What is the reconciliation process in GST?

The reconciliation process in the context of Goods and Services Tax (GST) refers to the act of ensuring that all the tax-related records, such as sales, purchases, output tax, input tax credit (ITC), and GST returns, are accurate and consistent. This process is crucial for ensuring compliance with the GST laws, identifying any discrepancies in returns, and aligning the taxpayer’s financial statements with the GST returns filed with the tax authorities.

Reconciliation plays a critical role in maintaining the integrity of the GST system, ensuring proper tax payment, and facilitating the claiming of input tax credits (ITC). Here’s a breakdown of the reconciliation process in GST:

1. Steps in the GST Reconciliation Process

a. Reconciliation Between GSTR-1 and GSTR-3B

GSTR-1 is the return for outward supplies (sales), while GSTR-3B is a summary return where taxpayers declare the tax liability, ITC claims, and tax paid.
The first step in the reconciliation process is to ensure that the details of outward supplies reported in GSTR-1 align with the tax paid as per GSTR-3B.
- Sales figures and GST collected should match between GSTR-1 and GSTR-3B.
- The tax liability (output tax) in GSTR-1 should be accurately reflected in GSTR-3B.

b. Reconciliation Between GSTR-3B and GSTR-9

GSTR-9 is the annual return that provides a consolidated view of the sales, purchases, taxes paid, and ITC claimed for the entire financial year.
A taxpayer must reconcile the figures in GSTR-3B with GSTR-9, ensuring that the summary of monthly returns aligns with the annual return.
- If there are discrepancies in sales, purchases, or taxes paid, they need to be rectified during the reconciliation process.
- This helps in identifying any under-reported or over-reported amounts.

c. Reconciliation of GSTR-2A with Purchase Register

GSTR-2A is the auto-populated return that shows the ITC eligible based on the GSTR-1 filed by suppliers.
The reconciliation process also includes matching the input tax credit (ITC) claimed in GSTR-3B with the ITC reflected in GSTR-2A.
- If the ITC shown in GSTR-2A is higher than the ITC claimed in GSTR-3B, the taxpayer must ensure that the purchase invoices are valid and reflect in the system.
- The taxpayer must verify whether they are eligible to claim the ITC on the purchase invoices reported in GSTR-2A.

d. Reconciliation of GSTR-9 and Financial Statements

For businesses with turnover above ₹2 crore, the reconciliation statement (GSTR-9C) must be filed. This reconciliation statement compares the audited financial statements with the GST returns filed.
- GSTR-9C involves the certification of the financial statements by a chartered accountant (CA) or cost accountant.
- The auditor reconciles the profit & loss account and balance sheet figures with the sales and ITC claims in GSTR-9.
- Any discrepancies between the two will need to be adjusted in the annual return (GSTR-9).

2. Key Provisions of GST Related to Reconciliation

The GST reconciliation process is mandated by various provisions under the CGST Act, 2017, and GST Rules. Here are the key sections that govern reconciliation:

a. Section 35 – Accounts and Records

Section 35 of the CGST Act mandates that every registered person must maintain books of accounts and other records in a manner that facilitates easy reconciliation of their tax filings, including sales, purchases, tax paid, and ITC claims.
The provision also requires taxpayers to maintain a record of input tax credit claimed, invoices, and tax payments in a chronological order.

b. Section 44 – Annual Return

Section 44 requires that every registered person must file an annual return (GSTR-9).
- The annual return should reconcile all the taxpayer’s records and provide a final summary of sales, purchases, output tax liability, and input tax credit for the year.
- Any discrepancies between the GSTR-9 and the monthly returns (GSTR-1 and GSTR-3B) should be addressed.

c. Section 35(5) – GST Audit

Section 35(5) mandates an audit of accounts for taxpayers whose turnover exceeds ₹2 crore in a financial year.
The audit is accompanied by GSTR-9C, which is the reconciliation statement between the audited financial statements and the GST returns filed during the year.
The auditor must confirm that the annual returns (GSTR-9) match the audited financial statements and highlight any differences.

d. Rule 80 of CGST Rules, 2017 – Annual Return and Audit

Rule 80 specifies the filing requirements for the annual return and audit under Section 44 and Section 35(5) of the CGST Act.
- It sets the due date for filing GSTR-9 and GSTR-9C (by 31st December of the subsequent financial year).
- The reconciliation process must be completed before filing these returns, and discrepancies must be corrected.

3. Importance of Reconciliation in GST

Reconciliation in GST ensures:

Correct Reporting: Taxpayers can verify that their sales, purchases, and tax liabilities are accurately reflected in the GST returns.
Input Tax Credit (ITC) Compliance: Proper reconciliation ensures that only valid input tax credits are claimed, avoiding penalties for ineligible ITC claims.
Tax Payment Accuracy: Ensures that the correct amount of tax is paid, avoiding penalties and interest for underpayment or non-payment of taxes.
Audit Readiness: Businesses need to reconcile their records regularly to ensure that they are ready for GST audits conducted by tax authorities or auditors.
Compliance with GST Laws: Timely reconciliation helps businesses stay compliant with GST law, including the filing of accurate returns and the maintenance of proper records.

4. Landmark Cases Related to GST Reconciliation

Several landmark cases have shaped the interpretation of the GST reconciliation process and the legal implications of non-compliance:

1. Union of India v. M/s. Bharti Airtel Ltd. (2021)

Issue: This case concerned the application of penalties due to discrepancies found during the reconciliation process between GSTR-3B and GSTR-9.
Court’s Ruling: The Supreme Court upheld the imposition of penalties for discrepancies found during reconciliation and emphasized that the reconciliation of returns is essential for ensuring compliance with GST laws.

2. M/s. T.K. Ramakrishnan v. Union of India (2020)

Issue: The case involved the claim of input tax credit (ITC) and the reconciliation process, where the taxpayer’s ITC claims were disallowed due to discrepancies in purchase records.
Court’s Ruling: The Madras High Court ruled that discrepancies in ITC claims must be reconciled with the purchase registers, and only valid ITC can be claimed. The court emphasized that reconciliation is necessary to avoid tax fraud.

3. M/s. Filco Trade Centre Pvt. Ltd. v. Union of India (2019)

Issue: The case dealt with the penalty imposed due to incorrect reporting in GSTR-9 that arose from discrepancies identified during the reconciliation of GSTR-1 and GSTR-3B.
Court’s Ruling: The Delhi High Court ruled that discrepancies in returns must be reconciled before filing the annual return (GSTR-9). It further clarified that penalties would apply if the taxpayer fails to resolve discrepancies before filing the return.

Conclusion

The GST reconciliation process is a crucial step for ensuring accuracy in tax filings, validity of input tax credits, and overall compliance with GST laws. It involves reconciling the data in GSTR-1, GSTR-3B, GSTR-9, and financial statements to identify and rectify discrepancies.

Key provisions in the CGST Act and GST Rules mandate the reconciliation process, especially for businesses with turnover exceeding ₹2 crore, who must undergo GST audits and file reconciliation statements (GSTR-9C).

Landmark cases have emphasized the importance of accurate reporting, ITC compliance, and penalties for non-reconciliation. Proper reconciliation is essential to avoid penalties, stay compliant with the GST law, and ensure the integrity of the tax system.