Section 66 of the Central Goods and Services Tax (CGST) Act, 2017 deals with Special Audit. It provides a mechanism through which the GST authorities can require the records and books of account of a registered person to be examined and audited by a Chartered Accountant or Cost Accountant nominated by the Commissioner.
A special audit is different from the ordinary departmental audit under Section 65. Section 65 permits the tax authorities to conduct an audit of a registered person as part of the regular GST audit framework. Section 66, on the other hand, is a special mechanism that can be invoked during scrutiny, inquiry, investigation or any other proceedings when the statutory conditions relating to the correctness of declared value or the amount of input tax credit are satisfied.
The law also provides safeguards for the registered person, including an opportunity of being heard where material gathered through the special audit is proposed to be used against the taxpayer. The cost of the special audit is borne by the Commissioner.
What is Section 66 of the CGST Act?
Section 66 empowers the GST authorities to order a special audit of the records and books of account of a registered person in specified circumstances.
The provision becomes relevant when, during an existing GST proceeding, an authorised officer forms the opinion that:
- The value declared by the registered person has not been correctly declared; or
- The input tax credit availed by the registered person is not within normal limits.
The special audit is therefore not simply a routine audit of every registered taxpayer. It is a specific audit mechanism that can be ordered when the statutory requirements under Section 66 are met.
The audit is carried out by a Chartered Accountant or Cost Accountant nominated by the Commissioner.
When Can a Special Audit Be Ordered?
Section 66(1) provides that a special audit can be directed at any stage of:
- Scrutiny
- Inquiry
- Investigation
- Any other proceedings
before the relevant officer.
The officer must also consider:
- The nature and complexity of the case; and
- The interest of revenue.
In addition, the officer must form an opinion that either the value has not been correctly declared or the credit availed is not within normal limits.
Therefore, all of these statutory elements are important.
Example
Suppose a registered company reports very substantial input tax credit compared with the nature and scale of its business.
During an investigation, the department finds that the credit claimed appears unusual and requires detailed examination of the company’s books and supporting records.
If the statutory conditions are satisfied, the authorised officer may seek the Commissioner’s prior approval for a special audit.
The purpose is to obtain an independent professional examination of the relevant records.
Who Can Direct a Special Audit?
Section 66 does not give every GST officer an independent power to order a special audit.
Under Section 66(1), the officer must be not below the rank of Assistant Commissioner.
The officer must also obtain prior approval of the Commissioner before directing the registered person to get the records audited.
Thus, the basic structure is:
Assistant Commissioner or higher-ranking officer → forms statutory opinion → obtains prior Commissioner approval → directs special audit
This approval requirement is an important distinction between a Section 66 special audit and an ordinary accounting review initiated by a taxpayer.
Who Conducts the Special Audit?
The special audit is conducted by a:
- Chartered Accountant, or
- Cost Accountant
who is nominated by the Commissioner.
The registered person does not simply select any professional of their choice for the statutory special audit. The direction identifies the nominated Chartered Accountant or Cost Accountant.
Rule 102 provides that the officer referred to in Section 66 issues the direction in FORM GST ADT-03, requiring the registered person to get the records audited by the Chartered Accountant or Cost Accountant specified in the direction.
What is Form GST ADT-03?
FORM GST ADT-03 is the prescribed communication for directing a registered person to undergo a special audit under Section 66.
The official form refers to circumstances such as ongoing:
- Scrutiny of returns
- Inquiry
- Investigation
- Other proceedings
and states that the books of account and records are required to be examined and audited by the nominated Chartered Accountant or Cost Accountant.
The form generally identifies the:
- GSTIN
- Name of the registered person
- Address
- Relevant financial year or years
- Nominated professional
- Officer issuing the direction
Why is a Special Audit Ordered?
The central purpose of Section 66 is to obtain a detailed professional examination where the tax authority considers that the case requires such examination.
The two specific concerns mentioned in Section 66(1) are:
Incorrectly Declared Value
The officer may have reason to believe that the value of supplies declared by the registered person has not been correctly declared.
GST valuation can involve complicated transactions, related parties, additional consideration, discounts, reimbursements and other factors. Where the valuation requires detailed examination, a special audit may be considered if the statutory conditions are satisfied.
Input Tax Credit Outside Normal Limits
The second statutory ground relates to input tax credit.
If the credit availed appears to be outside normal limits in the circumstances of the case, the special audit mechanism may be invoked subject to the requirements of Section 66.
The provision does not say that every unusual ITC figure automatically results in a special audit. The officer must form the statutory opinion and obtain prior approval of the Commissioner.
What Records Can Be Audited?
Section 66 specifically refers to the registered person’s records, including books of account.
Depending on the nature of the case, the special audit may therefore require examination of records relevant to the issues under investigation.
These may include:
- Books of account
- Sales records
- Purchase records
- Tax invoices
- Debit notes
- Credit notes
- Input tax credit records
- GST returns
- Financial statements
- Contracts
- Agreements
- Ledger accounts
- Stock records
- Payment records
- Other relevant supporting documents
The precise records examined will depend on the subject matter and scope of the special audit.
Special Audit Can Be Ordered Even If Accounts Were Already Audited
One important feature of Section 66 is contained in Section 66(3).
The provision expressly states that Section 66(1) applies even if the accounts of the registered person have already been audited under another provision of the CGST Act or under any other law.
Therefore, a taxpayer cannot argue merely on the basis that its accounts have already been audited that a Section 66 special audit cannot be conducted.
For example, a company may already have undergone:
- Statutory financial audit;
- Tax audit under another law;
- Internal audit;
- Another GST audit.
A Section 66 special audit can still be directed if the requirements of Section 66 are satisfied.
How Long Does the Special Audit Take?
Section 66(2) provides that the nominated Chartered Accountant or Cost Accountant must submit the special audit report within 90 days.
The report must be:
- Duly signed; and
- Certified by the Chartered Accountant or Cost Accountant.
The report is submitted to the Assistant Commissioner referred to in Section 66.
Can the 90-Day Period Be Extended?
Yes.
The Assistant Commissioner may extend the period by a further 90 days where:
- The registered person makes an application for extension; or
- The Chartered Accountant or Cost Accountant makes an application; or
- There is any material and sufficient reason for granting an extension.
Therefore, the statutory framework provides an initial period of 90 days, with the possibility of a further period of up to 90 days where the requirements for extension are satisfied.
What Happens After the Special Audit?
After completion of the special audit, the registered person is informed of the findings.
Rule 102(2) provides that the findings of the special audit are communicated through FORM GST ADT-04.
What is Form GST ADT-04?
FORM GST ADT-04 is the prescribed form for communicating the findings of the special audit to the registered person.
It is therefore important to distinguish:
| Form | Purpose |
|---|---|
| ADT-03 | Direction for special audit |
| ADT-04 | Communication of special audit findings |
The issuance of ADT-04 does not mean that every amount mentioned in the audit automatically becomes payable without following the applicable statutory demand process.
Right to Be Heard
Section 66(4) provides an important safeguard to the registered person.
If material gathered during the special audit is proposed to be used in proceedings against the taxpayer under the CGST Act or the Rules, the registered person must be given an opportunity of being heard.
This means that the taxpayer should have an opportunity to respond to material that is proposed to be relied upon against them.
For example, suppose the special audit identifies a particular amount of ITC as potentially inadmissible.
If the department proposes to use the audit material in subsequent proceedings against the taxpayer, the taxpayer must be given the statutory opportunity to be heard.
This is different from saying that the taxpayer automatically gets a right to disregard the audit or that every audit observation is automatically cancelled after an explanation. The relevant statutory proceedings must still be followed.
Who Pays the Cost of the Special Audit?
One of the important features of Section 66 is that the Commissioner determines and pays the expenses of the examination and audit.
This includes the remuneration of the nominated:
- Chartered Accountant; or
- Cost Accountant.
Section 66(5) states that the determination of these expenses by the Commissioner is final.
Therefore, the taxpayer does not have to directly bear the professional remuneration merely because a Section 66 special audit has been ordered.
What Happens If the Special Audit Finds Additional Tax Liability?
Section 66(6) deals with the consequences of the special audit.
Where the special 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 66.
The current text of Section 66 specifically refers to Sections 73 or 74. The applicable demand provision must be considered according to the relevant tax period and the law applicable to that period.
The important point is that the special audit identifies and examines the underlying issue; the resulting tax liability is dealt with through the applicable statutory proceedings.
Does a Special Audit Automatically Mean Tax Evasion?
No.
A Section 66 special audit is an investigation and verification mechanism. The fact that a taxpayer is directed to undergo a special audit does not, by itself, establish that the taxpayer has evaded tax.
A special audit may be ordered because the case is considered sufficiently complex or because the statutory conditions relating to declared value or input tax credit are considered satisfied.
The final outcome depends on the records, audit findings, explanations and subsequent proceedings.
Section 65 vs Section 66
Section 65 and Section 66 both relate to GST audits, but they serve different purposes.
| Particular | Section 65 | Section 66 |
|---|---|---|
| Name | Audit by tax authorities | Special audit |
| Nature | Departmental audit | Special professional audit |
| When used | Audit of registered persons under departmental audit framework | During scrutiny, inquiry, investigation or other proceedings when statutory conditions are satisfied |
| Who initiates | Commissioner or authorised officer | Officer not below Assistant Commissioner with prior Commissioner approval |
| Auditor | GST tax authorities | Nominated Chartered Accountant or Cost Accountant |
| Main concern | General GST compliance verification | Incorrect value declaration or ITC outside normal limits in a case requiring special audit |
| Form | ADT-01 | ADT-03 |
| Final communication | ADT-02 | ADT-04 |
| Professional audit fee | Not structured as Section 66 professional remuneration | Determined and paid by Commissioner |
| Opportunity to respond | Applicable under the relevant audit procedure | Explicit Section 66(4) safeguard for material proposed to be used against taxpayer |
Rule 101 governs the ordinary audit under Section 65, while Rule 102 governs special audit under Section 66.
Section 66 vs Section 61 Scrutiny of Returns
Section 61 deals with scrutiny of returns, whereas Section 66 deals with a special audit.
During scrutiny, the officer examines the return and related particulars and may seek an explanation for discrepancies.
A special audit can arise at a stage of scrutiny, inquiry, investigation or other proceedings when the statutory conditions for Section 66 are met.
Therefore, the two provisions can be connected in practice but are not the same procedure.
Simple Example
Suppose a taxpayer reports an unusual ITC amount.
Under Section 61, the department may first examine the return and seek an explanation for a discrepancy.
If, during scrutiny or another proceeding, the authorised officer considers the case sufficiently complex and forms the statutory opinion that the credit availed is not within normal limits, a Section 66 special audit may be directed after obtaining the Commissioner’s prior approval.
Section 66 vs Regular Financial Audit
A regular financial audit and a Section 66 special audit are also different.
A financial audit primarily examines financial statements and accounting matters under the applicable financial reporting and auditing framework.
A Section 66 special audit is specifically connected with a GST proceeding and is intended to examine records relevant to the issues identified under the CGST Act.
For example, a company’s financial statements may already have been audited, but the GST authorities may still direct a special audit if the requirements of Section 66 are satisfied.
Section 66 vs Section 35 Records and Accounts
Section 35 concerns the taxpayer’s obligation to maintain accounts and records.
Section 66 is different because it provides a mechanism for a special examination and audit of those records in specified circumstances.
In simple terms:
Section 35 → What records the taxpayer must maintain
Section 66 → Special audit of those records in specified circumstances
A taxpayer should therefore maintain complete and reliable records because those records may be examined during GST proceedings.
Practical Example of a Section 66 Special Audit
Consider XYZ Manufacturing Ltd., a registered GST taxpayer.
During an investigation, the GST authorities notice that the company’s declared value for certain transactions requires detailed examination. They also notice that the input tax credit claimed by the company appears unusually high compared with the business activity being examined.
The officer, who is not below the rank of Assistant Commissioner, considers the nature and complexity of the case and the interest of revenue.
After obtaining the Commissioner’s prior approval, the officer issues FORM GST ADT-03 directing the company to get its books and records audited by a Chartered Accountant nominated by the Commissioner.
The nominated professional examines the relevant records and prepares the special audit report.
The report is submitted within the prescribed period of 90 days, subject to any lawful extension.
The registered person is subsequently informed of the special audit findings through FORM GST ADT-04.
If the department proposes to rely upon material gathered through the special audit against the company, the company must be given an opportunity of being heard.
If the special audit establishes tax not paid, tax short paid, an erroneous refund or wrongly availed/utilised ITC, the proper officer may initiate the applicable statutory proceedings.
Another Example: Input Tax Credit
Suppose a service provider has claimed substantial ITC over several tax periods.
During an inquiry, the department identifies questions concerning the nature and extent of the credit.
The officer examines the records and considers the case in light of the statutory requirements.
If the officer forms the opinion contemplated by Section 66 and obtains the Commissioner’s prior approval, a special audit can be directed.
The nominated professional may examine:
- Purchase invoices
- Vendor records
- General ledger
- ITC workings
- GST returns
- Payment records
- Relevant agreements
- Other supporting records
The special audit does not itself replace the statutory adjudication process. If a tax liability is ultimately alleged, the appropriate provisions governing determination and recovery of that liability must be followed.
Important Responsibilities of the Registered Person
When a Section 66 special audit is directed, the registered person should:
1. Read ADT-03 Carefully
Check:
- GSTIN
- Audit period
- Nature of proceedings
- Nominated professional
- Officer issuing the direction
2. Preserve Relevant Records
The taxpayer should keep the relevant books and supporting documents organised.
3. Cooperate With the Audit
The records and information required for the special audit should be made available as required.
4. Review the Relevant GST Position
The taxpayer should internally review:
- Taxable turnover
- Valuation
- ITC
- Tax payments
- Returns
- Supporting invoices
- Accounting records
5. Document Explanations
Where there are legitimate differences or unusual transactions, explanations should be supported by relevant documents.
6. Review the Audit Findings
Once the findings are communicated, the taxpayer should carefully examine the issues identified and the supporting basis.
7. Use the Opportunity of Being Heard
If material from the special audit is proposed to be used against the taxpayer, the statutory opportunity of being heard should be used appropriately.
Important Points About Section 66
The major points of Section 66 can be summarised as follows:
- Section 66 deals with special audit under GST.
- It can operate during scrutiny, inquiry, investigation or other proceedings.
- The officer ordering it must be not below the rank of Assistant Commissioner.
- The officer must consider the nature and complexity of the case and the interest of revenue.
- The statutory grounds include incorrect declaration of value or input tax credit not being within normal limits.
- Prior approval of the Commissioner is required.
- The records, including books of account, are audited by a Chartered Accountant or Cost Accountant nominated by the Commissioner.
- The direction is issued through FORM GST ADT-03 under Rule 102.
- The normal period for submission of the special audit report is 90 days.
- A further period of up to 90 days can be allowed where the statutory conditions for extension are satisfied.
- A special audit can be conducted even if the accounts have already been audited under another law or GST provision.
- The taxpayer must be given an opportunity of being heard where material from the special audit is proposed to be used against the taxpayer.
- The Commissioner determines and pays the expenses of the special audit.
- Special audit findings are communicated through FORM GST ADT-04.
- If the special audit detects unpaid or short-paid tax, erroneous refund, or wrongly availed/utilised ITC, the proper officer may initiate the applicable statutory proceedings.
👉 Read More → Section 67 – Power of inspection, search and seizure
Conclusion
Section 66 of the CGST Act, 2017 provides a specialised audit mechanism for cases where, during scrutiny, inquiry, investigation or another proceeding, the statutory conditions indicate that a detailed professional examination may be necessary.
Unlike the regular departmental audit under Section 65, a Section 66 special audit is conducted by a Chartered Accountant or Cost Accountant nominated by the Commissioner. The officer ordering the special audit must be at least of the rank of Assistant Commissioner and must obtain the Commissioner’s prior approval.
The special audit may examine the registered person’s books of account and other relevant records, particularly in relation to incorrectly declared value or input tax credit that is considered outside normal limits. The professional normally has 90 days to submit the audit report, with a possible further extension of up to 90 days under the conditions specified in Section 66.
The taxpayer is not required to bear the professional audit expenses, as the Commissioner determines and pays those expenses. At the same time, the registered person must be given an opportunity of being heard where material gathered through the special audit is proposed to be used against them.
If the special audit identifies unpaid or short-paid tax, erroneous refund, or wrongly availed or utilised input tax credit, the proper officer may take further action under the applicable GST demand provisions.
In practical terms, Section 66 is an important GST compliance mechanism for complex cases where a detailed professional examination of the taxpayer’s records is considered necessary. Maintaining accurate books, complete supporting documents, proper valuation records and well-documented ITC workings can help a registered person respond effectively if a special audit is directed.
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