CAG Flags Rs 401 Crore GST Lapses in Construction, Rs 2,733 Crore Mismatches

The Comptroller and Auditor General of India (CAG) has found 1,334 compliance deficiencies involving Rs 401.42 crore in the GST treatment of works contracts and construction services. The findings are in CAG Report No. 20 of 2026, the compliance audit of the Union Government, Department of Revenue (Indirect Taxes, Goods and Services Tax) for the period ended March 2024. The report was sent to the government on 31 July 2026 and tabled in Parliament on 12 August 2026. The revenue department has accepted a large part of the findings.

Separately, the audit could not verify mismatches of Rs 2,732.56 crore (about Rs 2,733 crore) because taxpayer records were not produced. That figure is not a confirmed tax loss and should not be added to the Rs 401 crore of identified deficiencies.

What the audit covered

According to the full report, the audit examined GST returns for 2020-21 and 2021-22 and reviewed the working of departmental Ranges for 2020-21 to 2023-24. The sample covered 850 taxpayers and 71 Ranges:

• 715 taxpayers from 69 of the 104 Commissionerates;
• 20 taxpayers from 12 Commissionerates engaged in metro rail projects;
• 115 taxpayers from Audit Commissionerates; and
• 71 of 528 Ranges, for the department's own oversight functions.

Where the Rs 401 crore comes from

The 123 revenue cases fall into four groups: incorrect use of concessional GST rates on works contracts for roads, bridges, railways and earthwork; short payment of tax under the reverse charge mechanism; irregular availment of input tax credit; and income that was unaccounted for and not disclosed to the GST authorities.

The Rs 2,733 crore that could not be verified

In 431 cases involving 392 taxpayers, the audit identified mismatches of Rs 2,732.56 crore but the basic records needed to test them were not produced. Until those records are examined, the amount is an open difference, not a demand. The finding points as much to the verification process as to the taxpayers concerned.

Department's response

The Department accepted audit observations in 903 cases with a money value of Rs 268.36 crore and reported recovery of Rs 15.88 crore at the instance of audit. The report gives the number of recovery cases as 399 in one place and 339 in another.

Gaps in the department's own checks

CAG found deficiencies in the oversight functions of 57 of the 71 Ranges reviewed. Four Ranges did not carry out the required scrutiny of returns, 11 Ranges had assessment gaps of Rs 3.18 crore, 73 cases in 12 Ranges showed processing delays, and 76 cases in 10 Ranges showed inadequate follow-up of flagged cases with an impact of Rs 12.81 lakh.

The report also records follow-up on earlier IT audit findings on the GST Network. Of 56 outstanding issues, GSTN had rectified 38, one was partly rectified and rectification was in progress in three.

Recommendations

• A scrutiny mechanism for concessional rates claimed by sub-contractors on road, bridge and railway works, and for earthwork claims by service providers.
• Targeted review of reverse charge compliance in works contracts.
• Effective coordination between CBDT and CBIC so that information on unaccounted income held by the Income Tax authorities is used to determine the matching GST liability.

What construction businesses should check

Contractors and their advisers should test every concessional rate claim against the nature of the work and the recipient, reconcile outward supplies, ITC and RCM payments with GSTR-2A and GSTR-9C, and make sure all service codes and additional places of business are declared in the registration. Keeping these records ready matters because, as the report shows, an unexplained mismatch stays open until the records are produced.

Updated on 28 September 2026: added CAG Report No. 20 of 2026 as the source, with the audit sample, the breakdown of the Rs 401.42 crore, the 431 unverified cases, the department's acceptance and recoveries, the oversight gaps and the recommendations.