GST reconciliation has been an important task in the list of IDT teams since the introduction of GST in 2017. In GST Reconciliation, the taxpayer needs to match their sales and purchase records with the data available in the GST system (submitted by their vendors). It also involves matching other data submitted to the GST system via various other GST returns.
For taxpayers, the idea of reconciliation is not new because it was widely used during the pre-GST regime as well. However, reconciliation became more crucial under the GST system since every piece of information in the company’s records is rigorously scrutinised by the GST authorities. Additionally, due to the interconnected nature of all GST returns, reconciliation under this tax system becomes all the more essential.
What is GST Reconciliation?
Broadly, the term ‘reconciliation’ means to compare two sets of data entries to identify any mismatches or variances. The data sets are of the same origin but come from different sources. It is a practice for correcting errors in the process.
For beginners, GST reconciliation is a process to:
- Match the data reported to the GSTN by all the suppliers of your procurements during a given period with your purchase data
- Match the sales reported in GSTR-1 vs the liability reported in GSTR-3B
- Match the E-invoice data auto-populated by GSTN with the sales register
Why is Reconciliation under GST important?
GST Reconciliation is a crucial step that you, as a taxpayer, need to undertake to avail input tax credit (ITC) and also to understand your liabilities. For every month’s GST return filing, you need to reconcile your purchase data with all your suppliers’ sales data that they have uploaded on GSTN. If the data on both ends match in the recon process, claiming ITC can be a walk in the park. However, an account of mismatch can put you on an arduous journey, exploring through huge piles of invoices for one simple error.
GST reconciliation is extremely important as failing to do so can incur huge ITC losses to businesses. Additionally, there can be invoice mismatches causing return filing errors that can lead to penalties or SCNs from authorities.
As it becomes evident, Reconciliation is more of a need than the discretion of the taxpayer. Thus, as part of a routine and regular accounting as well as compliance process, a taxpayer needs to reconcile their purchase data with their vendor’s data for a set tax period and keep on repeating the reconciliation process for every tax period.
It is important for a taxpayer to reconcile and match the invoices to claim ITC. If there are any mismatches or discrepancies, it is not possible to get your ITC thus it is best to resolve them by having a healthy business relationship and communication with your vendors.
Another important reason for a regular GST reconciliation is that GST Returns are filed on a monthly and quarterly basis; however, every taxpayer also has to file the annual GST Returns every year at the end of a financial year. In the annual returns, the data is consolidated from the tax periods throughout the year. In order to reflect correct data in the annual returns and avoid any duplication, the taxpayer must reconcile the data on a regular basis.
Read why regular GST Reconciliation is critical here.
How to do GST Reconciliation?
Well, to put it simply, the reconciliation can be attained in three 3 simple steps: Identify Mismatches, Review the same and Communicate with your vendors for rectification!!
1. Identify: To begin your venture into the world of hassle-free reconciliation, the very first step is to identify the discrepancies occurring in your records and your suppliers’ sales data. Let’s analyse the above-mentioned scenario to identify possible discrepancies.
2. Review: Once you have identified the nature of the discrepancy, the next step is to review and accept/rectify the mismatches.
3. Communicate: The final stage in reconciliation is to communicate with your suppliers about all the discrepancies and ask for edits/changes if any. And as per the communication, you can accept/reject the changes reflected in GSTR 2A or ask your supplier to rectify the given mismatch.
However, going by the organizational structures and number of inward supplies, manually tracing the discrepancy across multiple invoices and further rectifying it with your vendors (probably spread across the country) can be a tedious task.
Read the full process here: 3-step Guide to a Hassle-free GST Reconciliation
GST Reconciliation for ITC Computation
All this time, while the ITC computation was more of an internal process, with GST and the changing rules, the dependency of ITC computation has grown on external data sources i.e. reporting of invoices by vendors on the GST portal. For the Government, the data reported by vendors is the basis of monitoring ITC claims by the recipient. Hence, it becomes essential to compare and match the internal and external versions of the same data. In other words, GST Reconciliation is more of a need than a choice for correct ITC claim.
Types of GST Reconciliation
Here is the list of most common types of reconciliation under GST that you must consider at the time of filing your GST Return:
1. GSTR 1 and E-invoice: Reconciling your e-invoices with GSTR 1 is important to check if IRN has been generated for all invoices. If your business has crossed the e-invoicing under GST threshold limit then it is mandatory to generate e-invoices in order to avoid huge penalties.
2. GSTR 1 and E-way Bill: Just as you reconcile e-invoices with your GSTR 1 data, similarly, you need to reconcile it with e-way bills too so that you know if EWBs are generated where IRNs are not applicable. All the e-way bill data needs to be reported in GSTR 1.
3. ITC-04 and E-way Bill: In the case of the movement of goods for job work, the generation of e-way bill becomes mandatory. processing or working with semi-finished products or raw materials that the primary manufacturer provides. Thus, reconciliation is needed between your GSTR 1 data and ITC 04.
4. GSTR 2A – GSTR 2B and Inward supplies: The vendor data is auto-populated in GSTR 2A as soon as data is submitted, while GSTR 2B is a static document generated with vendor data every 14th of the month. Hence, a proper reconciliation is needed between invoice data that gets auto-populated in GSTR 2A/GSTR 2B and your purchase register data.
Under GST, this process has gained utmost significance as the ITC is completely dependent on this reconciliation. And the sanctity of the Input tax credit utilised by businesses is monitored by the GST authorities regularly.
Read more here: GSTR 2A or GSTR 2B: Which is better for ITC maximization?
5. GSTR 3B and GSTR 1 Reconciliation: It is crucial to timely determine the difference between GSTR 1 and GSTR 3B data. GSTR-1 and GSTR-3B are to be matched for checking the liabilities reported in both returns.
6. GSTR 6 A and GSTR 6: This reconciliation is between the purchases made by head office and the sales reported by the vendors. This reconciliation helps the head office to decide how much ITC can be distributed to the branches.
Note: GST Authorities monitor the differences in your reported data and that of vendors. Hence, any mismatches noticed may lead to penalties or a show cause notice from the GST authorities. Read more about GST litigation here.
Major and common issues with reconciliation under GST
Reconciliation is a critical and also a challenging activity due to the multiple layers involved. Here are some of the common issues faced by taxpayers with GST reconciliation.
1. Data Source: Most large enterprises have ERPs where entire invoicing takes place. While the e-invoicing capabilities are integrated into the ERP, many times, the data for e-invoices and the data for GSTR 1 comes from different sources/tables of the ERP. This causes a mismatch in the two sets of data. A GST Software that can analyse these two sets may come in handy in these cases.
IRIS GST Software fetches e-invoice and sales-related data from the same source.
2. Manual Entries: Billing, in any company, is the starting point of the accounting process and is always manual. Hence, this is a major bucket where most of the invoice mismatches are identified between your data and vendor data. If an invoice number or the amount is incorrectly entered in certain invoices then it may create discrepancies while reconciliation. Also, there are certain cases where the party’s rounding-off conventions are different, hence the invoice values from the supplier and the buyer do not match because of the slight difference.
3. Missing invoices: Missing invoices is another major reason for issues in GST reconciliation. There can be multiple reasons for missing invoices:
You may operate in multiple states while your vendor has raised an invoice with another GSTIN/HQ GSTIN instead of the actual purchaser GSTIN. In this case, the invoices might not reflect completely at a GSTIN level.
It is also a possibility that you and your vendors have recorded invoices in different return periods.
Read here to know more about Missing Invoices in GSTR 1.
4. Vendor non-compliance: While the above reasons have a dependency on the customer side, there might be reconciliation issues due to vendor non-compliance. Certain points to keep in mind in case of vendor non-compliance are:
In certain cases, vendors miss declaring the liability on supplies made. It is advisable to recon your purchase data with GSTR 2A so that you get to know about such non-compliance well in advance. And then you must follow up with the vendor to ensure that the liability is declared.
However, if your vendor has declared liability but you missed to avail credit in your GST return then it should be availed before the due date of September returns or Annual returns.
Click the link to read all about Vendor Compliance for ITC maximization
5. Delays at the GSTN’s end: Sometimes there are changes and delays from the government’s end. For eg:
GSTR 1 Validation differences: Where the e-invoices get made but do not get reflected in GSTR 1
Due date changes: Recently, there was an issue in relation to duplicate entries in GSTR 2B for April and May 2022 which has now been fixed and correct GSTR 2B has been generated.
In the case of e-invoice data, the NIC stores information only for 2 days and thus, it is better to choose a GST software that can help you with historic data easily and resolve all the above-mentioned issues.
Challenges to overcome for easy GST Reconciliation
Reconciliation has its own challenges and taxpayers need to ensure these are managed well
1. Dynamic nature of GSTR2A: As late filing of earlier tax periods is allowed, invoices from vendors who do late filing will impact your GSTR 2A for earlier months. So even if internal systems have closed during the period, GSTR 2A always remains open. Due to this, while doing reconciliation, taxpayers need to fetch all the historical GSTR 2A, either in full or incremental, to ensure nothing is left out.
2. GST compliance by vendor may be deceptive: As GSTR 3B is self-declared, the tax liability paid by the vendor need not tally with their actual liability. So GSTR 3B filing would not necessarily mean that vendor has paid tax against your invoice. Also, there is no information available publicly to know if NIL return was filed. Apparently, it may seem that vendor is GST compliant, however still could result in ITC loss.
3. Accounting practices: As briefly touched upon earlier, in the case of debit or credit notes and also for amendments, the practices followed by the recipient could be different than those followed by supplier. This could result in one document maintained internally needing to be reconciled against the net amount of multiple documents in GSTR 2A and vice versa. With upcoming changes in GST Return, there will not be any linking between the invoice and its debit credit notes. Hence reconciling at a document level will be challenging.
All these common challenges can be easily tackled if you simply use a GST Software. No need to waste a lot of time, energy and resources to produce manual recon results which are prone to errors when you can opt for a smarter solution.
Best software to reconcile GST data faster and ensure 100% compliance
As a registered taxpayer, reconciling your purchase invoices with the supplier uploaded invoices on the GST system is a critical activity as it determines your ITC claim. Further, the Government issues legal notices to taxpayers for discrepancies in the ITC claimed in GSTR 3B and the amount as per supplier uploaded details. Our Smart Reconciliation comes in handy for managing the reconciliation tasks in a timely, efficient and easy manner.
Bulk Data upload facility – It will help you to upload data for multiple GSTINs in one go
2P Summary – Provides a summary of uploaded data. You can quickly check your uploaded data with the count of invoices getting considered for reconciliation
Bulk download of GSTR 2A – For multiple periods, you can send ’Get GSTR 2A data’ request in one go
Smart reconciliation – It auto-runs on your data and provides you the reconciliation results with summary
Advanced reconciliation – It helps you to extend the scope of comparison between data that is in the supplier-only and purchaser-only category. Some rules that help in better reconciliation are :
- Checking invoices across the financial years
- Fuzzy invoice no. logic
- Checking exact values ignoring invoice number
- Checking invoices within the tolerance provided by you
Monthly reconciliation results with monthly GSTR 2A report – Helps you to decide monthly ITC and how much you can claim as provisional ITC
Net vendor summary – It gives you a glance reconciliation status for each vendor
PAN level reports and GSTIN level reports – It will help you to analyse in detail of your purchaser-only and supplier-only invoices Send Mail – By using this feature you can easily communicate discrepancies to your vendor
Like all other GST compliance, reconciliation also is state-wise activity as the GSTR 2A is available month-wise. However, for an entity operating in many states, having an entity-wide view of reconciliation, vendor compliances and data quality and reports for overall reporting is necessary. Not only the CFO office but also the teams engaged in daily operations, payments and vendor follow-up may need certain information in a complied and actionable form. Hence MIS and insights from the reports become an extended expectation from the reconciliation activity.