For every business, complying with Goods and Services Tax (GST) requires keeping clean, accurate, and up-to-date records. An important way to ensure it is through GST audit and GSTR reconciliation. These processes confirm that the data you’ve filed in your returns matches your accounting records.
GST audit and reconciliation are an annual check-up for your GST business finances. They identify mismatches, lost invoices, and other issues that can lead to future notices or penalties. In this blog, we’ll understand everything you need to know about the GST audit in India.
A GST audit is a process of checking accounts and return books, along with GST records, for accuracy and compliance with GST rules. It ensures that the taxes you pay or collect are correct. In case your business has a high enough turnover, you must have your books audited under GST regulations.
On the other hand, GST reconciliation means matching the sales and purchase ledgers of account books with the data in the returns like GSTR-1, GSTR-3B, and GSTR-2B. The goal of GST reconciliation is to ensure that Input Tax Credit (ITC) claims, output tax liability, and other data are correct.
In India, a GST audit is not compulsory for all businesses, but only a few businesses are required to carry out a GST audit. It is dependent on your annual turnover. Previously, an annual GST audit was obligatory for taxpayers whose turnover was above ₹2 crore. The government, however, changed the regulation to facilitate the procedure.
Currently, the taxpayers themselves can do the GSTR-9C self-certification without the need for a chartered accountant’s approval (except for the special cases). Here is a threshold for the GST annual audit:
Here are the steps you can follow for GST reconciliation:
1. Match Sales Data: Books vs GSTR-1
Compare your outward supplies (sales) recorded in your books with those declared in GSTR-1. This helps identify missing invoices, duplicate entries, or mismatches in taxable value and tax amount.
2. Match Tax Liability: GSTR-1 vs GSTR-3B
Next, confirm that the tax reported in GSTR-1 (return of sales) is the same as the tax paid in GSTR-3B. Shortfall or overpayment, if any, should be adjusted prior to filing annual returns.
3. Balance ITC: Books vs GSTR-2B and GSTR-3B
Input Tax Credit reconciliation is the most important part of the GSTR reconciliation. Correlate the ITC that you have booked in your purchase records with the ITC auto-populated in GSTR-2B and availed of in GSTR-3B. Differences can occur due to the following:
4. Match with GSTR-9C
Once reconciliations for all the months are done, the next step is consolidating and verifying data for the financial year in GSTR-9C. Doing this will confirm that annual return numbers match your audited financial statements.
5. Identify and Fix Mismatches
Once you spot mismatches, contact the suppliers so that you can arrange corrections in their returns or adjustments in your future filings. It is beneficial to do it before the due date of the September return after the financial year, so that the benefits of ITC are not wasted.
Here are some of the main penalties and issues that you could encounter:
If you want to make the reconciliation and audit process easier, faster, and less stressful, then here are some tips you can follow:
If you want to comply with the GST rules and avoid penalties from the GST department, you should audit and reconcile your GST filings and data annually. This helps you keep your finances in check and ensure that your ITC claims are not rejected. Reconcile your GST information and compare GSTR-2B, GSTR-3B, and GSTR-1 books every month.
1. Can I correct my GSTR-9C after submission if I realise I made an error?
No, after filing GSTR-9C, you cannot modify it. You have to notify the GST department in writing or under test at a later date in case of significant deviations.
2. What do I need to prepare before starting GST reconciliation?
Prepare your purchases register, sales register, GSTR-1, GSTR-2B, GSTR-3B, E-Way bills, and year-end accounts before starting.
3. How far can I go back to rectify GST return mismatches?
You can rectify this until the due date of the September return after the financial year or before furnishing the annual return, whichever is earlier.
4. In what way are GSTR-2A and GSTR-2B different in reconciling?
GSTR-2A keeps on updating as the suppliers submit returns, but GSTR-2B remains static for a particular month, thus making it the desirable document for ITC claims.
5. Does the GST department automatically identify mismatches?
Yes. The GST system will automatically compare your returns and flag mismatches. It can lead to notices if left uncorrected.
6. Will I be required to reconcile nil-rated or exempt supplies?
Yes, nil-rated and exempt supplies must be reconciled too, so that you report correct turnover on your annual return.
7. Will delayed vendor filing impact my ITC claim?
Yes. If your supplier files the return late, their invoices will not be reflected in your GSTR-2B, and you will not be able to claim ITC for that month.
8. What is the ideal frequency of internal GST audits for large businesses?
Large businesses must ideally conduct quarterly internal audits to remain proactive against mismatches and the risk of non-compliance.
9. How can I monitor vendor-wise mismatches?
Use reconciliation software that offers reporting at the supplier level, as this will help you to monitor which suppliers are generating ITC mismatches.
10. Can invoice number mismatches cause denial of ITC?
Yes. Small variations in invoice numbers or dates between your books and those of suppliers can deny ITC until cleared.
