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Reconciliations under the GST
Articles- Jul 25,24
Reconciliation under the GST is a critical activity that ensures the accuracy of the tax amounts credited or debited in the accounts of businesses.
The Goods and Services Tax (‘GST’) was introduced in India on July 1, 2017, as a comprehensive indirect tax to replace multiple cascading duties and taxes levied by the central and state governments. It has transformed the tax structure by creating a single, unified market across the country. However, with the new tax regime, came the need for stringent compliance measures, one of which is the reconciliation process say Vishal Sharma, Consultant, Indirect Tax, at Ernst & Young LLP, India and Ankit Tibrewal, Senior Manager, Indirect Tax, at Ernst and Young LLP, India. Reconciliation under the GST is a critical activity that ensures the accuracy of the tax amounts credited or debited in the accounts of businesses. It involves matching the data of different ledgers, data filed by the suppliers with the recipients and rectifying any discrepancies that may arise.
Understanding the various reconciliations under the GST:
There are some reconciliations mandated by the GST law, such as Reconciliation of Form GSTR-2B with Purchase Register, Reconciliation of goods sent to and received from the job worker, Reconciliation of financial turnover with GST turnover, Reconciliation of GST input tax credit (‘ITC’) and so on.
However, the taxpayers must do several other reconciliations which are although not mandated by the GST law directly, but the same are necessary for effective compliance or are required by the GST authorities during audits and assessments.
The above list is not an exhaustive list. It is imperative to note that taxpayers must do multiple reconciliations first to prepare and identify records for reporting in Form GSTR-1. Preparation of Purchase Register itself requires reconciliation between multiple accounting records and reports.
The need for reconciliation:
The primary reason for reconciliation under the GST is to validate the details reported in GST returns and to validate the ITC claims, as ITC is a mechanism that allows taxpayers to off-set the GST paid on inputs, input services and capital goods, from the GST liability to be paid on the output side. If the transactions appearing in Form GSTR-2A/ 2B are not matching with the purchase register, then the ITC claims would be denied, leading to reversal of ITC and potential interest and penalties.
Moreover, reconciliation also helps in identifying any inadvertent errors or intentional tax evasion. It ensures transparency and accountability in the tax system, thereby enhancing compliance and minimising the risk of audits and assessments by the tax authorities.
The process:
The reconciliation process under the GST can be bifurcated into several steps:
Collection of data: Businesses need to extract/ collect the relevant data from their ERP system and the corresponding data reported in GST returns from the GST portal.
Matching of transactions: The next step is to match the data extracted from the system with the data extracted from the GST portal. For example - to determine the ITC eligibility, Purchase Register is extracted from the system and is matched with the data available in Form GSTR-2B downloaded from the GST portal. This matching includes reconciliation of various fields, such as - Invoice number, Invoice date, Supplier GSTIN, Taxable value, GST rate, GST amounts, Place of Supply among others.
Identification of discrepancies: Any mismatch in the data needs to be identified. Discrepancies can arise due to various reasons, such as - incorrect data entry, missing or unrecorded invoices, difference in tax amounts etc.
Communication with relevant stakeholders: In case of mismatches, businesses should communicate with the relevant stakeholders (can be internal or external) i.e. Mismatch between Purchase register and Form GSTR-2B needs to be communicated to the suppliers to rectify the errors. The suppliers are then required to amend their GSTR-1 filings to correct the discrepancies.
Rectification and adjustment: After identifying the mismatches, businesses should rectify the errors in their records and make necessary adjustments in their subsequent GST return filings.
Documentation: It is important to maintain proper and robust documentation of the reconciliation process for effective compliance, future reference and audit readiness.
Challenges in reconciliation:
The reconciliation process under the GST comes with its own challenges. Some of the common issues being faced by the businesses includes:
High volume of data: Large businesses with multiple GST registrations and numerous transactions finds it difficult to manually reconcile each entry.
Unstructured data: Even after 7 years of GST implementation, businesses are still struggling to have structured data which is required for reconciliations.
Single source of truth: Accuracy and reliability of the data received from multiple stakeholders and different sources is crucial for reconciliations.
Time constraint: The reconciliation process is time-bound, and delays can lead to missed ITC claims, heavy liabilities resulting in potential loss to the business.
Dynamic changes in GST law: Frequent changes in GST rules and regulations can complicate the reconciliation process.
Best practices:
To overcome the challenges and ensure an efficient reconciliation process, businesses can adopt the following best practices:
Use of automation tools: Automated reconciliation tool/ software can handle large volumes of data, reduce errors/ issues faced in manual reconciliation, saves time and provides management reports/ dashboards which helps in quick and effective decision making.
Regular reconciliation: Conducting reconciliations on a regular basis can substantially reduce the pendency and helps in resolving errors/ issues on a near real time basis.
Training and awareness: Keeping the finance, accounting and tax teams informed and updated about the latest GST amendments/ updates is very critical.
Supplier collaboration: Establishing strong communication channels with suppliers can facilitate quick resolution of mismatches/ errors.
The way forward:
Reconciliations under the GST is a vital process that ensures smooth compliance, proper claiming of ITC and discharge of correct GST liability in a timely manner. While there are several challenges, adopting best practices and leveraging the technology can make these processes more easy, effective and manageable. As the GST regime continues to evolve, businesses must stay vigilant and proactive in their reconciliation efforts to avoid financial setbacks and maintain healthy compliance records.
(Views expressed above are personal)
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Authors:
Vishal Sharma, Consultant, Indirect Tax, at Ernst & Young LLP, India
Ankit Tibrewal, Senior Manager, Indirect Tax, at Ernst and Young LLP, India
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