As the financial year 2025-26 begins, businesses must prepare by addressing both substantive and procedural GST compliance requirements. Substantively, legal amendments, such as the revised definition of Input Service Distributor (ISD) under the CGST Act, necessitate updated practices for input tax credit distribution. Businesses must also distinguish between ISD and cross charges for distinct persons under GST law. Procedural updates include mandatory e-invoicing for businesses with turnover exceeding ₹5 crore, ensuring compliance with Rule 48(4) of the CGST Rules. Agreements with vendors and customers must be reviewed to incorporate GST clauses, while transport agencies must file Annexure V by the revised deadline of March 31, 2025, for opting into the Forward Charge Mechanism. Additionally, businesses supplying exports without IGST payment must submit a Letter of Undertaking (LUT) before April 1, 2025. Key compliance tasks include updating invoicing patterns, HSN code usage, and addressing B2C QR code requirements for large taxpayers. Comprehensive reconciliations between GSTR filings, e-way bills, e-invoices, and financial books are critical to avoiding mismatches and penalties. Effective credit note and debit note management, as per Section 34 of the CGST Act, remains vital for adjusting taxable values and liabilities. Businesses opting for the Composition Scheme must file declarations in CMP-02 by March 31, 2025. Lastly, businesses are urged to reconcile Input Tax Credit (ITC) with GSTR-2A and books of accounts, ensuring accuracy and compliance with GST regulations to mitigate risks of credit denial or penalties. Let’s explore how to approach this effectively.
1. Substantive Aspects
I. Legal Changes Impacting Stakeholder Interactions:
Are there any recent legal amendments effective from 1st April 2025 that necessitate a change in how your business interfaces with customers?
II. Vendor Agreements:
Do the existing agreements with vendors require revisions in light of legislative updates or compliance requirements applicable from the new financial year?
2. Procedural Aspects
I. Regulatory Compliance Requirements:
Are there new compliance obligations or filing requirements that become applicable from 1st April 2025?
II. GST Reconciliations and Their Implications:
What do the reconciliations completed up to 31st March 2025 indicate? It is crucial to assess whether any retrospective adjustments are needed that could impact the compliance or reporting in the new financial year.
ACTION REQUIRED DUE TO CHANGE IN SUBSTANTIVE PROVISIONS:
1. INPUT SERVICE DISTRIBUTOR (ISD)
Amendment to Sec.2 (61) of the CGST Act,2017 “Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under subsection
(3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20;
It is critical to differentiate between Cross Charge and ISD
ISD
Receives tax invoices towards the receipt of input services and liable to distribute the input tax credit in respect of such invoices to the distinct Person. The benefit of ITC can be availed only by the specified distinct person. It is primarily applicable only for services and not for goods.
Cross Charge:
Under Schedule 1 of CGST, it is specified that any supply, even if made without consideration, between two distinct persons and/or Related person (different GST registrations, same PAN) will be treated as supply. In essence, Cross charge is applicable for both goods and services between distinct persons with no consideration.
2. E-INVOICE:
As per Rule 48(4) of the CGST Rules, read with the latest notifications issued by the Government, e-invoicing is mandatory for certain classes of registered persons. The threshold for mandatory e-invoicing is based on aggregate turnover in any financial year starting from 2017–18 onwards.
E-invoicing is mandatory for a registered person (excluding those covered under sub-rules (2), (3), (4), and (4A) of Rule 54) if, Their aggregate turnover exceeds the prescribed threshold (e.g., ₹5 crores as per recent amendments, subject to change via notifications),
- In any financial year from 2017–18 onwards, and
- They are making B2B supplies (to registered persons) or exports.
Such taxpayers are required to generate invoices and other prescribed documents electronically through the Invoice Registration Portal (IRP) and obtain a valid Invoice Reference Number (IRN) and QR Code., subject to exceptions provided in the section namely SEZ, Insurers, Banks and Financial Institutions and so on
3. RENEWAL OF AGREEMENTS: A GST PERSPECTIVE
With several customer and vendor agreements due for renewal in April 2025, it is imperative for businesses to revisit and review the contractual terms. This review should ensure that all agreements are updated to incorporate relevant GST-related clauses, including tax liability, invoicing, input tax credit eligibility, and indemnity provisions, to safeguard the company’s interests and ensure seamless compliance.
4. REQUIRED ACTIONS ARISING FROM PROCEDURAL AMENDMENTS:
1. Goods Transport Agent:
a Goods Transport Agency (GTA) that intends to pay GST under the Forward Charge Mechanism (FCM) must file a declaration in Annexure V between 1st January and 31st March of the preceding financial year.
For the financial year 2025-26, this means the GTA must file Annexure V by 31st March 2025, not by 15th March 2025. The deadline was extended from 15th March to 31st March as per amendments through Notification No. 06/2023-CT(R) dated 26.07.2023.
Also, once a GTA opts for FCM by filing Annexure V, the option continues for subsequent years unless the GTA files Annexure VI to revert to Reverse Charge during the same 1st Jan–31st Mar window of the preceding year.
2. SEZ and Export Supply:
For the financial year 2025–26, the Letter of Undertaking (LUT) must be filed on or before 1st April 2025 by any registered person intending to supply goods or services for export without payment of IGST. The following are the key points to be kept in mind:
- The LUT must be furnished in Form GST RFD-11 online on the GST portal.
- Once submitted, the LUT is deemed accepted upon generation of Application Reference Number (ARN).
- No physical documents are required to be submitted to the jurisdictional GST office.
- The LUT is valid for the entire financial year in which it is filed.
- Only those not prosecuted for tax evasion exceeding ₹2.5 crore are eligible to furnish an LUT instead of a bond.
5. COMPOSITION DEALERS:
Businesses that wish to avail the benefits of the Composition Scheme for the financial year 2025–26 must take timely and deliberate action. The first step involves filing Form CMP-02—a declaration of intent to opt into the scheme—before the commencement of the financial year, i.e., by 31st March 2025.
Before proceeding, it is essential to carefully assess eligibility. This includes reviewing the aggregate turnover of the preceding financial year and ensuring that the nature of supplies made falls within the scope permitted under the scheme. Equally important is verifying that the business has not contravened any provisions of the GST law, particularly those that would disqualify it from the scheme—such as supplying goods or services not eligible under composition or engaging in inter-state outward supplies.
6. QR CODE COMPLIANCE FOR B2C TRANSACTIONS:
In accordance with GST Notification No. 14/2020 – Central Tax, dated 21st March 2020, the Government has mandated the inclusion of Dynamic QR Codes on B2C invoices for taxpayers whose aggregate turnover exceeds ₹500 crores in the preceding financial year.
This requirement aims to enhance transparency, promote digital payments, and streamline the invoicing process. Businesses falling under this threshold must ensure compliance by embedding dynamic QR codes on all B2C invoices issued, enabling real-time payment verification and audit trails.
Non-compliance may attract penal consequences under GST law, making timely implementation crucial for large taxpayers.
7. CLAIMING OF REFUND
Under the GST regime, the timely filing of refund applications is a critical compliance requirement. As per Section 54 of the CGST Act, 2017, a taxpayer must file a refund claim within two years from the relevant date, which varies depending on the nature of the refund—such as export of goods/services, excess balance in the electronic cash ledger, or deemed exports.
Missing this statutory deadline can lead to the forfeiture of the refund entitlement, regardless of the merit of the claim. Taxpayers are advised to regularly reconcile their GST accounts and monitor potential refund scenarios to avoid such lapses.
8. ISSUE OF CREDIT NOTE AND DEBIT NOTE
credit notes and debit notes play a pivotal role in adjusting taxable value and tax liability post-invoice issuance. These adjustments may arise due to sales returns, post-sale discounts, pricing errors, or short/excess supplies. As per Section 34 of the CGST Act, 2017, businesses are required to disclose all credit and debit notes issued during a tax period in their monthly/quarterly returns (Form GSTR-1) and ensure the corresponding impact is reflected in Form GSTR-3B.
9. PLAN ALL TYPES OF INVOICING
- Every new financial year begins with a new series of invoice numbering pattern.
- However, every business owner is expected to calculate aggregate turnover from FY 2017–18 to 2023–24. If Turnover had crossed Rs.5cr in the previous FY not among the excluded categories under Rule 54(2) to (4A), then must comply with e-invoicing provisions. Failing to generate e-invoices when required can result in invoices being treated as invalid, affecting input tax credit and leading to penal consequences. If applicable then vendors are to be communicated for e-invoice change.
- It is essential to ensure that all self-invoices under RCM for FY 2024–25 have been duly prepared, recorded, and retained as part of statutory documentation
10. HSN REPORTING
As per GST Notification No. 78/2020 – Central Tax dated 15th October 2020, the requirement to mention HSN codes on B2C invoices varies based on the taxpayer’s aggregate turnover in the preceding financial year:
- 4-digit HSN code is mandatory for taxpayers having aggregate turnover up to ₹5 crore.
- 6-digit HSN code is mandatory for those with aggregate turnover exceeding ₹5 crore.
This mandate ensures standardized product classification and aids in effective compliance monitoring. Taxpayers must ensure accurate HSN code disclosure on invoices issued for B2C transactions to avoid penal consequences.
11. RECONCILIATIONS:
As the financial year closes and a new one begins, businesses must focus on comprehensive GST reconciliations to ensure accuracy in filings, avoid mismatches, and minimize compliance risks. Below are the critical reconciliation points that require attention:
- GSTR-1 vs. GSTR-3B
It is crucial to reconcile outward supplies reported in GSTR-1 (invoice-wise details) with the summary liability declared in GSTR-3B. Discrepancies can lead to demand notices or scrutiny by the department.
- E-Way Bill vs. GSTR-1
Details of supplies for which E-Way Bills are generated should match the outward supplies declared in GSTR-1. Any mismatch could trigger system alerts or departmental inquiries.
- E-Invoice Data vs. E-Way Bill
Both e-invoices and e-way bills are generated using the same IRP data. However, inconsistencies in values or document types between these two systems must be reconciled to maintain alignment and traceability.
- E-Invoice Data vs. GSTR-1
E-invoice data (auto-populated into GSTR-1 in many cases) must be reviewed and reconciled against manually entered or system-generated GSTR-1 data to avoid errors in tax reporting.
- E-Invoice Data vs. E-Way Bill vs. GSTR-1
A three-way reconciliation between e-invoice, e-way bill, and GSTR-1 is recommended to ensure consistency in supply value, tax liability, and compliance across all statutory systems.
- Turnover as per Books vs. GSTR-3B
Annual turnover reported in the financial statements should reconcile with the turnover disclosed in GSTR-3B. Significant differences may lead to audit flags or tax authority queries.
- E-Invoices Raised vs. Turnover as per Books
The total turnover reflected through e-invoices generated during the year should match the turnover as per books of accounts. This ensures the completeness of e-invoice compliance and accurate GST liability reporting.
12. INPUT TAX CREDIT
Proper reconciliation of Input Tax Credit (ITC) is critical for ensuring GST compliance and avoiding denial of credit, interest, or penalties. Below are the key ITC-related reconciliations that businesses must perform at the close of the financial year:
I. GSTR-2A vs. GSTR-3B
Taxpayers must reconcile the auto-populated ITC in GSTR-2A (based on supplier GSTR-1 filings) with the ITC claimed in GSTR-3B. Variances may arise due to missed invoices, timing differences, or supplier defaults. Unmatched credits may be flagged and disallowed.
II. ITC as per GSTR-2A and/or GSTR-2B vs. Books of Accounts
The ITC recorded in the books should align with the eligible credits appearing in GSTR-2A (dynamic) or GSTR-2B (static). Businesses should ensure that only eligible and supported credits are claimed and excess claims are reversed.
III. Electronic Credit Ledger Balance vs. Books
The closing balance in the Electronic Credit Ledger (ECL) available on the GST portal must be matched with the ITC ledger as per the books. Differences could indicate issues in return filing, incorrect utilization, or unrecorded adjustments.
IV. ITC Register as per Books vs. GSTR-3B and GSTR-2A
A three-way reconciliation is advisable:
- Compare the ITC register maintained in the books with the ITC claimed in GSTR-3B,
- ITC in the Books with 2B for any reversal due to ineligibility
- ITC in the Books with 2A for follow up
Conclusion
Beyond the key substantive and procedural compliances discussed, businesses must remain vigilant throughout the year on several ongoing aspects—such as changes in tax rates, correct classification of goods or services, and monitoring outstanding dues. GST, by its dynamic nature, demands continuous attention and proactive compliance. It serves as a constant reminder for every business owner to stay informed, adapt promptly, and maintain discipline in their financial and operational practices.
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