Goods and Services Tax (GST) in India started on July 1, 2017. Its purpose is to simplify taxes and treat goods and services equally all over the country.
GST replaces several older taxes like VAT, excise duty, and service tax, creating one single tax system. There are different GST rates for different goods and services, usually between 5% and 28%.
Overall, GST has changed how taxes work in India. It has made the system more efficient and easier to understand, which helps improve trade between states.
This article covers the top 10 mistakes businesses make when dealing with GST rules. We will also explain how to avoid these mistakes.
Common GST Registration Mistakes and How to Avoid Them
Incorrect GST registration means making mistakes during the Goods and Services Tax (GST) registration process, which can lead to compliance issues and penalties.
Common Reasons for Incorrect GST Registrations include:
- Choosing the wrong category, like regular taxpayer or composition scheme, based on your business type.
- Providing an incorrect Permanent Account Number (PAN) or one that doesn’t match official records.
- Mistakes in entering the business name, address, or contact details.
- Failing to register on time, leading to penalties and issues.
- Not registering in each state where your business operates.
How to Avoid These Mistakes?
To prevent these common errors, businesses should:
- Understand the requirements for different registration categories, such as regular taxpayer and composition schemes.
- Make sure PAN is correct and matches official documents.
- Carefully fill out your business name, address, and other details when applying for GST registration to avoid mistakes.
- If your business operates in more than one state, make sure to register separately in each state to comply with local GST laws.
Failure to File GST Returns on Time
Not filing GST returns on time can lead to penalties, interest charges, and compliance problems for businesses.
Key Issues with Late Filing:
- Late submissions can result in significant fines based on the tax amount due.
- Businesses may face interest on any unpaid tax.
- Late filings can attract more attention from tax authorities, increasing the likelihood of audits.
How to Avoid Late Filing?
To prevent these issues, businesses should:
- Learn the specific deadlines for different types of returns (monthly, quarterly, annual).
- Assign a person or team to handle GST compliance to ensure responsibility.
- Provide regular training for your accounting staff to keep them updated on GST regulations and filing processes.
- Regularly check your GST compliance status to identify and resolve potential issues early.
Inaccurate Data Entry
Inaccurate data entry in GST refers to mistakes made when recording information about sales, purchases, and tax calculations. These errors can cause mismatched returns, incorrect tax payments, and possible audits.
Consequences of Inaccurate Data Entry:
- Discrepancies between sales and purchase data can lead to increased attention from tax authorities.
- Errors might result in claiming ineligible Input Tax Credit (ITC) or missing out on eligible credits.
- Inaccuracies can lead to fines and interest on unpaid taxes.
- Frequent mistakes may harm your business’s reputation and attract more scrutiny from the tax department.
How to Prevent Inaccurate Data Entry?
To avoid these issues, businesses should:
- Create a system for double-checking data entry, especially for important information like invoice details and tax rates.
- Conduct training sessions for staff involved in GST compliance to highlight the importance of accurate data entry.
- Establish checks and reviews for data entry processes, including regular audits of entered data.
- Maintain organized records of invoices, receipts, and transactions to support accurate data entry.
- Consistently reconcile sales and purchase records to catch discrepancies early.
Not Maintaining Proper Records
Failing to maintain proper records in GST can lead to serious compliance issues, making it difficult to file returns, claim Input Tax Credit (ITC), and increasing the risk of penalties during audits.
Consequences of Poor Record-Keeping:
- Without proper documentation, businesses may miss out on claiming eligible ITC, leading to higher tax payments.
- Inadequate records can attract attention from tax authorities, raising the chances of audits.
- Poor record-keeping can cause delays in operations and lead to mismanagement of inventory and finances.
- Non-compliance with record-keeping requirements can result in fines and interest on unpaid taxes.
How to Maintain Proper Records?
To avoid these problems, businesses should:
- Create clear categories for different types of records, such as sales invoices, purchase invoices, bank statements, and tax returns.
- Keep digital copies of all documents to reduce the risk of loss and make it easier to retrieve them during audits.
- Provide training on the importance of proper record-keeping and the specific GST requirements.
- Establish clear policies on how long to keep various documents, typically at least 8 years.
- Conduct regular audits of your records to ensure accuracy and completeness, and address any discrepancies promptly.
Claiming Ineligible Input Tax Credit (ITC)
Claiming ineligible Input Tax Credit (ITC) happens when a business incorrectly claims GST credits for purchases that don’t qualify under the GST law. This can lead to compliance issues, penalties, and interest charges.
Common Reasons for Ineligible ITC Claims:
- Claiming ITC on goods or services used for personal purposes instead of for business.
- Claiming ITC on purchases related to exempt goods or services, which are not eligible for ITC.
- Using invoices that are not valid or do not meet GST standards, such as missing GSTIN or incorrect format.
- Claiming ITC on purchases from suppliers who are not registered under GST.
- Not following specific conditions set by GST law, such as not receiving the goods or services.
How to Avoid Ineligible ITC Claims?
To prevent these issues, businesses should:
- Ensure all suppliers are registered under GST and provide valid GST invoices.
- Keep complete and accurate records of all invoices and related documents to support ITC claims.
- Always check invoices for necessary details like GSTIN and correct tax rates before claiming ITC.
Ignoring Reverse Charge Mechanism
The Reverse Charge Mechanism (RCM) in GST is a system where the recipient of goods or services is responsible for paying the tax instead of the supplier. Ignoring RCM can result in compliance issues, penalties, and financial liabilities.
Common Mistakes Businesses Make with RCM:
- Many businesses overlook transactions that are subject to reverse charge, leading to missed tax payments.
- Errors in calculating the GST payable under RCM can result in either underpayment or overpayment.
- Businesses may not know which documents to maintain for compliance with RCM provisions.
How to Avoid RCM Compliance Issues?
To prevent mistakes related to RCM, businesses should:
- Set up processes to identify and track transactions subject to RCM to ensure timely tax payments.
- Keep thorough records of RCM transactions, including invoices and payment receipts, to support compliance.
- Provide training for your accounting team on RCM rules and the importance of accurate reporting.
- Make sure that GST on RCM transactions is paid promptly within the required timeframe.
Not Updating GST Details
Failing to update GST details means not correcting information related to GST registration, such as business address, bank details, or contact information. This oversight can lead to compliance issues and administrative problems.
Common Mistakes from Not Updating GST Details:
- Continuing to use an outdated address can cause mismatches in filings, leading to possible penalties.
- Using old bank account details can create issues with processing refunds and making payments.
- Not updating GST registration after changes in ownership, partnership, or business type can cause complications.
- Failing to change email or phone numbers can disrupt communication with tax authorities.
How to Avoid These Mistakes?
To prevent issues with outdated GST details, businesses should:
- Periodically review and update your GST registration details.
- Maintain a checklist of information to update regularly, including address, bank details, and authorized signatories.
- Whenever there are changes in business address, ownership, or contact information, update the GST registration immediately.
- Train employees on the importance of keeping GST details current and the process for making updates.
- Be aware of the deadlines for updating GST registration and ensure compliance within those timelines.
Misclassification of Transactions: Confusion Between State and Central GST
GST operates on a dual system with Central GST (CGST) and State GST (SGST) for intrastate transactions, and Integrated GST (IGST) for interstate transactions. Misclassifying these transactions can lead to compliance issues, financial penalties, and incorrect tax payments.
Common Misclassification Mistakes:
- Businesses may mistakenly classify sales and purchases as CGST, SGST, or IGST, leading to confusion.
- Not recognizing the difference between intrastate transactions (which require CGST and SGST) and interstate transactions (which require IGST) can result in applying the wrong tax rates.
How to Avoid Misclassification Errors?
To prevent these mistakes, businesses should:
- Ensure that you and your staff understand the GST system, especially the differences between CGST, SGST, and IGST.
- Offer training for your accounting and finance teams on how to classify transactions correctly.
- Set up procedures for recording transactions to ensure they are accurately classified based on their nature.
- Regularly review transactions to verify correct classification, especially during busy periods.
- Keep thorough records of all transactions, including invoices and contracts, to support the classification and tax treatment applied.
Lack of Training for Staff
A lack of training for staff on GST compliance can lead to significant issues for businesses.
Problems Caused by Insufficient Training:
- Mistakes in data entry can lead to incorrect tax calculations and mismatched returns.
- Failing to recognize key compliance needs can result in penalties and legal problems.
- Non-compliance may attract attention from tax authorities, raising the likelihood of audits.
- Staff may take longer to complete GST-related tasks, resulting in reduced productivity.
- Incorrectly categorizing transactions as CGST, SGST, or IGST can create additional compliance challenges.
Continuous non-compliance can damage a business’s reputation with tax authorities and stakeholders.
Strategies for Improving GST Compliance Training
To ensure proper compliance, businesses should:
- Conduct regular training sessions focused on GST regulations, compliance requirements, and best practices.
- Develop a centralized repository for GST-related documents, FAQs, and guidelines for staff reference.
- Incorporate GST compliance training into the on boarding process for new hires in relevant roles.
By investing in staff training and education, businesses can enhance their GST compliance efforts, reduce risks, and improve overall operational efficiency.
Neglecting Compliance for Exempt Goods/Services
Neglecting compliance for exempt goods and services under GST can lead to misunderstandings about tax obligations and financial repercussions. Exempt items are those on which no GST applies, but businesses must still understand the rules surrounding them.
Common Mistakes Related to Exempt Goods/Services:
- Failing to accurately identify exempt goods/services can result in improper tax treatment.
- Not keeping proper records for exempt transactions can cause problems during audits.
- Attempting to claim Input Tax Credit (ITC) on exempt goods/services is not allowed.
- Not reporting exempt sales correctly in GST returns can lead to discrepancies.
- Failing to understand specific conditions or limits under which certain goods/services are exempt.
Steps to Enhance Compliance
To avoid these issues, businesses should:
- Keep up with the list of exempt goods and services under GST and any changes in regulations.
- Educate employees about classifying exempt goods/services and associated compliance requirements.
- Create and communicate policies for handling exempt transactions, including documentation and reporting processes.
- Regularly audit to ensure compliance with GST rules regarding exempt items and correct any discrepancies.
By knowing these common mistakes and taking these steps, businesses can follow GST rules better and lower the chances of facing penalties.
Additionally, engaging a GST consultant can help minimize errors, enhance compliance, and save time and resources while navigating GST regulations.
