Rule 101: How a GST Audit Is Actually Conducted

Rule 101 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Section 65 gives the power. Rule 101 says what the officer actually does with it — and it contains one obligation that taxpayers routinely fail to invoke.

Rule 101(1): the period of audit shall be a financial year or part thereof or multiples thereof. 101(2): notice in FORM GST ADT-01. 101(3): the proper officer shall verify the documents on the basis of which the books of account are maintained and the returns and statements furnished, the correctness of the turnover, exemptions and deductions claimed, the rate of tax applied in respect of supply of goods or services or both, the input tax credit availed and utilised, refund claimed, and other relevant issues, and record the observations in his audit notes. 101(4): the proper officer may inform the registered person of the discrepancies noticed, if any, and the registered person may file his reply, and the officer shall finalise the findings after due consideration of the reply.

The audit period: a financial year or part of it

Rule 101(1): the period of audit to be conducted under s.65(1) shall be a financial year or part thereof or multiples thereof.

Three consequences:

• an audit cannot be for an arbitrary window such as "April 2023 to September 2024" that begins mid-year and ends mid-year without being expressible as a financial year or part of one — the notice should state a period that fits the rule;
• multiple years may be audited together, which is common;
• a part year is permitted, so a first year of registration or a period up to cancellation can be audited on its own.

The audit period should be checked against the ADT-01. A notice that names a period outside the rule is defective on its face.

What the officer verifies — the Rule 101(3) list

The rule names the items. In practice each maps to a specific reconciliation.

Each of these is a place where the department's data already differs from the return. The audit is largely a reconciliation exercise, and it is won or lost on whether the taxpayer's own reconciliations were done before the audit rather than during it. The eight reconciliations →

The audit notes

Rule 101(3) requires the officer to record the observations in his audit notes.

Audit notes are the working papers behind the ADT-02. They are the department's record of what was examined and what was found, and they matter because s.65(6) requires the ADT-02 to state reasons. Where the ADT-02 states a conclusion but no reasoning, the audit notes are the source that the reasoning should have come from.

Rule 101(4): the discrepancy stage taxpayers miss

Rule 101(4): the proper officer may inform the registered person of the discrepancies noticed, if any, as observed in the audit, and the registered person may file his reply, and the proper officer shall finalise the findings of the audit after due consideration of the reply furnished.

This is the most useful provision in the rule, and it is the one most often skipped.

Why it matters: a discrepancy resolved at this stage never becomes an ADT-02 finding, and never becomes a show cause notice. A discrepancy that goes unaddressed becomes a finding, then a demand, then an appeal — with pre-deposit, interest and penalty attached.

Why it is skipped: the word is "may". The officer is not obliged to communicate discrepancies before finalising. In practice many audits move straight to ADT-02.

What to do: ask for it, in writing, early. A letter at the start of the audit requesting that any discrepancy be communicated under Rule 101(4) before findings are finalised puts the request on record. Where discrepancies are then finalised without any communication, the failure to consider the taxpayer's explanation is a natural-justice point at the appellate stage — the stronger for having been asked for.

And where discrepancies are communicated, the reply must be substantive and documented, because Rule 101(4) requires the officer to finalise after due consideration of the reply. A reply that merely disagrees invites a finding; one that supplies the reconciliation, the invoice sample and the notification entry can close the point.

Key takeaways

• The audit period is a financial year or part thereof or multiples thereof — check it against the ADT-01.
• Rule 101(3) lists what is verified: turnover, exemptions, deductions, rate, ITC availed and utilised, refunds.
• The officer must record observations in audit notes, which are the source of the ADT-02's reasons.
• Rule 101(4) allows discrepancies to be communicated and replied to before findings are finalised.
• The provision is permissive — ask for it in writing at the start of the audit.
• A discrepancy closed at the Rule 101(4) stage never becomes a demand.

Read next

• Section 65 Audit: ADT-01, the Three Months and the Extension
• Section 66: Special Audit and the Commissioner's Nomination
• The Records an Officer Asks For First in a GST Audit
• The Eight Reconciliations That Prevent GST Notices

Disclaimer: Positions stated as on 5 September 2026, based on the CGST Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition).