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gst defaulter
GST defaulter can be a major headache for businesses whose cash flow gets affected due to the irregularities of filing GSTR-1 by these GST defaulting Suppliers.

When multiple Suppliers delay their GST return filings (mainly GSTR-1), your large amount of cash flow can get affected and in turn, your business may incur losses.

Recently anew broke out that the losses due to defaulting suppliers could be as much as 7% of the working capital of large companies having sales of over ₹500 Cr. This figure could be much worse for mid-level and small-scale companies.

As a solution to this trending problem, we have tried to formulate a step-by-step guide that will help you to identify your GST defaulting Suppliers.

Who should be called a Defaulting Supplier or GST defaulter?

who are gst defaulting suppliers
The answer lies in the name itself; the taxpayers who fail to file GST returns on time or do not file at all can be called the ‘Defaulting Suppliers’ or 'GST defaulter'.

Such Suppliers can be a problem to your business chain and can cause blocking of your cash flow as well.

We have listed down some common types of GST Defaulter:

  • Not filing of GST Return (GSTR-1 in this case)
  • Delayed filing of GSTR-1
  • Incorrect outward supplies details produced in the Supplier’s GSTR-1

For example:

Sagar Shoppe (Recipient) is buying their stationery worth Rs. 50,000 from Namrata Traders (Supplier).

On the Recipient’s side,

The Recipient pays 18 % GST of Rs. 9,000.

His total bill would be Rs. 59,000

Now, according to Sagar Shoppe’s purchase records, he can claim an Input Tax Credit of Rs. 9,000 as per his books.

On the Supplier’s side,

He collects GST of 18% i.e. Rs.9000

Supplier collects total amount = 50,000 + 9,000 = Rs.59,000

Ideally, this Supplier should file this transaction in his GSTR-1.

But he fails to do so.

Hence, Namrata Traders (Supplier) is the defaulting Supplier from the Recipient’s point of view.

Possible Reasons for the Supplier to NOT file his Returns & become GST defaulter

There can be multiple reasons why a Supplier has not filed his GST Returns or has delayed filing it.

He may have mistakenly furnished incorrect data in his returns which in turn will affect the Recipient’s working capital.

This can be rectified easily by the Recipient by simply consulting with the concerned Supplier. We will see about this in detail as we move ahead in the article.

This may affect your monthly outward liability and also affect the eligible ITC you can claim in a particular month as per your GSTR-2B.

And the most unfortunate reason can be that the Supplier has intentionally NOT filed his GST returns.

Boycotting such Suppliers in further business transactions is the best way to stay away from this mess.

We will see about this step of Boycotting defaulters in the following section.

How do I Identify Defaulting Suppliers?

input tax credit
Considering the GST is levied on value additions at every stage of the supply chain, non-compliance by any of the entities in this chain can inevitably affect the flow of Input Tax Credit for all the participants in that chain.

We will introduce you to some simple steps to identify the defaulting suppliers and save your business from further complications & malpractices.

  • Verify your Supplier
  • Identify Defaulting GST Suppliers
  • Notify Defaulting Suppliers
  • Agreement & indemnifying clause
  • Authorized Compliance Software
GSTR-2A reconciliation
 Step-1: Verify your Supplier
input tax credit under gst
It is advised that you verify the validity of the taxpayer you are going to do business with.

If you have taken this simple step, Congratulations! You have taken the first step towards eliminating the fraudulent suppliers and going further with the authentic and genuine suppliers.

How do I verify the Supplier?

There are 2 ways to verify your supplier:

  • Using GSTIN or UIN

You can log on to the GST Portal, and navigate to Home >> Search Taxpayer >> Search by GSTIN/UIN

GST Validation

Enter the GSTIN to be verified.

Click on the 'Search’ button.

gst defaulter suppliers
The details corresponding to the GSTIN will be shown.

This simple step will help you identify the credibility of the supplier & save your business from further tax complications.

  • Using PAN card details

You can check the credibility of your supplier using his PAN card details as well.

GST Supplier

Log on to the GST Portal, navigate to Home >> Search Taxpayer >> Search by PAN

You will get the details corresponding to this PAN detail.

This is the first step in the scrutiny you should take to confirm the authenticity of your supplier.

 Step-2Identify Defaulting Suppliers (GST defaulter)
GSTR-2B reconciliation
Irregularity in filing the GST returns by any of your suppliers can severely affect the cash flow of your business.

Your supplier fails in filing GSTR-1, your Input Tax Credit shall get blocked & this shall go on until the irregular supplier finally files his GSTR-1.

To identify such irregular suppliers, you have the following method to follow:

Purchase Data vs. GSTR-2B Reconciliation

Reconcile your Purchase Data (according to your books) against the GSTR-2B (GSTR-2B can be generated by the recipient every month based on the GSTR-1 filed by their suppliers).

This shall help you to identify the differences between your Purchase Data and the outward supplies data of your Supplier (GSTR1).

This reconciliation process, when done manually can be very tedious & there are high chances that you can introduce an error in the process.

Tax experts recommend the taxpayers use Compliance Software like GSTHero’s Reconciliation tool.

It is also advised that you avail of the services from an authorized GST Suvidha Provider appointed by the Government of India.

GSTHero is one such GSP and can make your Reconciliation tasks much easier.

NOTE: Recently, the CBIC has clarified that the Input Tax Credit MUST BE AVAILED as per the invoice details available in GSTR-2B.

The invoice details in the GSTR-2A shall not be used to avail of the Input Tax Credit.

Whatever details you have to check in regards to your Input Tax Credit details, you MUST refer to GSTR-2B only.

There was confusion within the taxpayers about which of the GSTR-2A or GSTR-2B should be considered for the claim of eligible Input Tax Credit.

But now, CBIC has clarified this through a tweet that, GSTR-2B shall prevail when it comes to availing the eligible Input Tax Credit.

 Step-3: Notifying the Defaulting Suppliers
GST defaulters
Not all Suppliers are bad!

There are many instances where your Suppliers may have missed out on filing their GSTR-1 corresponding to the outward supplies given out to you.

To err is human. It is completely acceptable that the Supplier might have missed out on return filing.

 The recipients can simply nudge or notify the supplier about this discrepancy.

This small act can help the suppliers to prioritize their GST return filings corresponding to the outward supplies made to you.

If you are using a GST Compliance software like GSTHero, your defaulting suppliers will be notified automatically after the reconciliation is completed.

 Step-4: Inserting compensatory clause in your agreement
gst defaulters
Most small businesses today still prefer oral agreements.

But when the mutually agreed conditions are put on paper, this gets a legal weightage and hence it is highly advised that you spare some cost on this legal front.

When you draft an agreement between the recipient and the supplier, it is a good practice that you insert a ‘compensatory clause’ in it.

The supplier will be required to compensate the recipient in the event the supplier fails to carry out the necessary compliance requirements, resulting in a loss of credit to the recipient.

This clause will act as a written proof that the Supplier shall abide by all the compliance requirements and in case of losses of recipients with his Input Credit, the Supplier shall be responsible for the same.

 Step-5: Get an Authorized Compliance Software
GST Returns filing can be a tricky affair. Be it Reconciliation, return filing before due dates, or notifying your defaulter clients.

Chartered Accountants and tax consultants suggest their clients use any authorized software for all their GST needs.

When a taxpayer uses software for all his GST processes, most of his manual work turns into an automated task & thus saving a lot of time & effort.

This should be seen as an investment for saving all your losses which a taxpayer may incur in the future due to non-compliance by any of his Suppliers.

Advanced Reconciliation services can help the taxpayers with finding the mismatches in their records so that they can take the necessary steps to rectify the errors.

GSTHero with its advanced reconciliation and numerous validation checkpoints can help you with sanitizing your records and minimizing the mismatches to almost zero.

This can help you with availing maximum eligible Input Tax Credit & thus keep your cash flow uninterrupted.

Additional Step every Business can take:

  • It is very important to keep the regularly defaulting Suppliers away.
  • When you notice a frequent behavior of delayed GST returns filing or avoidance in filing returns, you should restrict your business with this Supplier.
  • Boycotting such Suppliers can be the best way to avoid them from impacting your business negatively.

What happens if we don’t find the Defaulting Suppliers?

gst input tax credit

Spotting your defaulting suppliers should be your utmost priority as a Recipient.

The implications of not doing so or delaying in spotting your defaulting suppliers can have serious impacts on your working capital and can thus cause further compliance issues.

We have listed down some of the serious issues a business can face in case if it fails to identify its defaulting suppliers:

  • As the Supplier shall not file his GSTR-1, the recipient’s eligible Input Tax Credit will surely get affected.
  • When the Input Tax Credit will get affected, the overall Provisional Credit (which is 5 % as of now) will get affected.

Example:

A business ‘Alpha Traders’ has 2 Suppliers:

Beta Supplies & Gamma Supplies

For Beta Supplies

For Gamma Supplies

Total outward sales to Alpha Traders

INR 90,000

Total outward sales to Alpha Traders

INR 3,20,000

GST collected (18%) = INR 16,200

GST collected (18%) =INR  57,600

Total amount collected from Alpha

INR 1,06,200

Total amount collected from Alpha

INR 3,77,600

GSTR-1 filed & on time.

GSTR-1 NOT filed at all.

We can figure out that Gamma Supplies is the defaulting Supplier:

Now, let’s see on the Recipient’s Side:

Alpha Trader’s Purchase Records:

Beta

Gamma

GST paid = INR 16,200

GST paid = INR 57,600

ITC I can claim= INR 16,200

ITC I can claim= INR 57,600

But according to the GSTR-2B of the recipient,

Alpha Trader’s GSTR-2B

Beta

Gamma

GST paid = INR 16,200

GST paid = Nil

ITC I can claim= INR 16,200

ITC I can claim= Nil

Due to the defaulting Supplier Gamma, & the failure of NOT identifying this supplier by the Recipient, he has suffered a blocking of cash flow as follows:

Total cash flow blocked = 57,600 + 5% provisional Credit on 57,600 = 57,600 + 2880= 63,360

Other Implications include:

  • Claiming of Ineligible ITC based on the inaccurate information furnished by your supplier can attract a legal notice from the GST department for failure in compliance with the GST norms.
  • When the working capital gets jammed, you are left with limited resources to run your business.

In a Nutshell…

It is the responsibility of the recipient to stay cautious on the part of his Supplier's GST returns filing so that his working capital remains unaffected.

It is advised to have a robust system in place which can help you ease this process without any compliance issues.

Identifying a defaulting Supplier is a priority task for the Recipient and should be done either manually or with the help of automated software like GSTHero.

The taxpayer can be his protector if he follows these simple steps discussed in the article.

Until the next time…


About the author

Gaurav is an Engineer by training with a deep interest in Economics & Finance. He has been associated with the Fin-Tech industry for quite some time now. He writes for GSTHero for topics including GST Compliance, GST Structure, etc & aims to break down complicated technical jargon into simple terms for the taxpayers. His expertise includes GST Laws, Corporate Finance & Macro-Economics.

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