Section 65 – Audit by Tax Authorities under the CGST Act

Section 65 of the Central Goods and Services Tax (CGST) Act, 2017 deals with audit by tax authorities. It gives the Commissioner or an officer authorised by the Commissioner the power to conduct an audit of a registered person to verify whether the taxpayer has correctly reported turnover, paid the appropriate amount of tax, claimed eligible exemptions and deductions, availed and utilised input tax credit correctly, and complied with the provisions of the GST law.

A Section 65 audit is a departmental audit conducted by the GST authorities. It is different from the historical audit requirement under Section 35(5), which required certain taxpayers to obtain an audit by a Chartered Accountant or Cost Accountant. Section 35(5) was omitted with effect from 1 August 2021. A departmental audit under Section 65 continues to be an important GST compliance mechanism.

The statutory framework of Section 65 is supported by Rule 101 of the CGST Rules, 2017, which prescribes the audit period, notice in Form GST ADT-01, the verification process and the final audit findings in Form GST ADT-02.

What is Section 65 of the CGST Act?

Section 65 authorises the GST department to conduct an audit of a registered person. The Commissioner or an officer authorised by the Commissioner through a general or specific order may undertake the audit for a prescribed period, at prescribed intervals and in the prescribed manner.

The purpose is not limited to checking whether the taxpayer has filed GST returns. During the audit, the authorities can examine the taxpayer’s books of account, records, returns, statements and supporting documents to determine whether the GST compliance position is correct.

The audit may examine matters such as:

• Turnover declared in GST returns
• Tax liability reported and paid
• Exemptions claimed
• Deductions claimed from taxable turnover
• Applicable GST rates
• Input tax credit availed
• Input tax credit utilised
• Refunds claimed
• Books of account
• Invoices and other supporting documents
• Other relevant GST compliance issues

Rule 101 specifically provides that the authorised officer should verify the documents supporting the books of account and returns, the correctness of turnover, exemptions and deductions, the rate of tax applied, ITC availed and utilised, refunds claimed and other relevant matters.

Who Can Conduct an Audit under Section 65?

The power to undertake a Section 65 audit rests with the Commissioner or an officer authorised by the Commissioner through a general or specific order.

The audit is therefore not an ordinary private audit conducted by an independent Chartered Accountant. It is an audit carried out by the tax administration for GST compliance purposes.

The authorised audit officer may be assisted by a team of officers and officials. Rule 101 specifically refers to the audit being conducted by the proper officer with the assistance of the team accompanying him.

Which Taxpayers Can Be Selected for a Section 65 Audit?

Section 65 applies to registered persons. The provision does not restrict departmental audit only to taxpayers above a particular turnover threshold.

A registered taxpayer may therefore be selected for departmental audit depending on the tax administration’s audit process, risk parameters, compliance considerations and other factors.

Selection for audit should not automatically be understood as proof of tax evasion or wrongdoing. An audit is a verification mechanism through which the department examines whether the taxpayer’s records and GST compliance are correct.

What Period Can Be Audited?

Rule 101 provides that the period of audit under Section 65 shall be:

• A financial year;
• Part of a financial year; or
• Multiple financial years.

Therefore, the department does not necessarily have to audit only one complete financial year. Depending on the audit order, the audit period can cover a particular financial year, part of a financial year or multiple financial years.

Example

Suppose a registered business receives an audit notice covering:

Financial Year 2024-25

The department may examine the GST records and related documents for that specified period.

If the notice covers multiple years, for example:

FY 2022-23 to FY 2024-25

the audit can examine the relevant records for all those years.

Where Can a Section 65 Audit Be Conducted?

Section 65(2) provides that the authorised officers may conduct the audit:

1. At the place of business of the registered person; or
2. At their own office.

This gives the tax authorities flexibility regarding the location of the audit.

In a business-premises audit, officers may examine records and documents at the taxpayer’s premises. In other cases, the taxpayer may be required to furnish records and information for examination at the tax office.

Notice Before GST Audit

A registered person cannot ordinarily be taken by surprise by the commencement of a Section 65 audit without the prescribed prior notice.

Section 65(3) provides that the registered person must be informed through a notice not less than 15 working days before the conduct of the audit.

Rule 101 prescribes FORM GST ADT-01 for this purpose. The notice contains information regarding the proposed audit and the financial year or years to which it relates.

What is Form GST ADT-01?

GST ADT-01 is the prescribed notice for conducting an audit under Section 65.

The form identifies the registered person and specifies the relevant financial year or years. It also requires the taxpayer to provide the necessary facilities, information and records for the audit.

The taxpayer may therefore receive an ADT-01 notice requesting attendance and production of books, accounts and other documents required for the audit.

What Does the GST Department Check During a Section 65 Audit?

A Section 65 audit can involve a detailed examination of the taxpayer’s GST compliance.

1. Turnover

The department may verify whether the turnover reported in GST returns agrees with the taxpayer’s books and underlying transactions.

The officers may compare:

• Sales invoices
• Sales registers
• GST returns
• Financial statements
• E-invoice data, where applicable
• E-way bill information, where relevant
• Bank and other supporting records
• Other information available to the department

The objective is to identify whether taxable supplies have been correctly reported.

2. Tax Rate

The auditor may verify whether the taxpayer has applied the correct GST rate to the supplies made.

For example, if a particular supply is taxable at a higher rate but the taxpayer has charged a lower rate, the resulting tax liability may be examined.

The officer can also examine whether the classification of goods or services is correct.

3. Exemptions and Deductions

The audit may examine exemptions and deductions claimed by the taxpayer.

The taxpayer may be required to provide documents supporting the eligibility of the exemption or deduction.

A taxpayer should therefore maintain appropriate documentation supporting every significant GST exemption or deduction claimed in its returns.

4. Input Tax Credit

ITC is one of the important areas examined during a GST audit.

The officer may verify:

• Whether the underlying purchase actually took place
• Whether tax invoices are available
• Whether the recipient received the goods or services
• Whether the ITC satisfies the statutory conditions
• Whether restricted or blocked credit was claimed
• Whether ITC was correctly reported
• Whether ITC was correctly utilised
• Whether reversals were required
• Whether credit relating to exempt supplies or non-business use was appropriately dealt with

Rule 101 specifically includes verification of the input tax credit availed and utilised within the scope of the audit.

5. Refund Claims

Where a registered person has claimed GST refunds, the audit may examine whether the refunds were correctly claimed and supported by relevant records.

The officer may verify the underlying transactions and documents connected with the refund claim.

6. Books of Account and Supporting Documents

The auditor may examine the documents on the basis of which the books of account have been maintained.

This can include:

• Tax invoices
• Bills of supply
• Credit notes
• Debit notes
• Purchase records
• Sales records
• Stock records
• Expense records
• GST returns
• Payment records
• Other relevant supporting documents

The exact documents required will depend on the nature of the business and the scope of the audit.

What Assistance Must the Registered Person Provide?

Section 65(5) places certain responsibilities on the registered person during the audit.

The authorised officer may require the registered person:

• To provide necessary facilities for verification of books of account and other documents; and
• To furnish information required by the officer and provide assistance for timely completion of the audit.

Therefore, a taxpayer should not treat an audit notice as an optional request.

The business should designate an appropriate person to coordinate with the audit team and ensure that the requested records are available.

Commencement of Audit under Section 65

The date of commencement of audit is important because Section 65 establishes a time limit for completing the audit.

The Explanation to Section 65(4) provides that the commencement of audit means the later of:

1. The date on which the records and other documents called for by the tax authorities are made available by the registered person; or
2. The actual institution of audit at the place of business.

This distinction is important because the three-month audit period is calculated from the statutory date of commencement.

Time Limit for Completing the Audit

Section 65(4) provides that the audit must generally be completed within three months from the date of commencement of the audit.

However, where the Commissioner is satisfied that the audit cannot be completed within three months, the Commissioner may extend the period by a further period of not more than six months.

The reasons for the extension must be recorded in writing.

Therefore, the statutory framework can provide:

Initial period: Up to 3 months

Extension: Up to another 6 months

Maximum possible period under the statutory extension: Up to 9 months from the commencement of audit.

The extension is not an automatic additional six months. The Commissioner must be satisfied that the audit cannot be completed within the initial period and must record reasons in writing.

What Happens During the Audit?

The audit generally involves examination and verification of the taxpayer’s GST records.

The authorised officer, assisted by the audit team where applicable, verifies documents supporting the books and returns.

The verification may cover:

• Turnover
• Taxability
• Tax rates
• Exemptions
• Deductions
• ITC
• Refunds
• Returns and statements
• Other relevant GST matters

The officer records observations in the audit notes.

If discrepancies are noticed, Rule 101 allows the proper officer to inform the registered person about those discrepancies. The taxpayer can then file a reply, which is considered before the audit findings are finalised.

Can the Taxpayer Explain Audit Discrepancies?

Yes.

Where discrepancies are communicated during the audit process, the registered person can provide a reply and supporting documents.

For example, suppose the audit officer believes that a particular input tax credit is not eligible. The taxpayer may provide:

• Relevant tax invoice
• Proof of receipt of goods or services
• Payment records
• Accounting entries
• GST return details
• Other documents supporting the ITC claim

The officer is required to consider the reply before finalising the audit findings under Rule 101.

This makes proper documentation particularly important during a GST audit.

Completion of Audit and Form GST ADT-02

Section 65(6) provides that after completion of the audit, the proper officer must, within 30 days, inform the registered person about:

• The findings of the audit
• The taxpayer’s rights
• The taxpayer’s obligations
• The reasons for the findings

Rule 101 provides that the final audit findings are communicated through FORM GST ADT-02.

What is Form GST ADT-02?

GST ADT-02 is the audit report issued after completion of a Section 65 audit.

The form can record findings relating to matters such as short payment of:

• Integrated tax
• Central tax
• State/UT tax
• Cess
• Interest
• Other amounts

The official form also provides for audit observations and communicates the requirement to discharge statutory liabilities where applicable.

Does Every Audit Result in Additional Tax?

No.

A GST audit is a verification exercise. The fact that a taxpayer has been selected for audit does not by itself mean that additional tax is payable.

After examining the records, the department may find that the taxpayer’s returns, tax payments, ITC claims and other compliance matters are satisfactory.

Where discrepancies are found, the taxpayer may also be able to explain them with supporting documents.

Only where the audit identifies a tax issue requiring further action can the department proceed according to the applicable provisions of the GST law.

What Happens If Tax Is Found to Be Short Paid?

Section 65(7) provides that where an audit results in detection of:

• Tax not paid;
• Tax short paid;
• Tax erroneously refunded; or
• Input tax credit wrongly availed or utilised,

the proper officer may initiate action under the applicable demand provisions referred to in Section 65.

The Section 65 audit itself is therefore primarily a verification mechanism. Determination and recovery of tax consequences may involve separate proceedings under the relevant demand provisions.

For periods governed by the newer demand framework, the applicable provisions have to be considered according to the financial year and the law applicable to that period.

Section 65 Audit and Section 61 Scrutiny of Returns

Section 61 and Section 65 are different mechanisms.

Particular	Section 61	Section 65
Nature	Scrutiny of returns	Audit by tax authorities
Main focus	Verification of return and related particulars	Detailed examination of records, returns and compliance
Records	Return-related information	Books, records, returns and supporting documents
Audit team	Not necessarily an audit team	Audit may be conducted with officers and officials
Notice	Scrutiny discrepancy communication	ADT-01
Final communication	ASMT-12 where applicable	ADT-02
Possible further action	Audit, inspection, demand proceedings etc.	Applicable tax demand proceedings where discrepancies result in tax liability

Section 61 itself specifically allows the proper officer, in appropriate circumstances, to initiate action under Section 65 or other provisions where discrepancies are not satisfactorily resolved.

Section 65 Audit vs Section 66 Special Audit

Section 65 should not be confused with Section 66.

Particular	Section 65	Section 66
Name	Audit by tax authorities	Special audit
Auditor	Tax authority/authorised audit officer	Chartered Accountant or Cost Accountant nominated by Commissioner
Trigger	Departmental audit of registered person	Nature/complexity of case, revenue interest and specified circumstances
Prior approval	Commissioner authorises audit through general/specific order	Commissioner approval is required for direction
Main provision	Section 65	Section 66
Main form	ADT-01 and ADT-02	ADT-03 and ADT-04
Nature	Departmental GST audit	Special professional audit directed during specified proceedings

A Section 66 special audit is therefore a separate mechanism and should not be treated as merely another name for a Section 65 audit. Rule 102 prescribes ADT-03 for directing a special audit and ADT-04 for communicating its findings.

Section 65 Audit vs Regular Financial Audit

A GST departmental audit is also different from an ordinary financial audit.

A financial audit generally examines financial statements and related accounting matters according to the applicable financial reporting and auditing framework.

A Section 65 audit is specifically concerned with GST compliance.

The GST officer may examine whether:

• Taxable turnover has been correctly reported
• GST has been paid correctly
• Correct rates have been applied
• Exemptions are properly claimed
• ITC is eligible
• Refunds are correctly claimed
• GST records support the returns filed

Therefore, completion of a financial audit does not automatically prevent the GST authorities from conducting an audit under Section 65.

Important Documents to Keep Ready for a GST Audit

A registered person receiving a Section 65 audit notice should organise records systematically.

Depending on the nature of the business, the following may be relevant:

Sales Records

• Sales register
• Tax invoices
• Credit notes
• Debit notes
• Export documents, where applicable
• E-invoice records, where applicable
• E-way bill records, where applicable

Purchase and ITC Records

• Purchase register
• Purchase invoices
• Debit notes
• ITC workings
• Vendor details
• Payment records
• Records supporting receipt of goods or services
• ITC reversal calculations

GST Returns

• GSTR-1
• GSTR-3B
• Annual return, where applicable
• Other GST statements relevant to the taxpayer

Accounting Records

• General ledger
• Trial balance
• Profit and loss account
• Balance sheet
• Stock records
• Bank records
• Expense records

Other Documents

• Refund applications
• Exemption documents
• Contracts and agreements
• Relevant correspondence
• Reconciliation statements
• Other documents supporting GST positions

The exact documents required will depend on the audit notice and the business activities.

Practical Example of a Section 65 Audit

Suppose ABC Traders is a registered taxpayer engaged in wholesale trading.

The GST department issues FORM GST ADT-01 for an audit covering FY 2024-25.

The notice provides the relevant details and requires the taxpayer to make its records available.

During the audit, the officers examine:

1. Sales recorded in the books.
2. Sales reported in GST returns.
3. Tax rates applied to products.
4. Purchase invoices.
5. ITC claimed in returns.
6. Credit notes and debit notes.
7. Exempt supplies, if any.
8. Refund claims, if any.
9. Other relevant GST records.

The officers notice a difference between the sales ledger and the turnover reported in the GST returns.

ABC Traders explains that part of the difference relates to transactions recorded in the accounting system but subsequently cancelled and supported by appropriate documentation.

The officer considers the explanation and supporting documents before finalising the audit findings.

If the explanation is accepted, the discrepancy may not result in additional tax.

If the department establishes that taxable turnover was omitted and additional tax is payable, appropriate proceedings may follow under the applicable GST demand provisions.

What Should a Taxpayer Do After Receiving ADT-01?

A taxpayer should take the audit notice seriously and review the specified period and documents.

A practical approach is to:

Step 1: Check the Notice

Verify:

• GSTIN
• Legal name
• Audit period
• Date of audit
• Location
• Officer details
• Documents requested

Step 2: Reconcile Turnover

Reconcile books with GST returns and investigate differences.

Step 3: Reconcile ITC

Compare purchase records and eligible ITC with the ITC reported in GST returns.

Step 4: Review Tax Rates

Check whether the correct GST rates were applied to the supplies.

Step 5: Organise Documents

Keep records arranged according to the audit period and business transactions.

Step 6: Prepare Explanations

If known discrepancies exist, prepare a factual explanation supported by documents.

Step 7: Respond Carefully

Information supplied to the department should be accurate and supported by appropriate records.

Importance of GST Reconciliation Before Audit

Regular reconciliation can reduce the difficulty of responding to an audit.

Businesses should periodically compare:

Books of account → GST returns → Invoices → ITC records → Tax payments

Differences should be investigated rather than ignored.

For example, a turnover difference may arise because of:

• Credit notes
• Advances
• Year-end accounting adjustments
• Exempt supplies
• Non-GST supplies
• Timing differences
• Data-entry errors
• Classification differences

A proper reconciliation can help the taxpayer explain legitimate differences during the audit.

Can GST Officers Ask for Additional Information?

During the audit, the authorised officer may require information considered necessary for conducting the audit.

Section 65(5) specifically allows the officer to require the registered person to furnish information and provide assistance for timely completion of the audit.

The taxpayer should therefore maintain proper communication with the audit team and provide the requested records in an organised manner.

What Rights Does a Registered Person Have During a Section 65 Audit?

Section 65 does not give the tax department an unrestricted power to treat every audit observation as automatically payable tax.

The registered person is informed of the audit findings after completion, including the taxpayer’s rights and obligations and the reasons for the findings.

Further, Rule 101 allows the taxpayer to submit a reply to discrepancies noticed during the audit, which has to be considered before the audit findings are finalised.

The taxpayer should therefore preserve copies of:

• Audit notice
• Documents submitted
• Written explanations
• Replies
• Audit observations
• Final audit report
• Supporting reconciliations

Key Points of Section 65

The important provisions of Section 65 can be summarised as follows:

• Section 65 deals with audit by tax authorities.
• The Commissioner or an authorised officer may undertake the audit.
• The audit applies to registered persons.
• The audit may be conducted at the taxpayer’s business premises or at the officer’s office.
• At least 15 working days’ prior notice is required.
• Form GST ADT-01 is used for the audit notice.
• Rule 101 governs the procedural aspects of the audit.
• The audit period can be a financial year, part of a financial year or multiple financial years.
• The normal audit completion period is three months from commencement.
• The Commissioner can extend it by up to six additional months where the statutory conditions are satisfied.
• The taxpayer must provide facilities, information and assistance required for the audit.
• The officer can examine turnover, exemptions, deductions, tax rates, ITC, refunds and other relevant matters.
• Audit discrepancies may be communicated to the taxpayer for a reply.
• The taxpayer’s response is considered before final audit findings are finalised.
• Form GST ADT-02 is used to communicate the final audit findings.
• If the audit detects tax not paid, short-paid tax, erroneous refund or wrongly availed/utilised ITC, further action may be initiated under the applicable GST provisions.

Conclusion

Section 65 of the CGST Act provides the GST authorities with a structured mechanism to audit registered taxpayers and verify the correctness of their GST compliance. Unlike a simple return scrutiny, a Section 65 audit can involve detailed examination of books of account, invoices, returns, turnover, tax rates, exemptions, deductions, input tax credit, refunds and other relevant records.

The taxpayer receives advance notice through FORM GST ADT-01, and the audit is generally required to be completed within three months from its commencement, subject to the statutory extension available to the Commissioner. During the audit, the taxpayer is required to provide the necessary records, information and assistance. Where discrepancies are identified, the taxpayer can provide explanations and supporting documents before the findings are finalised.

After completion, the audit findings are communicated through FORM GST ADT-02. Where the audit reveals tax not paid or short paid, erroneous refunds, or wrongly availed or utilised ITC, the department may take further action under the applicable provisions of the GST law.

For businesses, the best preparation for a Section 65 audit is not merely arranging documents after receiving the notice. Maintaining accurate books, properly reconciling GST returns with accounting records, retaining supporting invoices, reviewing ITC regularly and documenting exemptions and other GST positions can make the audit process considerably more organised and transparent.

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