GST scrutiny notices and departmental audits have increased sharply since 2023 as the GST Network's AI-driven analytics flag ITC mismatches, turnover discrepancies, and return anomalies. Here is what triggers scrutiny, how to respond, and how to pre-empt demands.
What is GST audit scrutiny?
GST law provides for several forms of scrutiny and examination of taxpayers:
- Scrutiny under Section 61 — the GST officer scrutinises returns and issues a notice (ASMT-10) when discrepancies are found. The taxpayer must respond within 30 days.
- Departmental Audit under Section 65 — a full audit of accounts and records by a GST officer at the business premises.
- Special Audit under Section 66 — where the complexity of the case requires, the officer can direct the taxpayer to get accounts audited by a CA or CMA.
- Inspection & Search under Sections 67—68 — for cases involving suspected fraud or non-compliance.
What triggers ASMT-10 notices?
The GSTN's analytics engine compares taxpayer data across multiple returns and databases. Common triggers include:
- GSTR-1 vs GSTR-3B mismatch — outward supply declared in GSTR-1 does not match the GST paid in GSTR-3B
- ITC mismatch (GSTR-2A/2B vs GSTR-3B) — ITC claimed in GSTR-3B exceeds what is reflected in GSTR-2B from suppliers
- E-way bill to return mismatch — e-way bills generated do not correspond to GST turnover declared
- Turnover mismatch across authorities — GST turnover differs from income tax return, or MCA annual return, turnover
- ITC reversal failure — ITC not reversed on exempt supplies, non-business use, or goods written off
The risk is not just the tax demand — it is interest at 18% per annum and penalty of 10—100% of the tax short-paid.
How to respond to an ASMT-10
The taxpayer must respond within 30 days of the ASMT-10 notice (extendable). The response must be filed online via ASMT-11 and must:
- Accept the discrepancy and make payment — or
- Explain the discrepancy with evidence
Where the explanation is not accepted, the officer issues ASMT-12 (order accepting the explanation) or proceeds to assess the tax under Section 62 (ASMT-13) and may issue a show-cause notice under Section 73 or 74.
Responding to a Section 65 Departmental Audit
A departmental audit can cover up to 5 financial years and any GSTIN location. Practical preparation steps:
- Reconcile all GSTR-1, GSTR-3B, and GSTR-9 data before the audit commences
- Prepare a master reconciliation of ITC — purchase register vs GSTR-2B vs GSTR-3B vs books
- Identify and voluntarily reverse any excess ITC before the audit findings are issued
- Ensure physical records (purchase invoices, e-way bills, contracts) are in order and accessible
- Have a designated senior accounts person or CFO available for the audit team
Common ITC reversal demands
The most common demands arising from GST audit relate to:
- Rule 42 — ITC on inputs used partly for exempt supplies not reversed proportionately
- Rule 37 — ITC claimed where payment to supplier was not made within 180 days
- Section 17(5) — Blocked credits claimed (e.g., ITC on motor vehicles, food, club memberships)
- GSTR-2B mismatches — suppliers filed late or amended their GSTR-1, reducing the buyer's ITC entitlement
Pre-emptive steps to reduce scrutiny risk
The most effective approach is preventing notices, not responding to them. DeccanBridge recommends:
- Monthly ITC reconciliation between GSTR-2B and books — do not accumulate unresolved differences
- Quarterly GSTR-9 pre-reconciliation — do not leave annual return discrepancies as a year-end surprise
- Vendor communication programme — follow up with suppliers who fail to file their GSTR-1 on time
- Regular internal GST audit — annual or half-yearly review of GST compliance by an independent CA
DeccanBridge guidance
Our GST compliance and tax advisory team assists clients from our two Telangana centres for clients across India with ASMT-10 response drafting, departmental audit coordination, and ITC reconciliation. For urgent GST notices, same-day preliminary advisory is available from our Hyderabad HQ.
Contact: connect@deccanbridge.com or +91 94922 01497.