How to Handle GST Audit Notice: Guide for Businesses

Handling a GST audit notice is more than just about gathering documents, it requires a streamlined and well thought out approach.

This guide answers all the common concerns regarding responding to GST notices, the best practices so you can respond confidently, avoid penalties, and protect your business.

What is a GST Audit Notice?

A GST Audit Notice is an official letter from the tax authorities informing your business that they will be conducting a detailed review (an “audit”) of your GST records, returns, and compliance for a specific period.

The notice is sent under Section 65 of the CGST Act. The main objectives of a GST audit are to:

Verify the correctness of turnover declared, taxes paid, refunds claimed, and input tax credits availed.
Assess compliance with GST laws and regulations

Common Reasons of Getting GST Audit Notice

Routine or Risk-Based Selection: Some audits are random, while others are triggered by risk parameters identified through automated software.
Non-Filing or Late Filing: Regularly missing due dates or failing to file GSTR-1 or GSTR-3B returns is a major audit trigger.
Return Discrepancies: Mismatches between GSTR-1 and GSTR-3B, or frequent amendments to past returns, often draw scrutiny.
Input Tax Credit (ITC) Issues: Errors or mismatches in ITC claims—especially between GSTR-3B and GSTR-2A/2B—or unusually high claims can prompt audits.
Tax Payment or Refund Irregularities: Underpayment, late payment, or suspicious refund claims often lead to inquiries.
Failure to Register: Businesses that should be registered under GST but are not may receive audit notices.
Complaints or Intelligence: Tips from informants, other agencies, or competitors can trigger targeted audits.
High-Risk Sectors: Industries prone to evasion (e.g., construction, textiles, e-commerce) face more scrutiny, especially if involved in complex or high-value transactions.
Turnover or Large Transactions: Exceeding turnover limits or engaging in high-value cash transactions raises red flags.
Past Non-Compliance: A history of defaults, penalties, or previous notices increases the chances of future audits.
Post-Return Scrutiny: Initial review or cross-verification of returns may lead to deeper investigation.

Types of GST Audits

If you’ve received a GST audit notice, the first step is to identify the type of audit. Under GST law, there are three main types:

1. Departmental Audit – Section 65

Conducted by a tax officer for routine checks.
Notice (Form ADT-01) must be issued 15 days prior.
To be completed in 3 months (extendable to 6 months with approval).
Covers records, returns, stock, and ITC claims.
Findings are reported in Form ADT-02.

2. Special Audit – Section 66

Ordered in case of suspected fraud, discrepancies, or complexity.
Initiated by the Commissioner; order issued by Deputy/Assistant Commissioner.
Conducted by a nominated CA or Cost Accountant.
Taxpayer must provide required documents.
To be completed in 90 days (extendable by 90 days).
Findings in Form ADT-04.

3. Inspection, Search, and Seizure – Section 67

Used in serious violations or suspected evasion.
No prior notice needed.
Conducted by senior officers under GST law.
Involves inspection, search, seizure, and legal action.
Not a formal audit, but an enforcement measure.

What Does a GST Audit Notice Contain?

GST Audit notice must be sent at least 15 working days before the audit is conducted, commonly in the prescribed Form GST ADT-01.

It contains the following

Your Business Identification: GSTIN – Your unique GST identification number; Legal Name & Address of your registered business
Audit Period: Specific financial year(s), quarter(s), or month(s) under review
Reason for Audit: Brief explanation like: “Risk-based selection”,”Discrepancy in GSTR-3B vs GSTR-2B”*, “Random selection”, etc.
Audit Officer Details: Name, Designation & Contact: Phone, email, and office address of the officer in charge.
Venue of Audit: Where the audit will take place (usually your principal place of business or the tax office).
Documents Required: A specific list of records you need to prepare (e.g., ledgers, invoices, purchase/sales registers, bank statements, GSTR returns filed, e-way bills, agreements).
Start Date & Duration: Commencement date of the audit. Timeline (typically 3 months, extendable to 6 months).
Response Timeframe: Usually you have 21 days from receiving the notice to acknowledge it and start preparing.

Step By Step Process of Handling GST Audit Notice

A systematic approach can ensure a minimal disruption and risk that come with a GST Audit Notice.

Here’s how you can handle it:

I. Immediate Steps After Receiving a GST Audit Notice

Act Promptly: Treat the notice seriously—delays can lead to penalties.

Verify Authenticity: Check sender details (GSTIN, designation, office). Confirm on GST Portal under “Notices & Orders.”

Understand the Notice:

Audit period and focus areas (e.g., ITC, liability).
Documents required.
Audit date/location and submission deadline.

Acknowledge Receipt: Log into the portal and acknowledge the notice electronically.

Notify Internal Stakeholders: Inform Finance Head, CA, GST Consultant, and key teams.

Engage Your Advisor: Share the notice with your Tax consultant and begin preparations immediately.

II. Preparing for the Audit: Documents & Best Practices

Assemble Core Documentation

GST Returns: GSTR-1, GSTR-3B, GSTR-9/9C for the relevant period.
Books of Accounts: Trial Balance, Profit & Loss, Balance Sheet, General Ledger, Purchase and Sales Registers
Invoices: Outward tax invoices, Bill of Supply, Receipt/Refund vouchers, Delivery Challans
Input Tax Credit (ITC) Records: Supplier invoices, Debit/Credit Notes, ISD documents, ITC reversal records, payment proofs

Other Key Documents:

Bank Statements for all relevant accounts
E-Way Bills, if applicable
Contracts/Agreements for SEZ, exports, job work, etc.

Reconciliations:

GSTR-2A/2B vs ITC claimed in books
GSTR-1 vs GSTR-3B (tax liability)
GSTR-1 vs Sales Register
Books vs GSTR-9 & 9C

Best Practices

Start Early: Document collection takes time.
Organize Clearly: Sort by category and date (Sales, Purchases, ITC, Returns).
Review With Your Advisor: Pre-audit review helps catch discrepancies.
Maintain Digital Versions: PDFs, Excel sheets — be ready for soft copy requests.
Designate a Point Person: Typically your CA or Finance Head.
Staff Briefing: Ensure relevant staff are aware and available.
Pre-Audit Meeting: Strategize with your advisor — discuss weak areas and communication protocol.

III. During the GST Audit: What to Expect?

The GST audit process includes a number of steps. Here’s a quick overview:

Opening Meeting: Auditors will introduce themselves, explain audit scope, and walk you through the process.

Document Verification: Auditors will verify documents such as:

Examine submitted physical/digital records.
Match transactions with source documents (invoices, contracts, etc.).
Compare GST returns against your books.
Verify ITC eligibility and reversals.
Review tax payment timelines and calculations.
Ask factual questions about specific entries.

Interactions & Inspections:

Expect specific queries on mismatches, unusual entries, or document gaps. Be clear and factual—if unsure, offer to follow up.
Auditors may inspect your premises, stock, or ERP/accounting systems. Keep IT support ready if needed.
Further documents or clarifications may be requested. Keep a record and respond promptly.

Conducting Yourself During the Audit:

Use a Single Point of Contact: Only the designated person should engage substantively with auditors.
Cooperate Courteously: Be courteous, responsive, and provide requested information efficiently.
Be Honest: Avoid speculation, if unsure, consult your advisor.
Accuracy: Ensure documents and explanations are accurate and consistent.
Stay Professional: Be available, but do not interfere unnecessarily.
Seek Clarification: If a query is unclear, ask politely before responding.
Document Everything: Maintain your own log of questions asked, documents provided during the audit, and any verbal points discussed.
No Speculation: Stick to facts and documented evidence. Avoid guessing or offering unsolicited opinions.

IV. After the GST Audit: Key Follow-Up Actions

Audit Conclusion: Auditors may informally share preliminary findings – listen, take notes, avoid arguments at this stage.

Final Audit Report & Show Cause Notice (SCN)

If discrepancies are identified:

You will receive a Show Cause Notice (Form DRC-01).
It outlines tax demands, interest, and penalties with legal reasoning.
A response period (typically 30 days) will be granted.

Responding to SCN

Detailed Analysis: Review with your consultant point-by-point.
Evidence Gathering: Compile documents and legal references supporting your rebuttal.
Written Reply: Submit a structured, factual, and law-backed response on time.
Personal Hearing: You may request this to explain your case directly.

Possible Outcomes

No Demand Raised: If all issues are satisfactorily explained.
Demand Accepted & Paid: If valid, pay via Form DRC-03 (reduced penalties may apply).
Dispute Resolution: If you disagree:
- File an Appeal using Form GST APL-01 within 3 months.
- Prepare for pre-deposit and evaluate alternate remedies.

Post-Audit Action Plan

Fix Internal Gaps: Address control or process flaws highlighted during the audit.
Review Future Compliance: Update systems and train staff as needed.
Cost Management: Factor in professional fees for SCN responses and appeals.

How to Avoid a GST Audit in the Future?

Although it’s impossible to guarantee avoiding a GST audit since some are random or industry-specific, implementing the best practices can significantly reduce your risk.

Here’s a simple actionable guide for businesses:

1. Master Your Reconciliations

GSTR-2B/2A vs. Books (ITC): Match monthly. Only claim ITC shown in GSTR-2B. Investigate mismatches and document reasons.
GSTR-1 vs. GSTR-3B (Output Tax): Output tax in GSTR-3B should match GSTR-1. Fix any gaps quickly.
Books vs. GSTR-9 (Annual Return): Ensure books match your annual return. Use GSTR-9C for thorough checks before filing.
Sales Register vs. GSTR-1: All sales must be reported accurately in GSTR-1.

2. File Accurately & On Time

No Delays: Always file before the deadline. Set earlier internal cutoffs.
Check Details: Verify HSN codes, tax rates, place of supply, invoice values, and GSTINs before filing.
Fix Errors Fast: Use amendment options (like GSTR-1A or future returns) to correct mistakes promptly.

3. Keep Records for 6–8 Years

Organized Records: Store all documents (invoices, e-way bills, contracts, payment proofs) both digitally and physically.
Invoice Compliance: Ensure every invoice follows GST rules and includes mandatory details.
ITC Support: Keep valid invoices, proof of receipt, and payment records for every ITC claim.

4. Claim ITC Responsibly

Check Eligibility: Validate supplier GSTINs, ensure invoices are correct, and goods/services are received. Avoid ineligible ITC (e.g., personal use, exempt supplies).
180-Day Rule: Reverse ITC if supplier is not paid within 180 days.
Vet Suppliers: Be cautious with high-risk or non-compliant vendors.

5. Pay Taxes Properly

Avoid Shortfalls: Ensure enough funds in your cash ledger before filing GSTR-3B.
Pay Interest if Due: Don’t wait for notices – pay interest on delayed tax.
Accurate Tax Calculation: Especially for RCM, mixed supplies, and complex transactions.

6. E-Way Bill Compliance

Generate as Required: Create e-way bills for applicable transactions.
Match Details: Ensure consistency between invoice, e-way bill, and actual transport.
Link Documentation: Keep records tying e-way bills to invoices.

7. Handle Complex Transactions Carefully

Exports/SEZ: Follow proper procedures (LUT, shipping bills, BOE). Report correctly as zero-rated.
Job Work: Stick to timelines and document movements via challans.
RCM: Identify liable transactions, pay tax, and claim ITC only if eligible.
Related Parties: Use proper documentation and pricing as per law.

8. Use the Right Tools & Experts

Good GST Software: Use ERP systems with validations, automation, and reconciliation tools.
Train Your Team: Regular updates on GST changes are essential.
Engage a CA/Consultant: For reviews, complex issues, and compliance audits.

9. Monitor Risk Areas

Large ITC Claims: Especially if unusual for your turnover or sector.
Unusual Spikes: Investigate sudden changes in tax, turnover, or ITC.
Vendor Compliance: Monitor your key suppliers’ GSTR filings.
High-Value Deals: Keep thorough documentation and extra checks.

10. Conduct Regular Internal Audits

Quarterly or Half-Yearly: Schedule reviews to catch errors before GSTR-9 filing.
Be Proactive: Treat it like a mock audit. Fix issues early.

How Can PKC Help WIth GST & GST Audit Notice?

✅Expert ICAI/ICMAI registered auditors ensure complete compliance

✅Saves penalties through proactive non-compliance identification and fixing

✅Comprehensive GST return accuracy verification and certification

✅Industry-specific audit experience across multiple business sectors

✅Real-time GST advisory during filing seasons

✅Input tax credit eligibility verification prevents future issues

✅Financial controls assessment guides future compliance setup

✅Stress-free compliance management with professional communication skills

✅Expert consultation on evolving GST regulations and updates

GST Audit Notice Checklist

Here’s a comprehensive GST Audit Notice Checklist that would be valuable for businesses facing GST audit notices.

GST Audit Notice Checklist Download

Frequently Asked Questions

1. How do you respond to a GST audit notice?

You should respond in writing within the given deadline and attach all requested documents. It’s best to have a CA or tax expert draft your reply professionally.

2. What is the time limit for GST audit notice?

Usually, you must respond within 15 to 30 days from the date of the notice. Check the exact deadline mentioned in the notice carefully.

3. Is CA required for GST audit?

Yes, if your turnover exceeds ₹5 crore or if a special audit is ordered under Section 66, a Chartered Accountant or Cost Accountant is mandatory. Even if not mandatory, having one helps you avoid mistakes.

4. What documents are needed for a GST audit?

You’ll need your GST returns, tax invoices, purchase/sales registers, bank statements, and payment challans. Organize them neatly and ensure everything matches your filings.

5. Can a GST audit be done online?

Yes, audits can be conducted through email and portal submissions in a desk audit format. But in some cases, officers may visit your office for a field audit.