A GST audit under section 65 of India’s Central Goods and Services Tax Act does not, by itself, create a final tax liability. The officer first communicates audit findings—normally in FORM GST ADT-02. If those findings indicate unpaid or short-paid tax, an erroneous refund, or wrongly availed or utilised input tax credit, the proper officer may start separate proceedings under section 73 or section 74. A demand becomes payable only after the applicable notice, opportunity to respond and adjudication process.
The post-audit process at a glance
| Stage | What the tax department does | What it means for you |
|---|---|---|
| Audit notice | Authorised officer gives at least 15 working days’ advance information before a section 65 audit. | Prepare records and identify the tax periods, registrations and issues covered. |
| Examination | Officer reviews books, returns, turnover, exemptions, tax rates, input tax credit, refunds and related matters under Rule 101. | Provide complete, reconciled records and keep a log of every document supplied. |
| Audit observations | Officer records issues in audit notes and may communicate discrepancies. | You can explain, correct or contest an observation. An observation is not yet a final demand. |
| Audit closure | Within 30 days after the audit concludes, the officer must communicate findings, rights, obligations and reasons. Rule 101 uses FORM GST ADT-02. | Read the form carefully. It may close the audit, record accepted explanations or identify matters that could trigger another proceeding. |
| Possible demand action | For specified tax, refund or input-tax-credit issues, the officer may initiate section 73 or section 74 proceedings. | A separate notice and adjudication process follows. Only a properly determined liability is enforceable as a demand. |
How a section 65 GST audit proceeds
1. You receive advance information
The Commissioner or an authorised officer may conduct the audit at your registered place of business or at the officer’s office. You must ordinarily be informed at least 15 working days before the audit begins. Check the notice for the registration number, financial years or tax periods, location, records requested and officer’s contact details. If the notice appears to cover a different registration or period from your records, raise that mismatch in writing immediately.
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2. The statutory audit clock starts on the later of two dates
For section 65, “commencement” is not simply the date printed on the notice. It is the later of the date on which the requested records or documents are made available and the date on which the audit actually starts at the place of business. The ordinary statutory period is three months from commencement. The Commissioner may grant a reasoned extension of up to six additional months.
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Keep evidence of when records were delivered, such as an acknowledgement, email trail or portal receipt. That evidence helps establish the correct audit timeline if the process extends beyond the ordinary period.
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3. The officer tests the records behind your returns
Rule 101 covers more than a simple arithmetic check of GSTR filings. The review can include:
- Books of account and documents supporting the books, returns and statements.
- Reported turnover and differences between ledgers, invoices, e-way bills, bank information and returns.
- Exemptions, deductions and the conditions attached to them.
- Tax classification and rates applied to supplies.
- Input tax credit availed and utilised, including supporting invoices and eligibility conditions.
- Refund applications and the evidence used to establish entitlement.
- Any other matter relevant to determining the correct tax.
The officer records observations in audit notes. A request for clarification or a discrepancy communicated during this stage is an opportunity to explain the accounting treatment before findings are finalised.
4. You may reply to discrepancies
The proper officer may tell you about audit discrepancies and consider your response before finalising the findings. The law does not create one universal reply period for every audit discrepancy. Use the deadline stated in the communication; if none is stated, ask for a written deadline and submit a prompt interim response rather than allowing the issue to remain unanswered.
A useful reply ties each disputed figure to a document and a legal position. Separate factual corrections (for example, an invoice counted twice) from interpretive disputes (for example, whether a supply is exempt). State the amount affected, the period, the reconciliation and the relief requested.
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5. The audit closes with findings in ADT-02
On conclusion of the audit, section 65(6) requires the proper officer, within 30 days, to inform the registered person about the findings, rights and obligations, and reasons for those findings. The statutory wording is:
“On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings.”
Rule 101 specifies FORM GST ADT-02 for communicating the audit findings. Treat ADT-02 as the formal closing communication for the audit, not as a substitute for a section 73 or section 74 demand notice.
Does an adverse audit finding automatically create a demand?
No. Section 65(7) says the proper officer may initiate action under section 73 or section 74 if the audit detects specified unpaid or short-paid tax, an erroneous refund, or input tax credit wrongly availed or utilised. “May initiate” leaves a legal step between an audit finding and an enforceable liability.
The department must use the applicable demand provision, issue a notice setting out the proposed tax and grounds, consider your representation and then determine the amount through the prescribed adjudication process. An audit discrepancy is therefore evidence for possible action, not proof that a final amount is payable. A finding also does not automatically establish fraud, wilful misstatement or suppression.
Section 73 or section 74: why the distinction matters
| Issue | Section 73 route | Section 74 route |
|---|---|---|
| Alleged basis | Tax, refund or credit issue for reasons other than fraud, wilful misstatement or suppression of facts to evade tax. | The department alleges the issue arose by reason of fraud, wilful misstatement or suppression of facts to evade tax. |
| What to examine | Whether the proposed calculation is correct and whether the records support a non-fraud explanation. | Whether the notice identifies specific conduct and evidence supporting the heightened allegation, not merely an accounting difference. |
| Why the notice matters | Tax period, statutory provision, computation and response deadline govern the case. | The allegation can affect the applicable procedure, consequences and limitation rules; it cannot be inferred solely from an adverse audit note. |
The actual notice, the tax period and the version of the law in force for that period control. Do not accept a label such as “suppression” without checking what facts the notice says were withheld and how those facts allegedly affected tax.
What to do when you receive ADT-02 or a demand notice
- Identify the document. Determine whether you have an audit discrepancy letter, ADT-02, a section 73 or 74 show-cause notice, or an adjudication order. Each has a different legal function.
- Freeze the factual record. Preserve ledgers, invoices, contracts, e-way bills, delivery proofs, bank statements, return workings, credit registers, refund files and correspondence for the exact periods mentioned. Do not overwrite spreadsheets used to prepare the original returns.
- Build an issue-by-issue reconciliation. For every proposed amount, record the department’s figure, your figure, the difference, the tax period, the relevant return and the supporting document. Explain whether the difference is a timing issue, clerical duplication, classification question, credit eligibility question or an actual unpaid amount.
- Check the legal grounds. Match each allegation to the cited section, rule, notification or rate entry. Confirm that the notice identifies the taxable supply, credit, refund or transaction and states how the amount was computed.
- Submit a structured reply. Use headings matching the notice. Attach an indexed evidence bundle, provide a concise calculation and clearly state which amounts you accept, which you dispute and why. Request a hearing where the applicable procedure allows it.
- Track every deadline. Calendar the reply date, hearing date, payment or appeal date and any date stated for additional submissions. Keep proof of filing and delivery.
- Escalate technical issues early. A chartered accountant, tax lawyer or other qualified adviser can help with classification, input-tax-credit eligibility, limitation and penalty questions. Obtain advice before making an admission that could affect a later proceeding.
From notice to order: the decision points
| Document or event | Question to answer | Practical response |
|---|---|---|
| Audit discrepancy | Can the observation be resolved with records or an explanation? | Send a reconciliation and evidence by the stated date; ask for clarification where the calculation is unclear. |
| ADT-02 | What findings were accepted, rejected or left open, and what reasons are recorded? | Retain it with your permanent tax file and monitor whether a separate demand notice follows. |
| Section 73 or 74 notice | What tax, refund or credit is proposed, for which period, and on what grounds? | File a point-by-point reply, verify the legal route and attend the hearing or submit additional evidence as permitted. |
| Adjudication order | What amount has actually been determined, and what are the payment or appeal consequences? | Check the order against your reply, obtain advice on payment or appeal, and observe the order’s stated deadlines. |
Limitation dates require period-specific checking
Do not rely on a generic internet summary that promises one three-year or five-year deadline for every GST demand. The governing section, amendments, commencement notifications, tax period and transitional rules can change the calculation. Older summaries describe historical section 73 and 74 timelines, but they are not a safe basis for advice in 2026 across all periods.
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1Repair Windows errors before they cause bigger problems2Scan for outdated or missing drivers - takes under a minute3Clear out junk files and repair common Windows errorsWhen reviewing a notice, collect the tax period, annual-return due date if relevant, date of the notice, date of the order and the statutory provisions cited. Verify the current official Act text and the notifications applicable to that period before asserting that a notice is time-barred. If limitation is central to your defence, raise it expressly in the reply rather than assuming the officer will apply it automatically.
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Could section 128A relief apply?
A narrow historical relief may matter for some taxpayers. Section 128A took effect on 1 November 2024 and provides a conditional waiver of interest or penalty, or both, for certain section 73 demands relating to financial years 2017–18, 2018–19 and 2019–20. Rule 164 sets out the procedure and conditions and also took effect on that date.
This is not a general waiver for GST audit findings or for every demand. First establish that the case is a qualifying section 73 matter for one of the specified financial years; then check the current rule, circular instructions, filing or payment conditions and applicable deadlines. Relief under section 128A does not turn a section 74 allegation into a section 73 case.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Records that make an audit response stronger
Organise the evidence by tax period and issue rather than sending an unindexed data dump. A practical file normally contains:
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- Copies of tax invoices, debit and credit notes, contracts and proof of supply.
- GSTR-1, GSTR-3B, annual returns and reconciliation statements with working papers.
- Input-tax-credit register matched to supplier invoices and payment records.
- E-way bills, delivery records and export or refund documents where relevant.
- Rate, exemption and deduction analysis for disputed supplies.
- Bank statements or other payment evidence where the issue concerns consideration or credit conditions.
- A chronology of notices, meetings, document submissions and replies.
Where software is used to organise books and returns, preserve the underlying invoices and ledgers as well as exported reports. A system-generated reconciliation helps present the numbers, but it does not replace source documents or prove that a tax position is legally correct.
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Examples: how an audit finding can develop into a demand
Turnover mismatch
An officer finds that the sales register exceeds reported taxable turnover. You show that the difference consists of supplies reported in another tax period and cancelled invoices, supported by credit notes and return workings. The finding may be revised or dropped. If the officer instead concludes that taxable supplies were omitted, a section 73 notice could propose the tax and applicable consequences, followed by adjudication if you contest it.
Input tax credit questioned
The audit identifies credit claimed against invoices that cannot be matched to your records. You produce the invoices, goods-receipt evidence, payment trail and reconciliation, or concede the unsupported portion and reverse it. The final outcome depends on the evidence and the legal requirements for the relevant period; the initial observation is not itself the determined amount.
Refund treated as erroneous
An officer concludes that a refund exceeded the amount justified by the underlying export, inverted-duty or other calculation. You can challenge the computation with shipping, invoice and ledger evidence. If the department maintains that an erroneous refund occurred, it may use the applicable demand route, which must still identify the amount, grounds and opportunity to respond.
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Questions to ask before signing or paying
- Is this document an audit finding, a demand notice or an order?
- Which registration, financial year and tax period does it cover?
- Does the calculation separate tax from interest and penalty?
- Is the proposed route section 73 or section 74, and what facts support that choice?
- What exact reply, hearing, payment or appeal deadline is stated?
- Have all documents used in the department’s calculation been supplied to you?
- Could a period-specific amendment, transitional rule or section 128A condition affect the case?
What you should remember
A section 65 audit ends with communicated findings, normally in ADT-02, within 30 days of conclusion. Those findings can prompt section 73 or section 74 proceedings, but they do not automatically establish a final demand. Your outcome turns on the tax period, the nature of the alleged discrepancy, the factual and legal grounds in the notice, the response you submit and the adjudication that follows. Treat each document as a separate stage, preserve a complete evidence trail and verify deadlines under the law applicable to the specific period.
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