Table of contents:

• • What is a GST Audit?
  • Why GST Audits Are Crucial for MSMEs
  • Applicability of GST Audit
  • GST Audit Limits and Criteria
  • Due Dates for GST Audit
  • Steps to Conduct a GST Audit
  • Key Documents Required for GST Audit
  • Common Errors Found in GST Audits
  • Penalties for Non-Compliance
  • Special Considerations for MSMEs
  • Conclusion

A GST audit is an examination of a taxpayer’s records, returns, and other documents to verify their compliance with Goods and Services Tax (GST) laws. It ensures that businesses accurately report their turnover, pay taxes, claim input tax credit (ITC), and adhere to GST regulations. GST audits are conducted by the taxpayer, appointed professionals, or GST authorities, depending on the type of audit.

Update:
We get many request to publish the checklist. Here is the GST Checklist for everyone: https://icmai.in/TaxationPortal/upload/IDT/Article_GST/113_1803_21.pdf

The primary goal of a GST audit is to:

• Verify the correctness of GST returns filed by the taxpayer.
• Ensure that tax liabilities are accurately self-assessed and paid.
• Identify discrepancies or non-compliance, if any, in turnover, ITC claims, and tax payment.

The audit acts as a safeguard to ensure that businesses follow the GST framework and address any errors or inconsistencies proactively.

Why GST Audits Are Crucial for MSMEs

For MSMEs, GST audits are not just a regulatory requirement; they play a vital role in streamlining financial processes. Here’s why they matter:

• Enhance financial discipline: Regular audits ensure better record-keeping and reconciliation of accounts.
• Avoid penalties: Identifying errors early reduces the risk of hefty fines and penalties for non-compliance.
• Boost business credibility: A clean GST audit report reassures stakeholders, including lenders and investors, of the business’s financial health.
• Simplify refund claims: Ensuring compliance helps MSMEs claim refunds promptly, improving cash flow.
• Minimise departmental scrutiny: Proactive audits reduce the chances of being flagged for departmental audits.

Tip: Conduct periodic internal GST reviews to identify discrepancies early and ensure smoother audits.

Applicability of GST Audit

Not every business is subject to GST audits. The applicability depends on turnover thresholds and other factors.

Who Needs a GST Audit?

• Businesses with turnover exceeding ₹5 crore: These businesses must undergo a statutory audit conducted by a Chartered Accountant (CA) or Cost Accountant.
• Businesses flagged by authorities: Even those below ₹5 crore turnover can face a departmental or special audit if irregularities are suspected.

Must Read: Section 122 of GST Act: Penalties for Tax Evasion and Willful Offenses

Types of GST Audits

1. Statutory Audit: Mandatory for businesses exceeding the turnover threshold.
2. Departmental Audit: Initiated by GST officers to verify compliance for any taxpayer.
3. Special Audit: Ordered by authorities if complex discrepancies are detected.

Understanding whether your business requires an audit is the first step to staying compliant. Now that we’ve covered who needs a GST audit, let’s look at the turnover limits and criteria in more detail.

GST Audit Limits and Criteria

GST audits are primarily based on turnover thresholds. Here’s what you need to know:

Turnover Threshold for GST Audit

• A GST audit is mandatory for businesses with an annual aggregate turnover exceeding ₹5 crore.
• The turnover is calculated for all business locations across India under the same PAN, excluding GST collected on outward supplies.

Other Criteria

• Businesses flagged for discrepancies, even if their turnover is below ₹5 crore, may undergo departmental or special audits.
• Certain businesses, such as those involved in e-commerce, face additional scrutiny.

Tip: Keep track of your business turnover regularly to determine whether you meet the GST audit criteria.

Once you understand whether a GST audit applies to your business, it’s essential to stay updated on due dates to avoid penalties.

Due Dates for GST Audit

Timely filing of GST returns and audit reports is crucial for compliance. Missing deadlines can result in fines and other repercussions.

Key Deadlines

• Annual Return (GSTR-9): Must be filed by 31st December of the following financial year.
• Reconciliation Statement (GSTR-9C): Required for businesses with turnover exceeding ₹5 crore and must be filed along with GSTR-9.

We have covered How to file GSTR-9 annual return and applicability of GSTR-9C Return for better understanding in detail for businesses separately.

Consequences of Missing Deadlines

• Late Fees: ₹200 per day (₹100 for CGST + ₹100 for SGST), capped at 0.25% of turnover.
• Interest: 18% per annum on outstanding tax dues.

Read more: Know GST late fees and Interest on Delayed GST Payments in Detail

Did You Know? – Filing your GST audit report on time enhances your compliance score, reducing the likelihood of future scrutiny. With the deadlines clear, let’s move on to the steps involved in conducting a GST audit effectively.

Steps to Conduct a GST Audit

Conducting a GST audit involves several key steps, from gathering documents to filing the final audit report. Here’s how to do it:

1. Gather Essential Documents

Prepare all required documents, including:

• GST returns (GSTR-1, GSTR-3B, GSTR-9).
• Input Tax Credit (ITC) register.
• Sales and purchase invoices.
• Bank statements and ledgers.

Tip: Maintain digital copies of invoices and registers to streamline the audit process.

2. Reconcile GST Returns with Financial Books

Check for consistency between:

• Turnover reported in GST returns vs. financial statements.
• ITC claimed in GSTR-3B vs. supplier details in GSTR-2A.

3. Verify ITC Claims

Ensure ITC claims are valid and supported by proper invoices. Reverse ineligible credits.

4. File the GST Audit Report

Once discrepancies are resolved, file the GST Audit Report (GSTR-9C) along with the annual return.

Did You Know? Errors in ITC reconciliation are among the most common issues flagged during GST audits.

A video by http://www.gstn.org.in

After completing these steps, keeping track of the required documents is equally important. Let’s explore what these documents are.

Key Documents Required for GST Audit

A GST audit relies heavily on accurate and complete documentation. You should get the documents organised monthly to avoid last-minute scrambling during the audit period.

Mandatory GST Audit Documents

Missing or incorrect documentation can lead to errors. Let’s now discuss the most common mistakes found during GST audits.

Common Errors Found in GST Audits

Errors in GST filings are common and can lead to penalties. Here are the key issues businesses face:

Frequent GST Audit Issues

• Mismatch in ITC Claims: ITC claimed in GSTR-3B does not match supplier filings in GSTR-2A.
• Incorrect HSN/SAC Codes: Applying the wrong code can attract penalties.
• Reverse Charge Errors: Failure to account for reverse charge mechanisms properly.

Use reconciliation tools to identify and fix mismatches early. To avoid these errors, understanding penalties for non-compliance is crucial.

Penalties for Non-Compliance

Failing to comply with GST audit rules can have serious consequences.

To minimise these risks, let’s review best practices for ensuring GST audit compliance. Following these practices can simplify the audit process:

• Use Digital Tools: Accounting software like Tally or QuickBooks automates GST reconciliations.
• Conduct Internal Audits: Regularly review GST filings and financial records.
• Stay Updated on Rules: Monitor GST law changes to ensure compliance.

Tip: Engage a GST auditor or CA for professional assistance if your turnover exceeds ₹5 crore.

Finally, let’s discuss special considerations for MSMEs to ensure smooth GST compliance.

Special Considerations for MSMEs

Micro, Small, and Medium Enterprises (MSMEs) often face unique challenges when it comes to GST audits due to limited resources and smaller operational teams. Below is a detailed table highlighting common challenges and solutions tailored to MSMEs:

Pro Tip: MSMEs should maintain a monthly reconciliation process for their GST filings and financial books to stay audit-ready and minimise the risk of penalties.

By addressing these challenges with practical solutions, MSMEs can simplify their GST compliance journey, ensuring smoother audits and uninterrupted operations.

Conclusion

GST audits are more than just a regulatory requirement; they are an essential part of maintaining your business’s financial health and credibility. Ensuring compliance with GST rules not only helps avoid penalties but also strengthens your business’s standing with stakeholders like investors, lenders, and customers.

Key Takeaways for Businesses:

1. Understand Applicability:
   • Check if your annual turnover exceeds the ₹5 crore threshold.
   • Even if you are not statutorily required to conduct an audit, consider periodic internal GST reviews to identify discrepancies early.
2. Organise Records:
   • Keep all GST returns, invoices, ledgers, and ITC records well-organised.
   • Create digital backups of key documents to streamline the audit process.
3. Reconcile Regularly:
   • Match your GST returns with financial statements monthly.
   • Reconcile ITC claims with supplier data in GSTR-2A to avoid mismatches.
4. Meet Deadlines:
   • Mark important dates for GSTR-9 and GSTR-9C filing to avoid late fees and penalties.
   • Use a calendar or digital reminder system to track compliance timelines.
5. Adopt Technology:
   • Invest in GST-compliant accounting tools to automate reconciliations and filings.
   • Choose tools that generate GST audit reports in the correct format to save time.
6. Seek Professional Help:
   • Engage a Chartered Accountant or GST Auditor for businesses exceeding the threshold limit.
   • Consult professionals for advice on handling complex cases, like reverse charge mechanism or HSN/SAC code errors.

Being proactive about GST compliance helps businesses avoid unexpected penalties, saves resources in resolving audit queries, and improves overall operational efficiency. MSMEs, in particular, benefit from adopting a structured approach, as it ensures smoother audits and optimised cash flows. By taking these action steps, your business can navigate GST audits confidently, maintain compliance, and focus on growth without disruptions. Disclaimer: This article is for informational purposes only and brought to you here after researching freely available resources. Businesses should consult a Chartered Accountant or refer to the official GST portal for detailed guidance on GST audits and compliance.

Author: Anirban Sinha

A product manager with a writer’s heart, Anirban leverages his 6 years of experience to empower MSMEs in the business and technology sectors. His time at Tata nexarc honed his skills in crafting informative content tailored to MSME needs. Whether wielding words for business or developing innovative products for both Tata Nexarc and MSMEs, his passion for clear communication and a deep understanding of their challenges shine through.