Summary: Businesses finalizing their annual accounts must reconcile accounting records with GST compliance to avoid tax demands, penalties, and credit denials. Key reconciliations include sales, input tax credit (ITC), GST ledgers, and reverse charge mechanism (RCM). Sales reconciliation involves verifying sales reported in books with GSTR 1 and 3B, reviewing invoices, and ensuring correct place of supply. ITC reconciliation requires matching ITC claimed in GSTR 3B with books and GSTR-2B, adhering to Section 16(2) conditions, reversing ineligible ITC, and proportionately reversing common credits. GST cash and credit ledgers should be reconciled with payments, ITC availed, and journal entries. Year-end adjustments and provisions include accounting for March 2025 GST payable and ITC, evaluating GST liability on advances, and verifying GST on unbilled revenues. RCM reconciliation involves identifying and ensuring tax payment and ITC claims on RCM expenses. Disclosure and reporting of GST orders/demands in financial statements depend on whether the demand is disputed. Undisputed demands are accounted for as expenses and provisions, while disputed demands are disclosed as contingent liabilities. Financial statements, directors’ reports, auditors’ reports, and tax audit reports have specific reporting requirements for GST-related orders and litigations, as per accounting standards and CARO 2020. Thorough reconciliation enhances compliance accuracy, prevents disputes, and ensures financial statements present a true and fair view.
This article outlines key GST checkpoints and reconciliations to be performed as part of the annual accounts finalisation exercise, aiding in robust financial reporting and regulatory compliance.
Page Contents
1. Sales Reconciliation
- Verify that Sales reported in books of accounts reconciles with Sales reported in GSTR 1 and GSTR 3B. If any differences are found, identify the reasons for differences and make corrections/amendments where ever necessary.
- Review if all invoices, credit notes and debit notes raised during the financial year are reported in GST returns.
- Ensure that place of supply is correctly reported in B2B and B2C interstate transactions. IGST is paid on Inter-state transactions and CGST+SGST is paid on Intra-state transactions.
- Reconcile the tax liability recorded in books with the liability paid through GSTR-3B to identify any shortfall or excess.
- Ensure proper classification and treatment of non-GST income (e.g., interest income, dividend, sale of land/building) which should be excluded from taxable turnover but properly disclosed.
- Reconcile items from e-invoicing system as well as e-way bills with books of accounts.
- Verify whether export proceeds have been realized within one year
2. Reconciliation of Input Tax Credit (ITC)
- Reconcile ITC claimed in GSTR 3B with books and GSTR-2B for the entire year. ITC must be claimed only on eligible and invoices reflected in GSTR 2B and recorded in books of accounts.
- Claim ITC only if conditions under Section 16(2) of the CGST Act are fulfilled, i.e., invoice is available, goods/services received, tax paid by supplier, and invoice is recorded in books.
- Ensure ineligible ITC under Section 17(5) (e.g., personal use, food and beverages, motor vehicles, employee-related insurance, etc.) is reversed and appropriately expensed in books of accounts.
- Where common credits are used for exempt and taxable supplies, verify whether proportionate reversal has been computed under Rule 42/43 and accounted for.
- For capital goods, ensure ITC claimed is excluded from the asset cost while computing depreciation under Income Tax Act and Companies Act. For fixed assets sold during year, ensure ITC is reversed wherever applicable.
- Check ITC reversal for assets and liabilities written off.
- Check if ITC reversal is done for unpaid invoices beyond 180 days from invoice date as per Section 16(2), and that such credit is reclaimed when payment is subsequently made.
- Actively follow up with vendors whose invoices are accounted and paid but do not reflect in GSTR-2B. Such missing credits cannot be claimed unless appearing in GSTR 2B; hence vendor compliance must be checked and continuous follow ups to be taken to ensure vendor compliance.
3. Cross Verification of GST Ledgers with books
- Reconcile GST Cash Ledger with payments made via challans during the financial year and also balance as per books of accounts as on 31 March 2025 should match with the GST cash ledger.
- Reconcile GST Credit Ledger with ITC availed and utilized in GSTR 3B during the financial year and also balance as per books of accounts as on 31 March 2025 should match with the GST credit ledger.
- Verify whether following Journal Entries related to GST Cash Ledger and GST Credit Ledger have been properly passed in books of accounts.
| Transaction | Debit (Dr.) | Credit (Cr.) |
| GST payment made via challan | GST Cash Ledger | Bank |
| Liability discharged using GST Cash Ledger | Output GST Payable | GST Cash Ledger |
| ITC claimed and booked in books | GST Credit Ledger | Input GST |
| Liability discharged using ITC | Output GST Payable | GST Credit Ledger |
| ITC reversed (ineligible or 180-day payment rule) | Input GST | GST Credit Ledger |
4. Adjustment Entries and Year-End Provisions
- Verify that GST payable and ITC to be claimed for the month of March 2025 is accounted for and disclosed in current liabilities and current assets schedules respectively.
- Advances received for services should be evaluated for GST liability
- Verify if unbilled revenues are liable to GST under the time of supply provisions. (If services were rendered in March 2025 but the invoice is issued after the prescribed 30-day period, GST becomes payable in March 2025 itself, as per Section 13 of the CGST Act. Therefore, such cases should be reviewed and appropriate GST liability should be recognized in the year-end books.)
5.Reverse Charge Mechanism (RCM)
- Identify expenses on which GST under RCM is to be paid such as legal fees, import of services, director remuneration, goods transport agency services, etc.
- Ensure tax has been paid under RCM and ITC of the same is claimed.
- Reconcile RCM entries in books of accounts with GSTR-3B to identify any shortfall.
6. Disclosure and Reporting of GST Orders / Demands in Financial Statements
- If Demand is not disputed: When an order from the GST Department is received and the liability is accepted by the business (i.e., no appeal has been filed, or the company agrees with the demand), the amount should be accounted as an expense in the books and reflected as a provision or liability under “Statutory Dues Payable” in the balance sheet. Provision for Interest and penalties should also be made.
- If Demand is Disputed: Where the order is disputed and the company intends to file an appeal on that matter, the amount should be evaluated for disclosure as a contingent liability as per AS 29 or Ind AS 37. This means it will not be recorded in the books as an expense but will be disclosed in the Notes to Accounts, unless the outflow becomes probable and measurable (in which case it should be provided for in books).
The auditor may also explore AS 4 Contingencies and Events Occurring After the Balance Sheet Date in case orders have come subsequent to 31 March and before completion of audit.
- If GST demands are under appeal or pending litigation, a summary should be reported/disclosed in the financial statements:
| Sr. No. | Reporting in | Under Section/Clause | Remarks |
| 1 | Financial Statements | Notes to Accounts – as part of contingent liabilities or commitments | Report if Demand is disputed |
| 2 | Directors Report | Significant and Material Orders Passed by Regulators or Courts | Report If the amount involved in litigation is material or has a significant impact on the company’s financial position |
| 3 | Auditors Report | Clause 7 of CARO 2020 | Report if Demand is disputed |
| 4 | Tax Audit Report | In clause 41 of Tax Audit Report (Form 3CD) – details of Demand raised and Refund received | Report any Demand raised whether disputed or not. |
- Illustrative manner of disclosure:
| Statue / Nature of Dues | Amount in INR | Period to which the amount relates | Forum where dispute is pending |
7. Conclusion
Thorough reconciliation of GST records during accounts finalisation not only enhances compliance accuracy but also safeguards businesses from future disputes, audits, and penalties. A comprehensive review of sales, ITC, RCM, ledgers, and litigations ensures fair presentation in financial statements and upholds the principle of true and fair view.
*****
Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal.
The above article is written by Aman Inamdar and CA Shravan Suratwala. The authors can be reached at contact@smsuratwala.com or shravan.suratwala@outlook.com.
Aman Inamdar is currently pursuing his Chartered Accountancy course and is currently completing internship with S.M. Suratwala & Co., Chartered Accountants, Pune.
Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 10+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation and Assurance. He has also worked three plus years in the field of Internal and Process Audit while pursuing chartered accountancy course.”
Author Bio
