Scrutiny of GST Returns (Section 61): A Practical Guide for Taxpayers
Scrutiny of Goods and Services Tax (GST) returns is one of the most common "soft checks" used by the department to ensure correctness of self-assessed tax. Unlike audit or investigation, scrutiny is essentially a desk-based verification of your return data to identify mismatches, inconsistencies, or potential short payment of tax. If handled promptly and properly, scrutiny often ends at the clarification stage itself-saving a taxpayer from prolonged litigation and avoidable interest and penalties.
1) What is "scrutiny" under GST?
Under GST, scrutiny refers to examination of a registered person’s return and related particulars by the proper officer to verify its correctness. The legal foundation is Section 61 of the CGST Act, 2017 read with Rule 99 of the CGST Rules, 2017. The objective is straightforward:
detect apparent errors or anomalies;
seek explanations where required; and
ensure that tax and ITC (input tax credit) are correctly reported and paid.
Scrutiny is not a full-scale audit and does not, by itself, create a tax demand. It is more like a notice asking: "Your return shows X, but the system/other data indicates Y. Please explain."
2) Why do taxpayers receive scrutiny notices?
In practice, scrutiny is triggered by risk parameters and data analytics. Common triggers include:
(a) ITC mismatches and unusual ITC patterns
Large ITC claims compared to outward supplies.
ITC claimed in ineligible categories (blocked credits under Section 17(5)).
ITC pattern not aligned with industry norms.
(b) GSTR-3B vs GSTR-1 inconsistencies
Higher outward tax liability in GSTR-1 compared to GSTR-3B.
Amendments in GSTR-1 not reflected correctly in 3B.
B2C/B2B classification anomalies.
(c) E-way bill vs return data mismatch
E-way bills showing significant movement of goods but low taxable turnover in returns.
(d) GSTR-2B vs ITC availed
ITC taken in GSTR-3B not reflecting in GSTR-2B (or taken beyond permissible limits).
(e) Refund claims, exports, and zero-rated supplies
Zero-rated turnover and refund claims disproportionate to taxes paid or to supporting documents.
Inconsistencies in LUT/bond related reporting.
(f) Composition scheme red flags
Turnover crossing threshold.
Wrong tax rate or misclassification issues.
3) Legal process: Section 61 + Rule 99 (in simple steps)
The scrutiny mechanism typically runs in a clean sequence:
Step 1: Officer examines the returns and related particulars
The officer compares your filed returns with other information available on the system (GSTR-1, GSTR-3B, 2B, e-way bills, TDS/TCS, ICEGATE data for imports, etc.).
Step 2: Notice in Form GST ASMT-10
If discrepancies are found, the officer issues ASMT-10, describing the discrepancies and asking for explanation within a prescribed time (commonly 30 days, unless extended).
Step 3: Taxpayer’s reply in Form GST ASMT-11
You reply via ASMT-11, giving explanations and/or accepting the discrepancy and paying tax, interest, etc. You may also attach supporting documents.
Step 4: Outcome
If the explanation is satisfactory → officer issues ASMT-12 (dropping the scrutiny).
If not satisfactory → officer may initiate appropriate proceedings (demand and recovery) under Section 73 or 74 (as applicable), or other relevant provisions.
So, scrutiny is like an early warning. If you resolve it well, it ends well. If you ignore it or reply poorly, it can evolve into demand proceedings.
4) Scrutiny vs Audit vs Inspection: Don’t mix them up
Taxpayers often panic because "department is checking returns." But scrutiny is different:
Scrutiny (Section 61): limited examination of return data and discrepancies; begins with ASMT-10.
Audit (Section 65/66): detailed examination of records, usually for a period; can be departmental audit or special audit; more intensive.
Inspection/Search/Seizure (Section 67): enforcement action based on reasons to believe; high-stakes, intrusive.
Scrutiny is generally the least invasive among these, and many issues end at the clarification stage.
5) Common discrepancy themes (and how to respond)
Here are frequent issues seen in ASMT-10 notices, with a practical response approach:
(A) GSTR-1 vs GSTR-3B mismatch (outward tax)
Why it happens: timing differences, amendments, credit notes, wrong reporting, or genuine omission.
How to reply:
Provide a reconciliation statement month-wise.
Explain whether difference is due to amendments/credit notes/advances.
If tax short-paid, pay with interest and show challan.
(B) ITC claimed in 3B not matching 2B
Why it happens: vendor filing delays, wrong GSTIN, imports, ISD credits, RCM credits, transitional credits, or ineligible ITC.
How to reply:
Provide supplier-wise reconciliation between books, 2B, and 3B.
Explain timing differences (e.g., vendor filed later; reflected in subsequent 2B).
If ITC is ineligible or permanently not reflecting, consider reversal with interest (as applicable) and document the corrective step.
(C) Excess ITC or blocked ITC flags
Why it happens: misclassification, common credit errors, wrong eligibility under Section 16/17, or improper apportionment.
How to reply:
Provide legal basis for eligibility with invoices and usage justification.
If error is accepted, reverse with interest; show DRC-03 payment, if made.
(D) E-way bill turnover higher than declared turnover
Why it happens: stock transfers, job work, returns, bill-to ship-to, exempt supplies, or reporting under different period.
How to reply:
Provide a mapping: e-way bill movements vs invoices vs return period.
Show that certain e-way bills are for non-taxable/exempt movements or represent cancelled/returned goods.
Attach sample documents as proof.
(E) RCM liability not discharged
Why it happens: unregistered procurement, GTA, legal services, import of services, director’s remuneration issues, etc.
How to reply:
Identify transactions, prove whether RCM applies or not.
If applicable, show that tax was paid and ITC taken in same/next period.
If not paid, pay via DRC-03 and document it.
6) Best practices: How to "win" a scrutiny reply
A good scrutiny reply is not emotional; it is structured, reconciled, and backed by evidence. Follow this approach:
1) Acknowledge and classify each discrepancy
Create a table: discrepancy number → department’s observation → your explanation → documentary support → conclusion (accepted/contested).
2) Attach reconciliations
Most scrutiny disputes are solved through reconciliations:
Books vs returns
e-way bill vs outward supplies
3) Pay where clearly payable (but only after checking)
If there is an obvious short payment, it is often wiser to pay tax + interest promptly and close scrutiny. Use DRC-03 (voluntary payment) where appropriate and mention it in reply.
4) Don’t over-submit irrelevant documents Give precise annexures:
month-wise reconciliation statement
ledger extracts
sample invoices and credit notes
e-way bill samples (only where needed)
legal note for contentious issues (short and sharp)
5) Keep the tone professional
Avoid accusations; focus on facts and law. Officers are more receptive to clean, well-organized replies.
7) What happens if you ignore ASMT-10?
Ignoring scrutiny notice is risky. If no reply is filed (or reply is incomplete), the officer can proceed to demand proceedings under Section 73/74 depending on allegations. This could lead to:
tax demand with interest;
penalty exposure; and
prolonged litigation.
Even when you disagree, respond. The aim is to prevent escalation or at least ensure your position is on record.
8) Can scrutiny cover old periods?
Yes, scrutiny may be conducted for prior tax periods within the overall limitation framework relevant for subsequent demand proceedings. In other words, scrutiny itself may come later, but if it converts into Section 73/74 proceedings, those proceedings must still comply with limitation and procedure.
9) A short "Scrutiny Readiness Checklist" for businesses
To reduce scrutiny risk and to respond confidently if it comes, maintain these habits:
Vendor compliance tracking (follow-up for pending filings).
RCM register and periodic checks.
E-way bill and invoice mapping for high-movement businesses.
Documentation discipline: invoices, credit notes, contracts, payment proofs.
Conclusion
Scrutiny of GST returns is a compliance nudge, not necessarily a sign of wrongdoing. The department uses it to detect mismatches early and encourage voluntary correction. For taxpayers, the key is to treat ASMT-10 seriously, respond with reconciliations and documentary support, and pay where genuinely due. A well-managed scrutiny reply can close the matter swiftly and protect you from avoidable demand notices, interest, and penalties-keeping your GST compliance smooth and litigation-free.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.