The Central Government started the use of Goods and Services Tax(GST) on 1st July 2017 to simplify the indirect tax system in India. With the help of GST, a single uniform indirect tax, the Government aimed to treat India as one nation, one market. GST is definitely a good initiative from the Government to maintain systematic records of indirect taxes. However, business organizations have been facing multiple GST compliance challenges because of confusing GST laws. It is very important to have tax domain knowledge in order to stay compliant with GST laws.
Here, we are going to look into 5 common GST compliance problems, the impact of non-compliance to GST laws on businesses, and effective ways to avoid them. Before moving ahead, let’s get to know about GST compliance in brief.
Introduction to GST Compliance
The Goods and Services Tax (GST) has changed the indirect tax system in India. While GST has significantly simplified taxation, it has also created a complex web of compliance requirements that firms must follow. Understanding and adhering to these regulations is critical for businesses to avoid penalties and legal issues.
Following are the Major GST Compliances that every business organization needs to adhere to:
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Registration
Registration is one of the most crucial steps in the GST compliance process. Every business with an aggregate turnover that exceeds the GST threshold limit is obliged to register. The registration process includes getting a GSTIN (Goods and Services Tax Identification Number) and filling out the necessary forms online.
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Maintenance of Records
All GST-registered firms must keep proper books of accounts, which include records of sales, purchases, and input tax credits. These documents should be maintained for at least five years to ensure that you have your documents ready whenever needed.
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Issuing GST Invoices
GST invoices are the essential documents for tracking transactions and obtaining input tax credits. These invoices must comply with strict format and data criteria, which include:
GSTINs of suppliers and recipients
Invoice Number and Date
Description of products or services
For products, use the HSN (Harmonized System of Nomenclature) code, whereas for services, use the SAC (Services Accounting Code).
Include the taxable value, CGST (Central GST), SGST/IGST (State/Interstate GST), and total GST amount.
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GST Return Filing
Filing GST returns is an essential part of GST compliance. The regularity with which returns are filed depends on the business’s turnover. There are several forms of GST returns, each with a unique purpose.
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Input Tax Credit
Businesses can claim Input Tax Credit (ITC) for GST paid on purchases under specific conditions. Maintaining correct records of input and output taxes is critical for obtaining ITC. Maximizing ITC claims is critical for ensuring a steady cash flow. Well-defined internal processes and solutions, such as using GSTR 2B, can help reconcile purchase data and maximize ITC claims.
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Reverse Charge Mechanism
The Reverse Charge Mechanism (RCM) happens when the recipient pays GST instead of the supplier. Businesses must identify and record RCM transactions separately, as well as follow all applicable requirements.
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E-Way Bill Compliance
Businesses must generate an e-way bill when transporting products worth more than a certain amount. The e-way bill should follow the goods in transportation.
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GST Compliance Audits
The GST department performs regular audits to ensure compliance with GST legislation. These audits involve evaluating corporate documents, invoices, and returns to ensure that the organization complies with the applicable GST laws. Business organizations should be aware of these audits and be ready with proper documents to avoid penalties.
Common GST Compliance Problems
Since the introduction of GST, business organizations have reported multiple problems that they have faced throughout the years. These are the most common GST compliance challenges faced by business organizations:
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Errors in Manual Processing
According to GST compliance rules, faults in data accuracy result in errors and fines. Taking this into account, data input errors are always likely to occur throughout the manual GST return filing procedure. Any such mistakes increase the possibility of penalty and non-compliance, resulting in financial loss or operational issues.
Implementing automation with the help of cloud-based GST software may substantially decrease manual errors. It will allow you to apply automation beyond data entry for the entire GST operation.
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Poor GSTIN Notification Handling
One of the most common GST mistakes made by business owners is having a disorganized approach to handling notifications from the GSTIN.
To ensure effective compliance with GST, you must keep track of notifications and maintain a comprehensive data record for internal audits.
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Penalties on Late Filing of Returns
Late submission of GST returns can result in significant penalties and interest payment, whether the penalty is for GSTR-1 or GSTR-3B late filing. It usually happens due to unorganized monitoring and tracking processes for filing due dates.
To avoid this, business owners can set up return filing reminders to ensure timely submission before deadlines. Also, a business can outsource its GST return filing procedure to professionals who specialize in automating compliance while maintaining accuracy.
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Wrongly Credited ITC
Wrongly credited Input Tax Credit (ITC) is one of the major challenges faced by business organizations. Wrong claim of ITC can cause GSTR-1 and GSTR-B filing mistakes.
The errors related to the wrong claims of ITC can be reduced with the help of a well-organized monitoring and reconciliation system.
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GST Ignorant Suppliers
A common mistake in B2B GST compliance is depending on non-compliant sellers, which can create problems for the organization.
The businesses must have a systematic tracking and follow-up strategy with vendors, as well as withhold any payments until they ensure GST compliance.
Impact of Non-Compliance on Businesses
Goods and Services Tax acts as a pivotal component of taxation frameworks. GST aims to ensure streamlined tax administration, mitigation of tax evasion, and economic growth. However, GST non-compliance can severely impact businesses and lead to operational, financial, and reputational issues.
The following are a few of the impacts of GST non-compliance on businesses:
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Financial Repercussions
Tax authorities commonly impose financial penalties for non-compliance. This includes fines and interests on due taxes. The cumulative effect of these fines can cause financial hardships for businesses, impeding their liquidity and solvency.
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Legal Complications
GST non-compliance by businesses can create legal complications for them. Businesses are at risk of getting involved in legal matters like audits, inquiries, and potential litigations as they do not ensure GST compliance. Fraud or tax evasion cases can have serious legal consequences that compromise the trust of stakeholders and the stability of the organization.
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Operational Challenges
Dealing with GST non-compliance will require taking away key assets and management time from main business activities. Thus, it may lead to operational issues that hinder output and negatively impact strategic plans.
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Cash Flow Restrictions
Non-compliance can lead to unanticipated and unplanned tax obligations which contributes to cash flow restrictions and puts the financial stability at risk. The subsequent financial obligations arising from GST non-compliance can impact the financial health of the business.
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Exclusion from Government Benefits
Businesses that do not ensure compliance face the potential risk of missing out on contracts, subsidies, and access to government incentives. This exclusion impedes organizational growth opportunities and increases competitive disparities.
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Increased Regulatory Scrutiny
GST non-compliance invites heightened regulatory scrutiny, manifesting in augmented audit frequency and regulatory monitoring. This results in ongoing interruptions to operations, rising expenses associated with compliance, and an aberration in organizational agility.
Businesses that fail to comply with the Goods and Services Tax (GST) face severe and widespread impacts. Organizations must establish a culture of regulatory diligence and implement strong compliance processes to protect organizational viability and successfully navigate the GST compliance challenges.
Let’s now discuss the strategies to avoid GST compliance challenges.
Strategies to Avoid GST Compliance Challenges
Following best GST practices and fulfilling the requirements for compliance is the most effective method for avoiding GST compliance issues. Using effective GST compliance methods can help your organization solve immediate issues and contribute in the long run as well. Below, we have made a list of the
best 10 strategies to avoid GST compliance challenges for business organizations:
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Set a Return Filing Reminder
Setting a return filing reminder will allow you to actively handle your filing deadlines and potentially file returns ahead of schedule. Filing early helps to prevent penalties and allows you to address any unforeseen concerns that may occur during the filing process.
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Monitoring of GST Reconciliation Sheets
It is very crucial to keep track of important reconciliations like GSTR 1 vs. GSTR 3B, GSTR 2A vs. GSTR 3B, GSTR 1 vs. Books of Account, GSTR 1 vs. E-way Bill, and GSTR 2A vs. Books of Account on a daily or weekly basis. It will help you to quickly find mismatches, errors, and inaccurate entries, which you can fix immediately. You can use modern GST reconciliation software to find errors and provide useful suggestions for improvement.
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Supplier Follow-up and Compliance
Create an organized strategy for following up with sellers to confirm/verify their GST compliance. If required, consider withholding payments until merchants show proof of GST compliance. Establish collaborative ties with suppliers by providing joint GST compliance training sessions. It will allow you to establish a common commitment to GST compliance throughout your supply chain.
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E-Invoicing
Implement an automated e-invoicing system that works easily with your ERPs. This system will allow you to quickly generate large e-invoices, reduce human efforts, and assure real-time data accuracy, quickening the entire invoicing procedure and improving GST compliance.
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GST Compliance Training
Develop training sessions for your employees to help them gain a realistic understanding of GST compliance requirements. It will help to build a compliance culture inside the firm, decreasing the possibility of errors and ensuring improved GST workflows.
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Automated Entry of Invoices
Use automated and efficient GST filing software to ensure precise data entry, reduce the possibility of manual errors, and improve overall productivity. To speed up Report Phrase the e-invoicing process and meet GST compliance criteria, think about implementing solutions that include AI-driven data validation and real-time mistake alerts.
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Monitoring of GSTIN Notifications
GSTIN notifications should be monitored on a regular basis and recorded. Prepare unified data for internal audits and respond to notifications quickly to avoid legal ramifications. Using powerful analytics solutions such as the GST Litigation Management System, you can quickly track GSTIN notifications along with insights related to the root causes of issues faced by your organization during compliance. This will help your organization to address underlying issues and maintain overall GST compliance.
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Regular GST Auditing
Implement regular monitoring and auditing methods into your business apart from the usual reporting times. Also, evaluate your GST processes on a regular basis to find areas for improvement, ensuring continued compliance and decreasing the risk of difficulties.
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Overseas GST Compliance
If your company deals in foreign transactions, implement an effective framework for managing cross-border GST compliance. Also, keep up with international GST laws, connect with global compliance specialists on a regular basis, and employ technology-driven solutions to ease cross-border GST filings.
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Adoption of GST Practices Driven by Industry
Stay informed regarding the most recent changes in the laws regulating GST filing and compliance. Engage in a regular conversation with colleagues and industry experts to gain valuable insights that will help you modify your business procedures to comply with changing GST requirements. Also, look for and analyze the top GST filing software that may offer your company a one-stop solution for accuracy and automation in return filing and compliance.
By following the above-mentioned strategies, the business organization can effectively avoid the common GST compliance challenges faced by them.
Conclusion
Running a reputable and successful business requires flawless GST compliance. As a business owner, you must foresee potential dangers that could result in penalties, blunders, and noncompliance difficulties.
You can simplify the complicated process of filing returns and centralize GST compliance within your businesses by staying informed, using the latest innovations, and putting these preventative solutions into action. Apart from that, establishing strong partnerships with GST-compliant suppliers can enhance both your long-term commercial success and compliance with GST.
