Section 65 CGST Act — GST Audit by Tax Authorities

1. Why Section 65 matters

Searches such as “Section 65 CGST Act”, “GST audit by tax authorities”, “GST departmental audit”, “ADT-01”, “ADT-02”, “GST audit notice”, “GST audit 15 working days”, “GST audit 3 months” and “GST audit 6 months extension” all relate directly to this provision.

Section 65 is the legal basis for a departmental GST audit of a registered person. It is different from the annual financial-statement audit by a statutory auditor and different from the special audit under Section 66.

2. Section 65 in very simple language

Think of a GST audit as a detailed verification of whether the GST records and the actual business records tell the same story.

The department may select a registered taxpayer for audit. It gives the taxpayer advance notice, examines the records and checks the correctness of GST reporting.

If the audit finds tax that was not paid, tax that was short paid, an erroneous refund, or wrongly availed/utilised ITC, the proper officer may start the applicable tax-determination proceedings.

3. What is a GST departmental audit?

A departmental audit is an audit conducted by GST tax authorities under Section 65. It is designed to independently verify the correctness of the taxpayer's GST compliance.

Rule 101 specifically describes verification of books and documents, returns/statements, turnover, exemptions and deductions, tax rates, ITC, refunds and other relevant issues. citeturn0search1turn0search6

4. Who can order the audit?

Section 65(1) provides that the Commissioner or an officer authorised by him, through a general or specific order, may undertake the audit of any registered person.

The audit is therefore not an annual mandatory audit of every registered taxpayer. It is an audit conducted by the tax authorities when the competent authority decides to undertake it.

5. What period can be audited?

Rule 101 provides that the period of audit under Section 65(1) shall be a financial year or multiples of a financial year.

Therefore, the department may audit one financial year or more than one financial year, depending on the audit order and applicable procedure.

6. Where can the audit be conducted?

Section 65(2) allows the authorised officers to conduct the audit:

• at the registered person's place of business; or
• in the office of the tax authority.

Therefore, a taxpayer should be prepared for both possibilities and maintain the required records in a form that can be produced efficiently.

7. ADT-01 and 15 working days

Before the audit is conducted, Section 65(3) requires the registered person to be informed by notice not less than fifteen working days before the conduct of the audit, in the prescribed manner.

Rule 101 prescribes FORM GST ADT-01 for this notice.

8. When does the audit actually commence?

This is a very important technical point.

Section 65(4) explains that “commencement of audit” means the date on which:

• the records and other documents called for by the tax authorities are made available by the registered person; or
• the audit is actually instituted at the place of business;

whichever is later.

This date matters because the three-month audit-completion period is calculated from the commencement of audit.

9. Three-month completion period

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

This gives the taxpayer and department a statutory framework for concluding the audit.

However, the law also recognises that some audits may be complex and cannot be completed within three months.

10. Six-month extension

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 exceeding six months.

The reasons for the extension must be recorded in writing.

This does not mean every GST audit automatically gets nine months. The extension is conditional on the Commissioner being satisfied that the audit cannot be completed within three months and recording reasons.

11. What records can officers verify?

The audit can involve a wide range of accounting and GST records.

12. What does the officer check?

Rule 101 provides a practical picture of the audit scope.

13. Taxpayer's duty to assist

Section 65(5) allows the authorised officer to require the registered person:

• to provide the necessary facility to verify books of account or other documents; and
• to furnish information and render assistance necessary for timely completion of the audit.

Therefore, the taxpayer should nominate responsible finance/tax personnel, keep records organised and respond to information requests in a controlled manner.

14. Audit discrepancies and taxpayer reply

During the audit, the officer may identify discrepancies and communicate audit observations to the registered person.

Rule 101 allows the taxpayer to furnish a reply, and the proper officer must finalise the audit findings after considering that reply.

A good response should contain:

• issue-wise explanation;
• reconciliation statement;
• supporting invoices/documents;
• legal basis where a tax position is disputed;
• tax/interest computation where a correction is accepted; and
• clear identification of matters that remain disputed.

15. ADT-02 audit findings

On conclusion of the audit, Section 65(6) requires the proper officer to inform the registered person about the findings, rights and obligations and reasons for the findings within thirty days.

Rule 101 prescribes FORM GST ADT-02 for communicating the audit findings.

16. 30-day communication after audit

Section 65(6) provides that after conclusion of the audit, the proper officer shall, within thirty days, inform the registered person of the audit findings, rights and obligations and reasons for those findings.

This gives the taxpayer a formal record of what the audit concluded.

It is therefore important to preserve ADT-02 along with the detailed audit working papers and replies submitted during the audit.

17. What happens if tax short-paid is found?

An audit finding does not mean that the audit officer simply creates a demand without following the applicable tax-determination provision.

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

• tax not paid;
• tax short paid;
• tax erroneously refunded; or
• ITC wrongly availed or utilised;

the proper officer may initiate action under the applicable determination provision.

For current law, this includes Section 73, Section 74 or Section 74A, depending on the relevant tax period and facts. citeturn0search0

18. Section 73/74/74A after audit

Therefore, a GST audit and a subsequent tax demand are related but distinct stages.

19. Section 65 vs Section 66

20. Section 65 vs Section 61

21. Section 65 vs inspection/search

A GST audit is not the same thing as an inspection, search or seizure under Section 67.

22. Detailed practical examples

Example 1 — Turnover mismatch

Books show ₹100 crore turnover while GST returns show ₹94 crore. The audit team may reconcile invoices, credit notes, advances, exports, exempt supplies and other differences before deciding whether a tax discrepancy exists.

Example 2 — Wrong tax rate

A company applied 5% GST to a category that should have been taxed at 18%. The audit may identify the difference and seek an explanation or initiate the appropriate tax process.

Example 3 — ITC mismatch

The books show ITC of ₹4 crore while GST records show a different amount. The audit can examine invoices, eligibility, reversals and utilisation.

Example 4 — Exemption claim

A taxpayer claims a large exemption. The audit checks the notification, nature of supply, invoices and supporting records.

Example 5 — Refund

A refund has been claimed on accumulated ITC. The audit can examine the underlying invoices, eligibility and calculation.

Example 6 — Credit notes

Large credit notes reduce turnover after year-end. The audit may examine whether they were properly issued and reported.

Example 7 — E-invoice/e-way bill reconciliation

Taxable invoices in accounting records are compared with GST reporting and movement data to identify unexplained differences.

Example 8 — RCM

Expenses subject to reverse charge are identified in the books but not reflected in GST workings. The audit may determine whether RCM liability was discharged.

Example 9 — Multi-state business

A company has several GSTINs. The audit should be analysed for the particular registered person and period covered by the audit notice.

Example 10 — Audit observation accepted

The taxpayer accepts a genuine short-payment identified during audit, provides the reconciliation and pays/addresses the liability through the appropriate statutory process.

23. Construction and infrastructure audit

RA bills and turnover

Construction companies should reconcile RA bills, tax invoices, books and GSTR-1/GSTR-3B. Timing differences should be documented rather than left unexplained.

Mobilisation advances

Advance registers should be reconciled with tax invoices and time-of-supply workings.

Retention money

Contract terms and actual consideration should be analysed carefully because accounting recognition and GST timing may differ.

Material at site

Site stock, purchase invoices, GRNs, e-way bills and consumption records should reconcile with the books and GST returns.

Subcontractors

Subcontractor invoices, RCM positions where applicable, ITC and payment records should be maintained project-wise.

Works contracts

The audit may examine contract-wise turnover, tax rate, place of supply, advances, variations, credit notes and ITC.

24. Audit-ready documents

25. Internal controls

26. Legislative development

27. Important legal point on audit commencement

One issue that can become important in litigation is the meaning of “commencement of audit”.

Section 65(4) does not simply define commencement as the date of the audit notice. It says commencement means the later of:

• the date when the records/documents called for are made available by the registered person; or
• the date when the audit is actually instituted at the place of business.

Therefore, when calculating the three-month audit-completion period, the actual statutory commencement definition must be examined carefully.

Recent judicial discussion has also considered Section 65(4) commencement timing and the relationship between delayed audit completion and subsequent tax proceedings. citeturn0search0

28. Common mistakes

• Assuming GST audit is the same as statutory financial audit.
• Ignoring ADT-01 until the audit team arrives.
• Not preparing a books-to-GST turnover reconciliation.
• Not reconciling GSTR-1 with GSTR-3B.
• Not maintaining ITC reconciliation and reversal workings.
• Giving unsupported explanations for exemptions.
• Not reconciling e-invoices/e-way bills with books.
• Failing to preserve audit responses.
• Confusing ADT-02 audit findings with the final tax demand.
• Ignoring the distinction between Section 65 audit and Section 66 special audit.

29. Professional GST audit workflow

30. Section 65 GST FAQs

What is Section 65 of the CGST Act?

Section 65 allows the Commissioner or an authorised officer to conduct an audit of a registered person for the prescribed period and in the prescribed manner.

What is a GST departmental audit?

It is an audit conducted by GST tax authorities to verify the correctness of books, returns, turnover, exemptions, tax rates, ITC, refunds and other GST compliance matters.

What is ADT-01?

ADT-01 is the notice for conducting a departmental GST audit under Section 65.

How much notice must be given before a GST audit?

Section 65 requires notice not less than 15 working days before the audit.

How long can a GST audit take?

The normal statutory period is three months from commencement of audit. The Commissioner can extend it by a further period not exceeding six months where satisfied that the audit cannot be completed within three months and reasons are recorded in writing.

When does a GST audit commence?

For Section 65(4), commencement is the later of the date when the called-for records/documents are made available or the date when the audit is actually instituted at the place of business.

Where can the GST audit be conducted?

At the registered person's place of business or in the office of the tax authority.

What is ADT-02?

ADT-02 is the audit findings communication issued after conclusion of the departmental audit.

Does ADT-02 itself create a GST demand?

ADT-02 communicates audit findings. If the audit detects tax not paid, short payment, erroneous refund or wrongly availed/utilised ITC, the proper officer may initiate the applicable tax-determination proceedings.

What is checked in a GST audit?

Turnover, exemptions, deductions, tax rates, ITC, refunds, books, returns and other relevant GST issues can be checked.

Can the GST department audit multiple financial years?

Yes. Rule 101 provides that the audit period can be a financial year or multiples of a financial year.

Is Section 65 audit the same as Section 66 special audit?

No. Section 65 is audit by tax authorities. Section 66 is a separate special-audit mechanism involving a chartered accountant or cost accountant under the statutory conditions.

Is GST audit the same as statutory audit?

No. A statutory financial audit is conducted under company/other applicable law. Section 65 is a tax-authority audit under GST law.

Can an audit lead to a tax demand?

Yes. If the audit detects tax not paid/short paid, erroneous refund or wrongly availed/utilised ITC, the proper officer may initiate the applicable determination proceedings.

31. Related provisions