GST: Key Concerns for Taxpayers

GST: Key Concerns for Taxpayers

Eight years after GST's rollout, the compliance burden has shifted from understanding the basics to surviving automated scrutiny. In FY 2026-27, your biggest risks are ITC disallowance triggered by vendor mismatches, missed reverse-charge cash payments, refund claims stalled at field level, and the now-active 30-day e-invoice rule that makes back-dated IRN generation impossible. If your GSTR-2B does not reconcile with your books, a Section 73 or Section 74 notice is increasingly a matter of when, not whether. Here is what every taxpayer needs to know — and do — right now.

Input Tax Credit — Your Most Expensive Risk in FY 2026-27

The auto-populated GSTR-2B regime has fundamentally changed ITC eligibility. Under Rule 36(4) of the CGST Rules 2017, you cannot claim ITC on invoices that your vendor has not uploaded to their GSTR-1 (or Invoice Furnishing Facility for quarterly filers). This is not a reconciliation courtesy — it is a hard legal cap.

Why this matters more in 2026:

• GSTR-2B auto-populates directly into your GSTR-3B. Any excess claim over the auto-populated amount triggers an automated mismatch flag.
• Section 16(4) operates as an absolute deadline: ITC on FY 2025-26 invoices is permanently lost if not claimed by the due date of the September 2026 GSTR-3B. There is no condonation.
• The Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) cross-reference your ITC claims with supplier filings. Divergences above threshold are routed automatically for Section 61 scrutiny.

What the mismatch looks like in rupees:

Your GSTR-2B for April 2026 shows eligible ITC of Rs. 18,00,000. Your books show Rs. 22,50,000. The Rs. 4,50,000 gap — three vendors filed their GSTR-1 late — is ineligible ITC. If you claim it anyway and the department raises a demand, you owe Rs. 4,50,000 in tax plus interest at 18% per annum under Section 50. At 120 days of delay, that interest adds Rs. 26,630. If the department classifies the claim as fraudulent under Section 74, the penalty is 100% of tax — another Rs. 4,50,000. A paperwork oversight becomes a Rs. 9,26,630 liability.

The three-step ITC discipline process:

1. Download GSTR-2B on the 14th of each month — the day the portal generates it for the previous month.
2. Run a three-way match: purchase register → GSTR-2B → books. Flag every invoice present in your books but absent from GSTR-2B.
3. Contact the vendor and give them a 7-day cure window before your GSTR-3B due date. If they fail, do not claim ITC. Create a suspense entry and revisit the following month once they file.

Build a vendor compliance scorecard tracking each supplier's GSTR-1 filing regularity over the prior six months. A vendor with a pattern of late filing is a cash-flow risk to your business — price that into your procurement decision.

Reverse Charge Mechanism — The Cash Payment You Cannot Skip

RCM under Section 9(3) and Section 9(4) of the CGST Act 2017 continues to ambush SMEs and mid-sized businesses alike. The rule is simple: for specified supplies, the recipient pays the GST, not the supplier. The complication is the mandatory cash-leg requirement.

Common Section 9(3) RCM triggers:

• Legal services from an individual advocate or a firm of advocates
• Goods Transport Agency (GTA) freight on road
• Sponsorship services received by a body corporate or partnership firm
• Services by a director to their company (outside the employee-employer relationship)
• Import of any service from a supplier outside India
• Security services from unregistered persons

The cash-leg rule — and why it trips people up:

RCM tax must be paid from your electronic cash ledger. Section 49(4) of the CGST Act is explicit: ITC sitting in your electronic credit ledger cannot be used to discharge RCM liability. Finance teams who have accumulated large ITC balances routinely assume they can net off. They cannot. The portal does not block this in real time, but a scrutiny reconciliation will catch it, and the demand includes interest at 18% per annum for every day of delay.

Worked example — legal fees:

Your company pays a law firm Rs. 5,00,000 for advisory services in April 2026. Advocates are exempt from GST registration under Section 23, but their services attract RCM.

• RCM payable: Rs. 5,00,000 × 18% = Rs. 90,000
• Cash deposit deadline: on or before the GSTR-3B due date for April 2026 (20 May 2026)
• Self-invoice: You must raise a self-invoice for the receipt of service on or before the date of payment — this is your ITC-supporting document.
• ITC recovery: The Rs. 90,000 appears as eligible ITC in your GSTR-2B for May 2026 and can be claimed in your June GSTR-3B — but only if the service was used for a taxable supply.

Import of services — the most frequently missed RCM trigger:

Any SaaS licence, cloud subscription, foreign consultancy fee, or overseas advertising spend paid to a foreign vendor is an "import of service" under the IGST Act 2017. If the place of supply is India, you owe IGST at the applicable rate on the invoice value converted to INR at the RBI reference rate on the date of supply. Many finance teams track customs duty on goods imports but overlook the IGST liability on service imports entirely.

GST Refund Delays — What Actually Causes Them and How to Cut Through

Refund delays are structural, not accidental. Understanding the specific bottlenecks helps you design a filing approach that avoids them.

The two-year limitation under Section 54(1):

A refund application must be filed within two years from the "relevant date." For goods exporters, the relevant date is the date of filing the shipping bill. For service exporters, it is the date of issue of the invoice. There is no condonation-of-delay provision for refunds. A claim that lapses past two years is gone permanently.

Common causes of RFD-08 deficiency memos:

Step-by-step RFD-01 filing:

1. Reconcile all shipping bills or export invoices against GSTR-1 entries — every IRN and every invoice number must match.
2. Confirm GSTR-3B for the relevant period is filed and refund-eligible ITC is correctly reflected.
3. On the GST portal, go to Services → Refunds → Application for Refund (RFD-01). Select the correct refund category.
4. Upload supporting documents: FIRC or BRC for service exports, shipping bills for goods exports, and purchase invoices for inverted duty structure (IDS) claims.
5. Track the ARN (Acknowledgement Reference Number) weekly under Services → Refunds → Track Application Status.
6. If an RFD-08 deficiency memo arrives, respond within 15 days. Missing this window is treated as withdrawal of the entire application — you must refile from scratch.

E-Invoice Friction — The 30-Day IRN Rule Is Now Live

The 30-day e-invoice rule activated in 2026 means that the Invoice Registration Portal (IRP) will reject any invoice more than 30 days old at the time of IRN generation. An invoice dated 1 April 2026 that you attempt to upload on 2 May 2026 will fail. No IRN is issued. The invoice is legally invalid.

Current applicability: E-invoicing is mandatory for all B2B suppliers with aggregate turnover exceeding Rs. 5 crore in any preceding financial year. The threshold has been cut progressively; verify your position against the current CBIC notification.

What goes wrong and why:

• Month-end billing runs: Large invoice batches raised on the last day of the month are manageable within the 30-day window — but only if your team acts promptly. Invoices that miss the batch and are discovered in month two are the ones that fail.
• ERP-IRP integration breaks: If your API connection to the IRP silently fails for 35 days and no alert fires, those invoices cannot be retroactively registered. Set up a daily IRN-count check: if your ERP raises 50 invoices today and your IRP acknowledgement log shows 48 IRNs, two invoices need attention today.
• Credit notes and debit notes: Both require IRN under the e-invoice framework. Teams often raise these manually without routing through the system.

Legal consequence of a missing IRN:

Rule 48(4) of the CGST Rules 2017 treats an invoice that should carry an IRN but does not as not being a valid tax invoice. Your customer cannot claim ITC on that invoice. Your delay in generating an IRN becomes your customer's cash-flow problem — and a commercial relationship problem. Penalty under Section 122(1)(b): Rs. 10,000 or the amount of tax evaded, whichever is higher, per invoice.

The e-way bill dependency:

For taxpayers covered by e-invoicing, an IRN is a prerequisite for e-way bill generation. No IRN means no e-way bill. A truck intercepted on the road without a valid e-way bill faces detention under Section 129, with a penalty equivalent to 200% of the tax on the goods.

Section 73 and Section 74 Notices — Know the Difference Before You Respond

The GST department issues show-cause notices (SCNs) under two sections, and the distinction determines your penalty exposure and defence strategy.

Section 73 — non-fraud cases:

Applies when the shortfall in tax arises from mistake, oversight, or interpretation error — not fraud or wilful misstatement. The penalty is capped at 10% of the tax demand or Rs. 10,000, whichever is higher. If you pay the full tax and interest before the SCN is issued, the penalty is nil.

Section 74 — fraud, wilful misstatement, or suppression:

Used when the department alleges intentional evasion. The penalty is 100% of the tax determined. The burden partially shifts: you must affirmatively demonstrate the absence of intent. The limitation period extends to five years (versus three years under Section 73).

What AI-driven risk profiling flags in 2026:

• ITC claimed in GSTR-3B substantially exceeds GSTR-2B auto-populated amount
• Sudden ITC spike without proportionate turnover growth
• High vendor concentration — large ITC claims from a small number of suppliers with poor compliance scores
• Refund-to-turnover ratio outside the sector benchmark
• Divergence between e-invoice IRN data and GSTR-1 reported values

The notice response protocol:

1. Day 1: Log the notice — section, date received, demand amount, response deadline.
2. Days 2–7: Gather every document cited: GSTR-1, GSTR-3B, GSTR-2B, purchase invoices, e-invoice IRNs, payment challans.
3. Days 7–12: Draft a reply addressing each paragraph of the notice. For a Section 74 SCN, engage a qualified GST practitioner immediately — a self-drafted response to a fraud allegation rarely ends well.
4. Day 14 (at the latest): File the reply on the GST portal under Services → User Services → My Applications → View Notices and Orders.

Never leave a notice unanswered. Non-response is treated as acceptance of the demand and leads to an ex-parte order.

The pre-SCN consultation window:

CBIC Circular No. 207/19/2023 mandates a pre-SCN consultation for cases above Rs. 1 crore before the formal SCN is issued. Use this window aggressively. Presenting documents, correcting filed returns, and paying admitted tax at this stage can prevent a formal demand — and the associated penalty.

HSN Classification Disputes — Get an Advance Ruling Before the Department Does

Misclassification under HSN generates some of the largest GST demands in active litigation. Two supplies that appear similar can attract sharply different rates depending on whether they are classified as goods or services, composite or mixed, or under one HSN chapter versus another.

High-risk classification areas in FY 2026-27:

• Works contracts: Construction contracts attract 18% GST. Misclassifying a works contract as a pure service — or vice versa — changes both the rate and the ITC eligibility of the recipient.
• Composite vs. mixed supplies: A composite supply is taxed at the rate of the principal supply. A mixed supply is taxed at the highest rate of its components. The distinction turns on whether the components are naturally bundled or artificially combined.
• Custom software vs. packaged software vs. SaaS: Custom software development is a service (18%). Pre-packaged software on a physical medium has historically been treated as goods. SaaS is a service. The lines between these continue to be litigated at Advance Ruling Authorities across states.
• Agricultural and food products: Exemption eligibility depends on processing level and the specific HSN chapter. Minimal processing may preserve the exemption; further processing may not.

The advance ruling route — Section 97, CGST Act 2017:

An advance ruling is binding on the tax authority with respect to your specific transactions. File the application before the Authority for Advance Ruling (AAR) in your state. The fee is Rs. 10,000 per application. The AAR must ordinarily pass an order within 90 days of receiving the application.

If you disagree with the AAR's order, appeal to the Appellate Authority for Advance Ruling (AAAR) within 30 days. With the GST Appellate Tribunal (GSTAT) now becoming operational state by state through 2026, the appellate chain is finally complete — cases no longer need to go directly to the High Court.

When to file: Before you begin the supply. An advance ruling obtained after you have already issued invoices at the wrong rate protects only future transactions; it does not protect the past.

Common Mistakes That Invite GST Scrutiny

The patterns of errors that generate automated flags and Section 65 audit triggers are well-documented after eight years of GST. Avoiding them is significantly cheaper than defending against a notice.

Claiming ITC before receiving goods or services: Section 16(2)(b) requires that the supply must have been received before ITC is claimed. ITC on advance payment invoices — where delivery has not yet occurred — is ineligible and must be reversed.

Not reversing ITC on exempt supplies: If you make both taxable and exempt supplies, Rules 42 and 43 of the CGST Rules require proportionate reversal of ITC attributable to exempt supplies. Missing this reversal is among the top triggers for Section 65 departmental audits.

Paying RCM from the ITC balance: Already covered in detail — but it bears repeating because it is common. Interest at 18% per annum accumulates silently from the original due date.

Turnover mismatch between GSTR-1 and GSTR-3B: Amendments, credit notes, and revised invoices must be reflected in both returns in the same period. A Rs. 10 lakh divergence between GSTR-1 and GSTR-3B in a single month is a direct trigger for automated Section 61 scrutiny.

Missing the GSTR-9 deadline: GSTR-9 (Annual Return) for FY 2025-26 is due on 31 December 2026. Late filing attracts Rs. 200 per day (Rs. 100 CGST + Rs. 100 SGST), capped at 0.25% of turnover in the state. For a business with Rs. 10 crore turnover, the cap is Rs. 2,50,000. A late GSTR-9 also complicates any ongoing refund processing and audit responses.

Ignoring IFF uploads under QRMP: Quarterly Return Monthly Payment (QRMP) filers can upload invoices through the Invoice Furnishing Facility (IFF) in months 1 and 2 of the quarter, enabling customers to claim ITC promptly. Skipping IFF leaves customers' GSTR-2B blank for two months — damaging commercial relationships and potentially losing business.

Worked Example — A Mid-Sized Manufacturer's Compliance Quarter

Scenario: ABC Polymers Pvt. Ltd., Mumbai — aggregate turnover Rs. 28 crore for FY 2025-26, covered by e-invoicing and QRMP opt-out (monthly filer).

April 2026 ITC reconciliation: GSTR-2B shows eligible ITC of Rs. 12,40,000. Books show Rs. 14,80,000. The Rs. 2,40,000 gap traces to two vendors who filed their GSTR-1 late. ABC contacts both vendors immediately. One files by 5 May 2026; the other by 10 May 2026 — both within ABC's GSTR-3B window (due 20 May 2026). ITC of Rs. 2,40,000 is claimed in May's GSTR-3B after confirming the updated GSTR-2B. ✓

GTA services — RCM: Freight payments of Rs. 8,00,000 to an unregistered GTA in April 2026. RCM @ 5% = Rs. 40,000 payable in cash. ABC deposits Rs. 40,000 via the GST portal on 17 May 2026, raises a self-invoice for the freight service, and files GSTR-3B on 20 May 2026 with RCM paid. The Rs. 40,000 ITC appears in June GSTR-2B and is claimed. ✓

E-invoice lapse: Three invoices dated 15 April 2026 had IRN generated on 20 May 2026 — 35 days after the invoice date. The IRP rejected all three. ABC must reissue fresh invoices with a new date, issue credit notes for the original invoices, and notify the customers. Customer ITC on the original invoices is lost unless corrected. ABC implements a daily ERP alert: any invoice over 22 days without an IRN triggers an email to the finance manager. ✗ → corrected going forward.

Refund claim — IGST on exports: Goods exports of Rs. 3,20,00,000 in Q4 FY 2025-26; IGST refund of Rs. 28,80,000 pending. RFD-01 filed on 30 April 2026. An RFD-08 deficiency memo arrives on 20 May 2026, citing shipping bill SB number mismatches on seven invoices. ABC responds on 3 June 2026 (within 15 days) with corrected shipping bill data. Refund of Rs. 27,40,000 sanctioned on 15 July 2026; Rs. 1,40,000 remains under additional scrutiny.

The pattern is consistent across all four scenarios: errors caught internally through reconciliation cost time and process effort. Errors caught by the department cost money — tax, interest, and potentially penalty.

The GST Council's 2026 Reform Agenda — What to Track

The Council's broader reform direction affects planning, not just month-to-month compliance.

Rate rationalisation: Merging the 12% and 18% slabs into a single 15–16% rate is under active discussion. If this materialises in FY 2026-27, it requires repricing of contracts, revision of supply agreements, and ERP reconfiguration — none of which can happen overnight.

E-invoicing perimeter expansion: The Rs. 5 crore threshold is expected to fall further. Businesses approaching this level should integrate their ERP with the IRP now rather than scrambling when the mandate arrives.

GSTAT operationalisation: Appellate Tribunal benches are going live state by state through 2026. Cases historically stuck at the High Court can now be filed before the GSTAT, which is structurally designed for faster disposal of indirect tax disputes.

Cross-functional ownership — the final piece: GST hygiene fails when only the finance team owns it. Procurement must run vendor compliance score checks before onboarding any new supplier. Logistics must synchronise e-way bill generation with actual goods despatch — not the day after. Sales must identify RCM-triggering contract terms — GTA, legal services, director services — before they are signed. IT must maintain ERP-GSTN integrations through every GSTN portal upgrade. When GST compliance is treated as a board-level cross-functional metric rather than a finance department task, the operational defects that invite automated scrutiny steadily disappear.

Key Takeaways

• ITC eligibility is binary: If it is not in your GSTR-2B, it is not claimable. Build a monthly three-way reconciliation — purchase register, GSTR-2B, books — as a non-negotiable process, not a year-end exercise.

• RCM cash payments cannot be netted against ITC: Pay RCM from the electronic cash ledger before your GSTR-3B due date, raise a self-invoice on the date of payment, and only then claim the corresponding ITC in the following month's return.

• Refund claims have a hard two-year limitation with no extension: File early, reconcile shipping bill data with e-invoice IRNs before submitting RFD-01, and respond to every RFD-08 deficiency memo within 15 days.

• The 30-day e-invoice rule makes daily IRN generation mandatory: Set up automated ERP alerts so no B2B invoice goes 22+ days without an IRN. A missing IRN invalidates your customer's ITC and triggers your own penalty exposure.

• Section 73 vs. Section 74 determines whether your penalty is 10% or 100%: Respond to every notice on time, engage a qualified GST practitioner for any Section 74 SCN, and use the pre-SCN consultation window to present documents before a formal demand is raised.

• Classification uncertainty is resolvable for Rs. 10,000: An advance ruling under Section 97 filed before you begin a supply costs Rs. 10,000 and takes approximately 90 days. A classification dispute surfaced in a Section 65 audit — covering multiple years of back supplies — can take years and cost far more than the tax itself.

• GSTR-9 for FY 2025-26 is due 31 December 2026: Late filing costs Rs. 200 per day, capped at 0.25% of state turnover. File on time and ensure the annual return reconciles with your audited financial statements — any unexplained variance is a potential audit trigger.