15 Common GST Pitfalls That Invite Scrutiny – And How Businesses Can Proactively Plug Them

1. Background: Why GST Scrutiny Is Rising

Under GST, assessees are expected to self-assess their liability, claim input tax credit (ITC), pay tax and maintain records independently. However, this self-assessment framework now runs on a powerful data analytics backbone.

The Department routinely cross-verifies:

  • GSTR-1
  • GSTR-3B
  • GSTR-2B
  • E-invoices
  • E-way bills
  • Annual returns (GSTR-9, GSTR-9C wherever applicable)
  • Books of account and ledgers
  • Audited financial statements
  • Third-party and departmental intelligence databases

Most notices today are not necessarily based on clear evidence of evasion. They are frequently triggered simply because:

  • Figures in different returns do not align
  • Books and GST records are not reconciled
  • Obligatory reversals are missed
  • Documentation is insufficient or weak

A business may intend to be compliant yet still face audit and enquiries if its data trail does not clearly support that position. The discussion below identifies 15 recurring GST lapses that commonly trigger scrutiny and sets out preventive controls for each.

2. ITC Not Reversed Where Supplier Payment Exceeds 180 Days

One of the first checks in any GST audit is whether ITC has been reversed where supplier dues are outstanding beyond 180 days from the invoice date.

Core Requirement

Where the recipient has availed ITC on an invoice but fails to pay the supplier the value of supply plus GST within 180 days:

  • The proportionate ITC must be reversed, or
  • The amount must be paid to the Government with interest

If payment is made at a later date, the assessee can re-avail the eligible ITC.

Typical Scenarios

  • Full invoice unpaid beyond 180 days – Entire ITC relating to that invoice must be reversed.
  • Partial payment – Reversal is required only for the unpaid proportion of the invoice.
  • Subsequent settlement – ITC may be taken back in the period in which payment is actually made.
  • RCM invoices – The 180-day payment condition does not apply; a separate ledger for RCM vendors should be maintained.

Practical Controls

  • Maintain an invoice-wise ageing report for every supplier
  • Link each vendor payment to specific invoices, not merely to total amounts
  • Periodically identify dues older than 180 days and compute corresponding ITC reversal
  • Preserve robust payment evidence and reconciliation statements

3. Non-Compliance With Rule 42/43 for Exempt and Mixed Supplies

Where inputs, input services and capital goods are used for both taxable and exempt supplies, the assessee cannot retain the full ITC. Common credit must be reversed in the prescribed manner.

Applicable Rules

  • Rule 42 – Reversal mechanism for inputs and input services used commonly for taxable and exempt supplies
  • Rule 43 – Reversal mechanism for capital goods used for both taxable and exempt purposes

Frequent Errors

  • Claiming full ITC on inputs and input services when a portion of turnover is exempt
  • Failing to apply Rule 42 on routine administrative and office expenses (rent, communication, stationery, etc.)
  • Not working out credit reversal on capital goods as per Rule 43 despite use in both taxable and exempt activities
  • Ignoring non-business use of assets or services and omitting proportionate reversal

Conceptual Formula

Common ITC attributable to exempt supplies
= Common ITC × Exempt Turnover ÷ Total Turnover

Sectors at Higher Risk

  • Hospitals and healthcare organisations
  • Educational institutions
  • Banks and NBFCs
  • Real estate and construction projects
  • Charitable entities executing both exempt and taxable activities
  • Assessees dealing with mixed or composite supplies

Monthly workings for Rule 42 and Rule 43 should be properly documented and preserved for scrutiny.

4. Incidental and “Other Income” Not Considered for GST

Many businesses focus only on their main sales ledger while preparing returns. Departmental officers, however, pay close attention to “Other income” in the Profit & Loss account.

Income Heads That Require GST Evaluation

  • Sale of scrap and waste
  • Commission, incentives or brokerage
  • Employee recoveries (canteen, transport, notice pay, etc.)
  • Penalties, cancellation charges or liquidated damages
  • Packing, delivery, handling and loading charges
  • Documentation and processing charges
  • Disposal of old machinery, furniture or other fixed assets
  • Recoveries from customers booked as reimbursements
  • Forex gains where linked to underlying taxable supplies

Key questions include:

  • Is the activity a supply of goods or services under GST?
  • If yes, has it been reported in GSTR-1 and GSTR-3B?
  • Has the correct classification and rate been applied?

The Department often follows this trail:
Profit & Loss Account → Other income → Ledger scrutiny → GST taxability analysis → Comparison with GSTR-1/GSTR-3B → Issue of notice if mismatch persists.

5. Non-Payment of GST on Advances for Services

For goods, liability on advances has been relaxed for regular registered suppliers in most cases. Services remain a sensitive area for GST on advances.

When to Review Advances

  • Advances for taxable services – Time of supply provisions may trigger GST at the time of receipt of advance unless covered by a specific relief
  • Mobilisation advances – Common in construction, turnkey, and long-term service contracts
  • Retention amounts – Require review of contract terms and time of supply
  • Security deposits – Not taxable at the time of deposit if purely in the nature of refundable security; if adjusted as consideration, GST implications arise
  • Advances subsequently refunded – Need proper issuance of refund voucher or credit note as applicable

A frequent compliance lapse occurs where advances are posted in the balance sheet but never examined from a GST time-of-supply perspective.

6. Ignoring Reverse Charge Mechanism (RCM) on Eligible Expenses