnover within limit
• No inter-state sales
• Proper tax calculation
• Quarterly returns filed

Audit Preparation Checklist

30 Days Before Audit

• ☐ Hire CA if not already engaged
• ☐ Gather all documents for audit period
• ☐ Reconcile GSTR-2B with books
• ☐ Check for missing invoices in GSTR-1
• ☐ Verify 180-day rule compliance
• ☐ Review Section 17(5) blocked credits
• ☐ Prepare stock register

15 Days Before Audit

• ☐ Conduct internal mock audit
• ☐ Identify potential issues
• ☐ Prepare explanations for anomalies
• ☐ Organize documents chronologically
• ☐ Create digital backup of all records
• ☐ Clean up accounting software data

7 Days Before Audit

• ☐ Final reconciliation of all returns
• ☐ Prepare summary reports
• ☐ Brief key staff who'll interact with auditor
• ☐ Arrange clean, private space for audit
• ☐ Test accounting software accessibility

During Audit

• ☐ Designate single point of contact
• ☐ Provide documents as requested only
• ☐ Don't volunteer extra information
• ☐ Take notes of all queries
• ☐ Request time if immediate answer not possible
• ☐ Maintain professional, cooperative demeanor

Common Issues Found in Audits

Issue 1: ITC Claimed But Supplier Didn't File Return

Problem: Your GSTR-2B doesn't show invoice because supplier didn't file GSTR-1

Consequence: ITC claim disallowed

Prevention: Verify supplier's return status before claiming ITC

Issue 2: Payment Not Made Within 180 Days

Problem: Claimed ITC but paid supplier after 180 days

Consequence: ITC + 18% interest

Prevention: Track payment due dates, pay within 150 days to be safe

Issue 3: Wrong HSN Code Used

Problem: Used wrong HSN resulting in lower tax rate

Consequence: Tax demand + interest + penalty

Prevention: Verify HSN from official list, consult CA when unsure

Issue 4: Blocked ITC Claimed

Problem: Claimed ITC on motor vehicle, food items under Section 17(5)

Consequence: ITC reversal + interest

Prevention: Use ITC calculator to identify blocked credits

Issue 5: Stock Mismatch

Problem: Physical stock doesn't match books

Consequence: Suspected tax evasion, scrutiny of sales

Prevention: Regular stock audits, proper inventory management

How to Respond to Audit Findings

If Issues Are Valid

1. Acknowledge: Accept the mistake
2. Calculate: Determine tax + interest owed
3. Voluntary Payment: Pay before demand notice
4. Reduced Penalty: Self-payment = lower penalty (25% vs 100%)
5. File DRC-03: Form for voluntary payment

If You Disagree

1. Written Reply: Submit detailed explanation with evidence
2. CA Support: Technical interpretation by CA
3. Legal Opinion: If interpretation dispute
4. Request Hearing: Personal hearing before final order
5. Appeal Option: If order unfavorable

Rights During Audit

• Right to be heard
• Right to inspect documents officer is referring to
• Right to take CA's help
• Right to request adjournment (with valid reason)
• Right to appeal against audit findings

After the Audit

Possible Outcomes

Clean Report

No major issues found. File may be closed or kept for record.

Minor Issues

Small discrepancies. Voluntary payment of tax + interest + reduced penalty.

Major Issues

Demand notice issued (Form GST DRC-01). You have 30 days to:

• Pay the demand, OR
• File reply contesting it, OR
• Request installment payment

Learning from Audit

Use audit experience to:

• Identify gaps in compliance processes
• Strengthen internal controls
• Train staff on common mistakes
• Update software/tools if needed
• Implement monthly reconciliation