GST reconciliation

When two things (or amounts) don't work well together or correspond with each other, then it's a mismatch. Under GST there are various returns to be filed by the taxpayer, which provide data to the department.

Each of these returns filed by the taxpayer is interlinked, among themselves and also with the data provided by those GSTINs which are mentioned in them.

Hence when the data received from one taxpayer is compared with the data received from the counterparty, it should be the same. In case it is different then it will be termed as a mismatch.

There may also be mismatches when the taxpayer furnishes the same data in two different returns filed for distinct purposes.

mismatches in GST return

(1) Various types of possible mismatches


The following are some of the possible mismatches;

  • Mismatch in Turnover in GSTR 1 and GSTR 3B
  • Mismatch in Input tax credit claimed in GSTR 3B against eligible Input Tax credit reflected in GSTR 2A (The above two are the most important mismatches, which have to be necessarily reconciled because they can result in the suspension of the GSTIN)
  • Non-payment of Interest when GSTR 3B is filed late as per sec 50.
  • Non-payment of differential tax under GSTR 3B when some amendments are made in invoices and accordingly changes are done in outward supplies in GSTR 1 ( increase in taxable output )
  • Non-payment of differential tax under GSTR 3B when some amendments are made in invoices and accordingly changes are done in outward supplies in GSTR 1 ( increase in taxable output )
  • GSTR 2A of a taxpayer (trader) showing inward supplies at a particular tax rate but there are no outward supplies appearing at the same tax rate.
mismatches in GST return

(2) Mismatch in GSTR 1 and GSTR 3B (for turnover and output tax)


Reasons for mismatch:

  • The main reason for the difference in the sales amount and output tax in 3B and GSTR1 is the; (i) Issuance of credit notes/ debit notes, (ii) the amendments made in the sales invoices, and (iii) some invoices which are disclosed in GSTR1 and not in 3B and vice versa. (inadvertently or by commission)
  • These methods are adopted by some taxpayers to reduce their sales and output liability. They keep a separate record of these omissions and make necessary adjustments in subsequent returns. This way they file their returns and even escape from paying tax on time.They issue credit notes randomly to unregistered dealers after receiving the payment from them. Since the need to relate the invoice number with the debit/credit note has been removed, they use this voucher as a means to adjust their sales, mostly through unregistered sales.
  • Some dealers issue invoices to unregistered dealers for meagre amounts, just to send the goods outstation. If they have issued an invoice of a big amount to an unregistered dealer and the goods have reached safely, and the payment is received then they amend the invoice, before the end of the month in which the invoice has been issued.
  • It came to the notice of the department that some dealers were only filing their GSTR 1 and not filing 3B on time. By this method, the invoice was reflected in the 2A of the recipient, but the ITC of the said invoice was not available to them. The recipients were facing problems from the department as they had already availed such ITC, but now they had to reverse it due to non-payment of tax by the supplier.

Measures taken by the GST department

Therefore the department took certain corrective measures. It made it mandatory that ITC would be available only on those invoices whose output tax has been paid.

  • As per the newly introduced sec 16(2)(aa) of the Finance act 2021,” Input can be claimed against those invoices/ Debit notes only, which are disclosed by the supplier in the GSTR1 and are communicated to the buyer.”
     
  • And as per Sec 16(2)(c),” The output tax of the invoice has to be actually paid to the government, either in cash or through the utilisation of input tax credit admissible in respect of the said supply;
  • These rules have created a burden on the recipient that he would be able to get ITC only from those invoices which are appearing in his 2A and tax has been paid on it.
  • A new rule was introduced where the facility to furnish GSTR 1 was withheld if the taxpayer had not filed his GSTR 3B.
  • According to notification No. 01/2021–Central Tax 
  • In the situation where a taxpayer does not file his GSTR-3B for two subsequent months, his GSTR-1 shall be blocked.
    Similarly, for quarterly return filers, the taxpayer who does not file his GSTR-3B for the preceding quarter, shall not be permitted to file GSTR-1 of the subsequent quarter.
  • Earlier non-filing of GSTR-3B only resulted in blocking of Eway-Bill facility, but from now on it shall also result in blocking of GSTR-1 of the taxpayer.

A new sub-rule 2A of rule 21A

  • Also, a new sub-rule 2A was introduced where the data as per 3B ( return as per sec 39) was compared with the data as per GSTR 1, and if some major anomalies were found then the GSTIN could be suspended even leading to cancellation.
  • The most common mismatch is that sales and output tax disclosed in GSTR 1 is more than disclosed in 3B. It implies that the taxpayer is furnishing more sales and paying tax on a reduced amount.

Introduction of sec 43A

Originally, the matching concept was envisaged in sections 42 and 43 of the CGST Act. Owing to certain technical reasons that did not materialize and therefore the department had to bring sec 43A which starts with a non-obstante (notwithstanding) clause. It supersedes sec 41, 42, 43, 37, 38 and 16(2).

According to sec 43(6); (6) The supplier and the recipient of a supply shall be jointly and severally liable to pay tax or to pay the input tax credit availed, as the case may be, in relation to outward supplies for which the details have been furnished under sub-section (3) or sub-section (4) but return thereof has not been furnished.

Hence this subsection has made the recipient also liable to pay the output tax ( not paid by the supplier) on outward supplies or reverse such ITC already availed. As you can see this subsection is prone to judicial interpretation and intervention.

mismatches in GST return

(3) Mismatch in GSTR 2A and GSTR 3B ( for ITC )


This is the second important reconciliation that has to be done by the taxpayer and the department. Regarding the ITC utilised, the department has to ensure the following things;

  • The invoice on the strength of which ITC is claimed, should not be bogus. 
  • The ITC should not be ineligible for that taxpayer. 
  • The ITC should have been reversed for exempt and non-business supplies. 
  • The ITC claimed should not be in excess as reflected in the 2A of the taxpayer. 
  • The tax under the reverse charge mechanism is paid only by the cash ledger. 

Some taxpayers do not show reversal of ITC in the return 3B for exempt supplies. This practice should be discarded as the department may question you for non-reversal of ITC. The taxpayer should always remember that he should not utilise ITC more than what is shown in his books.

Sub Rule 2A for ITC

If on comparing the eligible ITC as per 2A and the ITC utilised in the 3B by the taxpayer, the department finds that the ITC claimed is in excess, or any major anomaly is caught, then it can even suspend and ultimately cancel the registration.

Reasons for mismatch:

(i) Rule 86B (for large taxpayers)

  • In the case where a taxpayer whose monthly turnover exceeds 50 lakhs (except exempt and zero-rated sales), and he discharges more than 99% of his output tax liability by electronic credit register (input available on the strength of making taxable purchases), i.e. not even 1% of output tax liability is discharged by the electronic cash register, then he is in violation of the rule 86B, provided the taxpayer does not fall in the exemption list.
  • This rule has been made to refrain the taxpayers from indulging in unfair practices of availing fake ITC by declaring fake purchase invoices without making actual purchases and paying tax thereon.

(ii) Types of Input credit and how they are entered in the return 3B

If you have given your GST number to any supplier, and he has filed his return, the ITC would be reflected in your 2A. There are 5 types of ITC;

  • ITC Available: This is the total ITC which is reflected in the 2A on all kinds of inward supplies, capital goods, purchase of inputs, Import of Goods or Services, supplies liable to reverse charge etc. 
  • Ineligible ITC: This ITC pertains to GST paid on inward supplies listed in the negative list, which are not eligible for the input tax credit.

    This is only required to be reported for disclosure purposes as far as the taxpayer is concerned. For e.g., ITC on food services received for staff, cab services received for staff, a car purchased by the company etc. In form 2B, bifurcation of eligible and ineligible credit is given. 
  • ITC Reversed: This is the ITC on inputs/input services/capital goods used for non-business purposes, or partly used for exempt supplies. Also, if the depreciation is claimed on the tax component of capital goods, plant and machinery – then this ITC will not be allowed.

    Suppose a person provides exempt services of transporting school children from school to their homes and vice versa.

    He also has a repair workshop for cars where the buses (which provide such exempt service) are also repaired and maintained. The labour utilised, the spare parts, consumables are procured jointly.

    The ITC on the said inputs is reversed in the appropriate ratio (distributed according to the repair and maintenance of buses providing exempt services and other taxable services to other customers). 
  • Eligible ITC: This is calculated by deducting ineligible ITC and ITC reversed from the ITC Available. 
  • Utilised or adjusted ITC: This is adjusted in making the payment of the output tax. This is a part of the eligible ITC. The balance eligible ITC ( if it remains unadjusted ) is show

Most of the taxpayers do not disclose ineligible ITC, which creates problems for the department to reconcile the complete value of the available ITC as per the 2A.

One of the major factor for the above is that all the Ineligible input tax credit is clubbed with relevant expenses and booked as a part of the total cost in the books of accounts and it does not impact the Input Tax Credit Ledger of the taxpayer.

mismatches in GST return

(4) To give relief to the taxpayers for non reflected invoices in the 2A


An amendment had been made in rule 36(4) of the CGST Rules,2017. As per the Press release of CBIC dated 02.05.2021 sub-rule (4) inserted in rule 36 of the Central Goods and Service Tax Rules, 2017, a taxpayer filing GSTR-3B can claim provisional Input Tax Credit (ITC) only to the extent of 5% of the eligible credit available in GSTR-2A.

Before the IFF, there was a scope that the invoice may not be reflected in the 2A of the recipient in case of a quarterly filer, but now there is no leeway given by the department as IFF has enabled seamless reporting of invoices. This 5% scope is only given to the recipients in case their supplier has not filed his GSTR1 or not paid the tax on it.

The ITC utilised can not be more than the eligible ITC as per the accounting books. Therefore it became necessary to keep track of extra provisional ITC claimed and the invoices which were not reflected in the 2A. Hence annual reconciliation became very important, to recognize invoices that are not reflected and to see if any extra ITC is not claimed.

In the case of M/S. D.Y. Beathel Enterprises versus The State Tax Officer (Data Cell), (Investigation wing) Commercial Tax Buildings, Tirunelveli

  • The Honourable Madras high court held that the tax authorities should first take action against the supplier for not depositing the output tax before demanding the same from the recipient. Consequently, the order imposing GST liability on the recipient on the account of non-payment of tax by the supplier of goods was quashed.
  • There was another decision of the Hon'ble Madras High Court in Sri Vinayaga Agencies vs. The Assistant Commissioner, CT Vadapalani, wherein it was held that “Non-payment of output tax by the supplier of goods is not a proper ground to reverse the ITC which has been already availed by the recipient.” 
  • Moreover, a press release issued by the GST Council on 4 May 2018, stated that there shall not be any automatic reversal of ITC from the buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller first. 
  • However, for recovery of tax on the invoice on which the supplier has not paid the output tax, reversal of credit from the buyer may be an option available with the Revenue Authorities. But it has to be exercised in exceptional situations like missing dealer, closure of business by the supplier or the supplier not having adequate assets, etc. 
  • Moreover, the law cannot compel the recipient taxpayer to do the impossible. The output tax has to be paid by the supplier. The recipient cannot force the supplier to do so.
mismatches in GST return

(5) Sending of notice and initiation of further proceedings


(a) Sec 61 Scrutiny of returns.

After you have furnished your return, then the proper officer shall scrutinize the said return as per sec 61.  According to this section the proper officer will;

  • Scrutinize the return furnished by the taxpayer, and verify the particulars submitted by the taxpayer.
  • If he finds any discrepancy, then he shall inform him in the prescribed manner. 
  • He shall seek an explanation from the taxpayer with regards to such discrepancy.
  • If the explanation is found to be acceptable (after applying various rules of matching like sub-rule 2A of 21A, or rule 86B ), the registered person shall be informed in accordance with the rules and the ongoing proceedings will be stalled. 
  • If the explanation provided ; (i) is not satisfactory, or (ii) no explanation is given, then
  • Within thirty days of being informed by the proper officer, or such further period as may be permitted by him, or 
  • In case the registered person, having accepted the discrepancies, fails to take the corrective measure [ payment of tax, interest or any other amount, or reversal of ITC availed, or further disclosure of turnover etc ] in his return for the month in which the discrepancy is accepted, 
  • The proper officer may initiate appropriate action including those under section 65 or section 66 or section 67, or proceed to determine the tax and other dues under section 73 or section74.

Note:

  • Scrutiny under GST is not mandatory and no periodicity for scrutiny has been prescribed. 
  • There is no definite criteria or method of selection. 
  • There is no limitation period for scrutiny of returns. 
  • These notices can even become the starting point of suspension or cancellation of GSTIN

(b) Rule 99

The prescribed manner stated in Section 61 is provided under Rule 99, which is given below ;

  • If during the scrutiny of the return, any discrepancies are observed by the proper officer, then he shall issue a notice to the registered person in the FORM GST ASMT-10, informing him of those discrepancies and seeking an explanation.
  • The registered person has to give an explanation within 30 days from the date of service of notice. Even higher time may be permitted by the proper officer if he deems fit.
  • The tax, interest and any other amount payable by the taxpayer in relation to such discrepancy should be quantified and included in the notice to the best of the ability of the concerned officer.
  • The registered person may accept the discrepancy mentioned in the notice issued and pay the tax, interest and any other amount arising from such discrepancy and inform the same to the proper officer. Such correction is required to be made in the return of the month in which the discrepancy is accepted as per Section 61(3).
  • If the registered person does not accept the discrepancy, he may furnish an explanation for the discrepancy in FORM GST ASMT- 11 to the proper officer.
  • Where the explanation furnished or the information submitted by the taxpayer is found to be acceptable, the proper officer shall inform him accordingly in FORM GST ASMT-12 and the further proceedings are halted.
  • In the case where the explanation is not furnished or the information submitted by the registered person is not found to be acceptable, the proper officer may initiate proceedings under the following provisions, which he deems appropriate considering the nature and severity of the discrepancy.

Various sections under which further proceedings can be initiated: 

  • Initiate Departmental Audit under Section 65; or 
  • Initiate Special Audit under Section 66; 
  • Initiate Inspection, Search and Seizure as per Section 67; 
  • Issue Show Cause Notice under Section 73 or 74.

Conclusion

Today I was reading that the industries have made a representation to the honourable Finance minister regarding the high handed attitude of the GST department.

The Director-General of GST Intelligence has been issuing notices to all and sundry. The denial of ITC on comparison of GSTR 3B and 2A, seeking 2A for the financial year 2017-18 when such facility was not even available, and blocking of the entire ITC when only one vendor has not paid the output tax are some of the grievances raised by them. I think the tax department is determined to kill the same goose that lays the golden eggs.


CA Shaifaly Girdharwal

About the author

CA Shaifaly Girdharwal is a qualified chartered accountant practicing in GST. She is the co-founder of ConsultEase.Com and a famous YouTuber with more than 2,40,000 subscribers for her channel dedicated to the GST videos. She is also a trainer and author. She has written a book on GST for Taxmann Ltd.

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