For small businesses, GST compliance is perceived as a monthly task that can be done in a hurry so they can focus on other tasks, such as operations, sales and growth. It’s a perfectly human reaction, but it is the same reaction that leads to the same mistakes happening over and over again. Most GST issues occur over time and small business owners may not notice a single big error, but instead, a series of small errors. Here are 5 of the most frequent errors and some practical solutions to prevent them.
Mistake One: Mismatched Invoices and Return Filings
This is one of the common problems that are faced by small businesses – the error between the actual invoice issued/received and the same reported in GST returns. This frequently occurs if invoicing is recorded in one place, for example in an easy-to-use billing system or spreadsheet, and the return filing is done in another place, possibly by an external accountant who is provided with incomplete or late information. As the months go on, minor discrepancies in the invoice number, date or amount begin to show up in GSTR-1 and GSTR-3B and these mismatches are what catch the eye when looked at by the department during scrutiny.
In the case of the fix here it is mostly a process-oriented one. A single, consistent invoicing system which flows into the preparation of returns is a major advantage to businesses when compared to having to reconcile multiple invoicing systems after the fact. Monthly mismatch between books of account and GST return, as well as even a simple recon check prior to filing, identifies most mismatches before they become a habit to a notice.
Mistake Two: Claiming Input Tax Credit Without Proper Verification
Input tax credit is one of the better features of GST regime for small businesses and is also one of the most abused ones. One of the most common mistakes is claiming the credit based only on the vendor’s invoice, and not confirming that the vendor has filed their returns and input their sales information. The GST regime has provided allows for credit only when reflected in GSTR-2B and thus even in the event of a genuine purchase, if the vendor is late or defaults to file his return, the credit can be denied.
This risk is particularly acute for small companies with a large number of vendors, especially smaller vendors who have not been as disciplined in their own compliance habits. The reconciliation of input credit claims against GSTR-2B (before filing) without depending on purchase bills only helps to avoid credit reversals or related interest which usually comes up during a future audit or notice.
Mistake Three: Incorrect Classification of Goods and Services
The rate and applicability of GST depends on the correct classification of products/services under HSN or SAC codes, and many small businesses use the codes incorrectly, perhaps by copying the code of a similar product/service, but not always checking if the classification is correct based on the product/service. For businesses that sell a combination of goods and services, or in industries where classification has been less clear-cut or interpreted differently from state to state, this can be a real issue.
Misclassification of a transaction could lead to either a gap in claiming GST or paying too much GST, and this gap could cause future interest liability, or it could create a liability and cause difficulties in customer relationships and compliance. It’s important to periodically review classification, especially when a company launches a new product line or service offering, to avoid errors accumulating over several filing periods.
Mistake Four: Missing or Delayed Return Filing Deadlines
But it’s a simple thing, and it’s one of the most frequent – and avoidable – compliance missteps small businesses make. Late fees are charged on a daily basis and not only will there be an immediate financial cost, but it will also impact a business’s compliance rating, and vendors and larger clients can determine their reliability based on their GST compliance history when onboarding as a vendor.
Sometimes there is more to it than business disorganisation; often it is that businesses do not have a dedicated compliance calendar, with deadlines clearly marked in advance. This is a risk that gets reduced by using a reminder to each return type, instead of memory or ad hoc tracking. A centralised tracking system is even more crucial for companies that hold multiple registrations in states, as the registration deadlines and requirements may differ slightly from state to state and by type of registration.
Mistake Five: Ignoring E-Invoicing and E-Way Bill Requirements
Turnover thresholds for e-invoicing have gradually been decreased, leaving many small businesses that did not qualify for e-invoicing until recently, and many times they are not aware of the thresholds until a return is rejected or a client points out the lack of an e-invoice. Likewise, the e-way bill provisions for conveyance of goods exceeding a stipulated limit on value are often ignored, especially for those businesses that are not involved with selling goods but occasionally do so.
With these thresholds changing so often in recent years, it’s important to stay informed on the ones that apply, instead of assuming that they’ll keep applying from year to year. Small businesses can avoid the hassle of rejected invoices or delayed deliveries by conducting periodic compliance checks, even a quick one every couple of months.
Building Better Habits Early
Many of the problems with GST compliance among small businesses are not a sign of intentional non-compliance, rather a result of gaps in processes that occur when the business grows more rapidly than its in-house processes can keep up. A few simple habits in these five areas will minimize the chances of penalties, notices and input credit being delayed.
In the case of small businesses, professional assistance could be beneficial in detecting and addressing these gaps before they grow into a big problem and disrupt the compliance environment. Anagha Consulting provides various services to small business on GST compliance, filing of returns and reconciliation assistance.