No Liability for Paying GST on Issuance of an Audit Report

Does a report on an audit that the GST authorities provide result in a tax demand?

Nearly 30,000 GST audits would have been conducted by the CBIC in FY23. The GST administration would have chosen 50,000 new cases for GST auditing in the Financial year 2024, Shri Vivek Johri, Central Board of Indirect Taxes and Customs (CBIC) chairman mentioned. Given that the GST authorities execute audits on a massive scale, it is crucial to comprehend whether unfavorable observations place any demands on the taxpayers.

According to Section 65 of the CGST Act, audits are performed. After the audit is complete, the competent officer must submit Form GST ADT-02 to the registered person, informing him or her of the findings, his or her rights and duties, and the reasons behind them. Section 65(6) of this form is labeled “Audit Report.” It is important to notice that the following sentence is stated quite explicitly in this form:

“You are directed to discharge your statutory liabilities in this regard as per the provisions of the Act and the rules made thereunder, failing which proceedings as deemed fit may be initiated against you under the provisions of the Act.”

Sub-section(7) of section 65 furnishes in which these audit consequences in fetching the tax not filed or short paid or incorrectly refunded or ITC claim or used inappropriately then the proper officer might take action under section 73 or section 74.

The legislative scheme is sheer apparent. In spite of the announcement made through Form ADT-02, the claim recognized by the audit is not constitutionally legitimate claims as of this stage. As per the proceedings, the demand can only be raised by adhering to the methods mentioned in Section 73 or Section 74 i.e., by issuing a show cause notice and conclusion of the adjudication proceedings.

In the case of Shalimar Chemical Works (P) Ltd. Versus commissioner of commercial taxes and goods and service tax, Cuttack and another – 2023 (8) TMI 776 – Orissa high court, it was acknowledged that-

“6. Having heard learned counsel for the parties and after going through the record, it appears that the petitioner has challenged the audit report under Annexure-4 contending that certain observations have been made in the audit report to which the petitioner is not liable to pay the amount. On the basis of such audit report, the notice under Section 65 (6) of the Act (Annexure-5) has been issued, where the petitioner has been directed to discharge its statutory liabilities as per the provisions of the Act and the Rules made thereunder, failing which proceedings as deemed fit may be initiated against it under the provisions of the Act. The petitioner has not come against any order passed by the authority concerned. In any case, if the petitioner shall have any grievance with regard to the audit report and the subsequent order in connection with the notice under Annexure-5, then he may raise the objection before the assessing authority. The petitioner shall get a chance to have its say in the assessment proceeding. Thus, this writ petition at this stage is premature one, for which this Court is not inclined to entertain the same.”

The Hon’ble High Court of Orissa ruled that the petitioner can raise his concerns before the assessing authority. The petitioner should be provided with an opportunity to be heard in the assessment proceeding. Therefore, at this stage, the writ petition is premature, and on the grounds of that the Court will not entertain this under any circumstance. The Court had stated clearly that it is not a directive given by the relevant authority.

An audit report issued in Form ADT 02 under Section 65(6) is just a summary version of the observations and findings carried out by the proper officer. It doesn’t serve as a notice or as an assessment order that would require a response or an appeal needs to be filed. Upon issuing the Audit report, the proper officer may or may not issue a notice under Section 73 or 74. If a notice is issued, the taxpayer would be subjected to submit a response along with an explanation and essential documents, and they will be granted an opportunity for a personal hearing before an order is passed.

Understanding the impact and relevance of the Audit Report given to the taxpayer is crucial, and it should be treated accordingly. If the Audit report points out liability to the taxpayer and the taxpayer considers it as legitimate, it can be voluntarily deposited with the amount under Section 73(5) and duly inform the authorized officer. In such instances, the proper officer may not be bound to issue a notice. In any case, submitting a response or explanations in response to the Audit report would not be a fruitful effort.