What is reconciliation?
Reconciling transactions with those of related parties is not a new concept to business owners. VAT and Excise also had their versions of reconciliations to ensure accurate data is filed by the supplier and the recipient.
Reconciliation under Goods & Service Tax (GST) is about matching the sales and purchase data reported by the supplier and recipient. This ensures that no sales or purchases are omitted or reported incorrectly in the GST returns.
The taxpayers must reconcile their data with that of their vendors regularly to claim the Input Tax Credit (ITC) and to avoid any discrepancies or mismatches in ITC claims.
How to do GST reconciliation?
- Taxpayers should mandatorily file the periodic GST returns within the due date. To enable the claim of ITC to the recipient first important thing is to file the GSTR 1 within the due date. Even if the due date is missed the returns should be filed with the applicable late fee.
The reconciliation process will not happen if the GST returns are not filed by the taxpayers. Hence, adequate ITC cannot be claimed by the recipient business owner if the supplier has not filed the GST returns.
Example: Supplier Anil has raised an invoice of Rs 1180 (Rs 1000 + 180(GST)) to recipient Akash in May 2020. Akash pays the invoice in the same month.
In June when Akash is filing his returns, he is unable to claim Rs 180 as ITC. When he reconciles his data with that of his suppliers using the form 2A, he notices that Anil has not filed his GSTR1 return yet. Hence, Akash is unable to claim the ITC. Now, he has to notify Anil to file his GST return at the earliest so that he can claim ITC. - Taxpayers should identify the mismatches in reconciliation and amend the respective invoice in the subsequent GST return filings. GST laws do not allow the taxpayer to revise the previously filed returns. However, an amended invoice with the corrected values can be filed in the next periodic return.
- Consistency between the GST returns filed and the books of accounts are very crucial for claiming ITC. While reconciling the taxpayer should ensure that the purchase register is carefully matched with the GSTR 3B (uploaded in the monthly filing) and Form 2A (uploaded by the supplier). This will enable the taxpayer to claim the ITC for all the purchases, avoid losing ITC, or paying extra tax.
- Taxpayers while claiming ITC should keep a check on the taxes paid under reverse charge. An ITC can be claimed under the reverse charge mechanism if the goods and/or services are used for business.
- ITC not availed by the taxpayers in the preceding months can be availed in the subsequent months until the subsequent FY or before filing the annual GST returns GSTR 9. Any amendments or changes in the previously filed returns can also be done in the same period only until the annual returns are filed.
Common issues observed in mismatch during reconciliation
- Mismatch in invoice number between the recipient and the seller due to the difference in the invoice numbering convention followed by both the parties.
- A mismatch is the invoice date due to the accounting of the invoices in different periods by both parties.
- Mismatch in GSTIN on the invoice due to business in multiple states and holding multiple GSTINs
- Mismatch in invoice amount due to a difference in rounding off practice followed by both the parties
Importance of GST reconciliation
- Avoids mismatch in credit while claiming ITC in monthly 3B
- Avoids scrutiny, tax notices, and further application of penal provisions under GST laws which may result in additional taxes, interest, and penalties if not reconciled.
- Helps maintain healthy B2B customer relationships and ensure credibility in the market.
Therefore, reconciliation is a must in GST and should be done regularly to claim adequate input tax credit timely and avoid any kind of compliance issue with the GST department.
Read about Income Tax filing in India