Section 66 of CGST Act Explained: In-Depth Guide to Special Audit, Procedures and Legal Implications

Section 66 of the CGST Act, 2017 empowers GST authorities to initiate a Special Audit when discrepancies arise during scrutiny, inquiry, or investigation, particularly related to undervaluation or abnormal input tax credit claims.

Initiated by an Assistant Commissioner with the Commissioner’s approval, the audit is conducted by a nominated CA or CMA and must be completed within 90 days (extendable). The provision ensures due process, including the taxpayer’s right to be heard, and may lead to recovery proceedings under Sections 73, 74, or the newly inserted Section 74A. It serves as a critical compliance mechanism to protect government revenue and ensure transparency.

Delving Deeper into Section 66 of the CGST Act: A Comprehensive Analysis of Special Audit

Section 66 of the Central Goods and Services Tax (CGST) Act, 2017, complemented by Rule 102 of the CGST Rules, lays down a critical framework for conducting Special Audits. This provision, in force since July 1, 2017, via Notification No. 9/2017-Central Tax, acts as a powerful mechanism in the GST compliance structure.

Unlike routine audits, which are more procedural, a special audit under this section is targeted and in-depth, undertaken only when the tax officer suspects substantial discrepancies or irregularities. At AUBSP, our goal is to make complex provisions like this accessible, helping professionals, businesses, and students navigate GST with clarity and confidence.

The Genesis of a Special Audit under Section 66(1)

Understanding why and when a special audit is ordered is essential, especially because it’s not a randomly deployed tool. A special audit is initiated only when a senior GST officer, specifically one not below the rank of Assistant Commissioner, forms an informed opinion that such an audit is necessary. This ensures that only officers with sufficient experience and authority are empowered to initiate such a rigorous process.

The provision allows such an audit to be ordered at any point during scrutiny of returns, inquiries, investigations, or any other GST-related proceedings. This means that whenever the tax department is assessing records—whether casually during routine compliance checks or more seriously during investigations—it can call for a special audit if deeper inconsistencies arise. These triggers may come up during return scrutiny under Section 61, investigations under Sections 70 or 71, or any other formal review processes.

What prompts this opinion is the officer’s belief, based on evidence or logical inference, that the nature and complexity of the case, coupled with potential risks to revenue, warrant such a move. If there’s reason to believe that the taxpayer has not declared the correct value of supply or has claimed an excessive amount of input tax credit (ITC), then a special audit may be the next step. Common examples include under-valuation in related party transactions, mismatches in ITC claims compared to industry norms, or large deviations from past filings.

The Audit Authorization Process and FORM GST ADT-03

One of the key safeguards within Section 66 is the layered authorization requirement. Even if the Assistant Commissioner believes a special audit is necessary, the direction for the audit cannot be issued without the express prior approval of the Commissioner. This dual-approval process reduces the risk of misuse and ensures that the audit is a considered decision, not one taken in haste or due to minor irregularities.

Once the Commissioner approves the proposal, the registered person is informed through FORM GST ADT-03. This form is a formal notice, clearly specifying which financial year(s) will be audited, the name of the nominated auditor (either a Chartered Accountant or a Cost Accountant), and other pertinent details. By maintaining transparency through such formal communication, the provision ensures that the taxpayer is not kept in the dark about the audit or its purpose.

Conducting the Special Audit: Provisions under Section 66(2) and Rule 102

After the audit direction is issued, the procedure becomes technical and time-bound. The audit must be conducted by a qualified Chartered Accountant or Cost Accountant who is nominated by the Commissioner. This adds an element of professional independence to the process, as the appointed auditor is not from within the tax department but an external professional. Such a setup lends credibility to the findings and allows for expert scrutiny of the financials.

The nominated auditor is required to complete the audit and submit a certified report within 90 days. This report must be comprehensive and include all observations, discrepancies, and recommendations, usually submitted in FORM GST ADT-04. The form allows the auditor to detail tax liabilities such as unpaid Integrated Tax, Central Tax, State Tax, or any applicable Cess, along with interest or penalties. Moreover, if the audit involves voluminous records, the auditor may upload a separate PDF containing detailed annexures and justifications.

Recognizing the complexity of some audits, Section 66(2) also allows the Assistant Commissioner to extend the 90-day period by another 90 days. This extension can be granted upon a formal request from either the taxpayer or the auditor or based on other material and sufficient reasons, such as the need for additional documentation or cooperation from third parties.

Legal Safeguards and Due Process: A Closer Look at Sections 66(3) and 66(4)

An essential feature of Section 66 is that it ensures that the taxpayer’s legal rights are preserved, even as the tax department exercises its power to dig deeper. According to Section 66(3), the power to order a special audit overrides any other audits that may have already been conducted under GST laws or any other legislation like the Companies Act or Income Tax Act. In other words, even if a taxpayer’s books have already been audited by statutory or internal auditors, the GST department can still call for a special audit if it has valid reasons to do so.

However, the law also mandates that any findings from the special audit cannot be used directly against the taxpayer without giving them a fair opportunity to be heard, as stated in Section 66(4). This is a cornerstone of natural justice. Before any action is taken based on the audit report—such as raising a tax demand—the taxpayer must be given a chance to review the findings and offer clarifications, additional documents, or counter-arguments. This provision ensures that the audit doesn’t become a one-sided process and that taxpayers can defend themselves against potential misinterpretations.

Who Bears the Cost and What Happens After? Sections 66(5) and 66(6) Explained

An often-overlooked but important aspect of Section 66 is its clarity on the financial burden of a special audit. Unlike other services where the party receiving the service bears the cost, the CGST Act explicitly states in Section 66(5) that the taxpayer is not liable to pay for the audit. The remuneration for the nominated auditor is determined and paid by the Commissioner, and this decision is considered final. This ensures that the audit is not seen as punitive or financially burdensome for taxpayers, especially when initiated at the department’s discretion.

Following the submission of the audit report, if it reveals underpayment of tax, wrongful refunds, or ineligible ITC claims, the department can take action. Under Section 66(6), such findings can lead to proceedings under Section 73 (for non-fraudulent cases) or Section 74 (for cases involving fraud or suppression of facts). Section 73 covers scenarios where discrepancies are found without any fraudulent intention, and typically involve lower penalties and more lenient timelines. In contrast, Section 74 deals with deliberate evasion and attracts higher penalties and stricter procedures.

The New Dimension: Impact of Section 74A via Finance (No. 2) Act, 2024

A significant legislative development came through the Finance (No. 2) Act, 2024, which added a new clause—Section 74A—into the CGST compliance framework. Effective from November 1, 2024, and notified via Notification No. 17/2024-Central Tax, this section is now included alongside Sections 73 and 74 within Section 66(6). While its precise contours are still emerging, the insertion of 74A is expected to create a new category or procedural pathway for initiating demand and recovery, especially tailored to findings from special audits.

It may offer a more balanced or simplified mechanism to address issues that fall between pure procedural lapses and outright fraud. As this provision begins to apply to financial years from 2024–25 onward, both taxpayers and professionals will need to keep a close watch on its interpretation and implementation.

Judicial Interpretation and Practical Observations

Special audits, due to their intrusive nature, have often been subject to judicial scrutiny. Courts across India have emphasized the importance of a reasoned opinion before ordering a special audit. The Assistant Commissioner must base their opinion on credible data or logical inference—not on suspicion alone. Failure to do so can lead to the audit order being quashed.

Timely compliance with the prescribed 90-day (and extended) timelines for audit reports is also non-negotiable. Courts have ruled that excessive delays without proper justification can nullify the audit findings. Furthermore, the taxpayer must receive a genuine opportunity to be heard, not merely a formal notice. Authorities must allow the taxpayer enough time and detail to respond meaningfully.

While tax officers may use industry benchmarks as a tool to identify anomalies, the courts have clarified that such comparisons cannot be the sole basis for directing a special audit. There must be concrete evidence pointing to irregularities specific to the taxpayer in question.

Conclusion: Why Section 66 Remains Central to GST Enforcement

Section 66 of the CGST Act is more than just a procedural provision; it is a robust compliance and enforcement tool. When used correctly, it helps the tax administration ensure fair taxation, detect non-compliance, and protect revenue. The procedural safeguards—dual approvals, professional audits, and the opportunity to be heard—offer a balanced framework that respects both administrative needs and taxpayer rights.

As GST laws evolve, and with new dimensions like Section 74A entering the scene, taxpayers must stay vigilant. Special audits will increasingly play a role in shaping litigation, risk exposure, and tax strategies. Staying compliant, maintaining clear documentation, and understanding these provisions will be critical to avoiding unnecessary disputes.

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FAQs on Section 66 of the CGST Act

What is Section 66 of the CGST Act?
Section 66 of the CGST Act, 2017 deals with Special Audits, allowing tax authorities to conduct a deeper examination of a taxpayer’s records if discrepancies are found during scrutiny, inquiry, investigation, or any other proceedings.

Who can initiate a Special Audit under Section 66?
Only a GST officer not below the rank of Assistant Commissioner can initiate a Special Audit, and it must be approved by the Commissioner before being formally directed.

When can a Special Audit be ordered?
A Special Audit can be ordered at any stage during the scrutiny of returns, inquiries, investigations, or any proceedings under the CGST Act where complexity or risk to revenue is suspected.

What triggers a Special Audit?
A Special Audit is triggered when the officer believes that the value of supplies is not correctly declared or input tax credit claimed is not within normal or acceptable limits.

Is the taxpayer notified before a Special Audit?
Yes, the taxpayer is formally informed through FORM GST ADT-03, which includes the reasons for the audit, the scope, and the name of the nominated auditor.

Who conducts the Special Audit?
The audit is conducted by a Chartered Accountant or Cost Accountant nominated by the Commissioner to ensure independence and professional scrutiny.

What is the time limit to complete the Special Audit?
The audit must be completed within 90 days from the date of appointment, with a possible extension of another 90 days if justified.

What is FORM GST ADT-03?
It is the official notice issued to the registered person indicating that a Special Audit under Section 66 has been directed.

What is FORM GST ADT-04?
FORM GST ADT-04 is the audit report submitted by the nominated auditor to the Assistant Commissioner, detailing the findings and tax implications.

Can the audit period be extended beyond 90 days?
Yes, the Assistant Commissioner may extend the period by another 90 days based on a request by the taxpayer, the auditor, or for other valid reasons.

Does Section 66 override other audit provisions?
Yes, Section 66(3) allows a Special Audit to be conducted even if the taxpayer’s accounts have already been audited under any other law, including the Companies Act or Income Tax Act.

Does the taxpayer have the right to be heard?
Absolutely. Section 66(4) guarantees the taxpayer an opportunity of being heard before any findings from the audit are used against them in proceedings.

Who bears the cost of the Special Audit?
The cost of the audit, including the auditor’s remuneration, is borne by the government and is determined by the Commissioner. The taxpayer does not pay for it.

What happens after the Special Audit report is submitted?
If discrepancies are found, the department may initiate recovery proceedings under Section 73 (non-fraud) or Section 74 (fraud or suppression of facts), based on the audit findings.

What is Section 74A and how is it related?
Inserted via Finance (No. 2) Act, 2024, Section 74A provides a new category or mechanism for recovery based on audit findings. It becomes effective from November 1, 2024, and will work alongside Sections 73 and 74.

Can industry benchmarks alone justify a Special Audit?
No, courts have held that industry benchmarks are not sufficient by themselves to justify a Special Audit. The officer must have specific and concrete reasons related to the taxpayer’s records.

What are the legal safeguards built into Section 66?
Section 66 requires layered approval, independent auditing, proper documentation, and ensures the taxpayer’s right to respond, providing a balanced approach between enforcement and fairness.

Can a Special Audit be challenged in court?
Yes, if the procedure is not followed properly—such as lack of a reasoned opinion or violation of timelines—the taxpayer can challenge the audit through appropriate legal channels.

Is there a limit on how many times a Special Audit can be conducted?
While the Act does not specify a numerical limit, repeated audits without strong justification may be considered harassment and can be challenged legally.

Is a Special Audit different from departmental or statutory audit?
Yes, a Special Audit under Section 66 is more focused, triggered by specific doubts or risks, and conducted by an independent professional, unlike regular departmental or statutory audits.

Can a taxpayer request a copy of the Special Audit report?
Yes, the taxpayer is entitled to a copy of the audit report and should receive it along with the opportunity to respond to any findings mentioned therein.

What kind of discrepancies usually lead to Special Audits?
Common issues include undervaluation of supplies, excessive or ineligible ITC claims, inconsistencies between GSTR-1 and GSTR-3B, or mismatch with books of accounts.

Does the Special Audit lead to automatic penalties?
No, penalties are not automatic. Proceedings under Sections 73 or 74 are initiated separately and require the department to issue a show-cause notice and follow due process.

Is consent of the taxpayer needed for a Special Audit?
No, the taxpayer’s consent is not required for initiation. However, they must be formally informed and allowed to respond to findings.

What role does the nominated auditor play?
The nominated auditor conducts a comprehensive analysis of the taxpayer’s financial and GST records and prepares a report identifying discrepancies and tax implications.

Are Special Audit findings final?
No, the findings form the basis for further proceedings, but the taxpayer has a right to contest them through hearings or appeals under GST law.