No liability to pay GST on the issue of Audit Report

[Kamal Aggarwal]

Does an audit report issued by the GST authorities creates any tax demand?

In FY 23, the CBIC conducted about 30,000 GST audits. The Central Board of Indirect Taxes and Customs (CBIC) chairman, Shri Vivek Johri, has said that the GST administration has shortlisted 50,000 fresh cases that will be taken up for GST auditing in the current financial year (FY24). Given the fact that audits are being conducted on a very large scale by the GST authorities, it is extremely important to understand whether adverse observations create any demand on the taxpayers.

Audits are conducted under section 65 of the CGST Act. On conclusion of the audit, the proper officer within thirty days, inform the registered person, about the findings, his rights and obligations and the reasons for such findings in Form GST ADT-02. This form is titled as Audit Report under section 65(6). It is pertinent to note that this form very clearly mentions the following statement:

“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 provides that where such audit results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, the proper officer may initiate action under section 73 or section 74.

The legislative scheme is quite clear. Notwithstanding the statement contained in the Form ADT-02, the demand identified by the audit are not statutorily enforceable demands as yet. In these proceedings, a demand can only be created by following the procedures laid down in section 73 or section 74 i.e., by issuance of a show cause notice and conclusion of the adjudication proceedings.

In the matter 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 observed as follows:

“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 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.”

It was held by the Hon'ble High Court of Orissa that the petitioner may raise his 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 court very clearly held that it is not an order passed by the authority concerned.

An audit report issued in Form ADT 02 under Section 65(6) is merely a summary of observations and findings of the proper officer. It is neither a notice nor an assessment order against which a reply or an appeal needs to be filed. On issue of the Audit report, the proper officer may or may not issue a notice under Section 73 or 74. And if a notice is issued, the taxpayer would be entitled to furnish a reply along with explanations and documents and be granted an opportunity of personal hearing before passing of the order.

Impact & Relevance of Audit Report issued to the taxpayer needs to be understood in the correct proposition and treated accordingly. In case of any liability intimated to the taxpayer in the Audit report, and the taxpayer admits it to be a genuine liability, the same may be deposited voluntarily under Section 73(5) and communicated accordingly to the proper officer. In such a case, the proper officer may not be inclined to issue a notice at all. In any event, furnishing of any reply or providing any explanation in response to the Audit report is a futile exercise.