GST Notices on the Rise: Key Issues, Common Mismatches and Major Compliance Areas Taxpayers Must Review
Summary: During August 2026, the GST Department issued notices covering multiple financial years and issues including turnover mismatches, ITC differences, supplier compliance, classification, exemptions, RCM, discounts, credit notes, inter-State registrations, SEZ supplies, exports, refunds and e-way bill compliance. The article explains the principal forms of GST communication, including FORM GST ASMT-10 under Section 61 read with Rule 99, DRC-01B, DRC-01C and DRC-01. It then examines turnover reconciliation across financial statements, GSTR-1, GSTR-3B, GSTR-9, e-invoice and e-way bill data; ITC mismatches and supplier-related concerns; blocked and common-credit reversals under Sections 16 and 17 and Rules 42 and 43; classification, rates and exemptions; post-sale discounts and credit notes; RCM liabilities; transactions between distinct GST registrations and ISD/cross-charge; SEZ and export refunds; and e-way bill and goods-in-transit compliance. The article concludes with an immediate-response checklist covering identification of the notice, relevant period, discrepancy, documentary evidence, reconciliation, statutory provisions and computation of tax, interest and penalty.
- Introduction
- What Kind of GST Notice Can a Taxpayer Receive?
- 1. GSTR-1, GSTR-3B, GSTR-9 and Books of Account Not Matching
- 2. ITC Claimed in GSTR-3B Exceeding GSTR-2A/GSTR-2B
- 3. ITC From Cancelled, Non-Filing or Non-Compliant Suppliers
- 4. Ineligible ITC and Failure to Reverse Common Credit
- 5. Wrong GST Rate, HSN Classification or Exemption
- 6. Post-Sale Discounts, Dealer Incentives and Credit Notes
- 7. Reverse Charge Mechanism Liability Not Discharged
- 8. Transactions Between Different GST Registrations, ISD and Cross-Charge
- 9. SEZ Supplies, Exports and GST Refund Claims
- 10. E-Way Bill and Goods-in-Transit Violations
- Why GST Notices Are Increasingly Data-Driven
- What Should a Taxpayer Check Immediately After Receiving a GST Notice?
- Conclusion
Introduction
During August 2026, the GST Department issued a significant number of notices covering different financial years and involving a wide range of issues. These notices were not confined to one particular type of default. They covered matters such as ITC mismatches, ineligible credit, differences in turnover, wrong GST classification or rate, exemption claims, Reverse Charge Mechanism, post-sale discounts, credit notes, SEZ supplies, export refunds and transactions between different GST registrations.
| In this article, I have discussed the practical applicability, calculation methodology, reporting requirements, and key precautions relating to Rule 42 and Rule 43 of the CGST Rules. In case you have any doubt after reading this article, or if you feel that any practical aspect requires further discussion, you may contact me at the contact details mentioned at the end of this article. |
The recent wave of notices therefore provides an important indication of the areas presently receiving greater departmental scrutiny. In this article, we discuss the major issues on which GST notices are being issued, the nature of the discrepancies identified by the Department, and simple examples to understand how such issues may arise in practice.
What Kind of GST Notice Can a Taxpayer Receive?
Before examining the individual issues, it is important to first understand the nature of the communication received from the GST Department.
| FORM GST ASMT-10: | This is a scrutiny notice issued under Section 61 of the CGST Act read with Rule 99 of the CGST Rules. The Proper Officer points out discrepancies noticed during scrutiny of returns and calls upon the taxpayer to explain them. |
| FORM GST DRC-01B: | This is generally a system-generated intimation where the tax liability declared in GSTR-1/IFF exceeds the liability discharged through GSTR-3B beyond the prescribed parameters. |
| FORM GST DRC-01C: | This relates to differences between Input Tax Credit claimed in GSTR-3B and ITC available in GSTR-2B beyond the prescribed system parameters. |
| FORM GST DRC-01: | This is the summary of a formal show-cause notice in demand proceedings. For periods up to FY 2023-24, proceedings may arise under Section 73 or Section 74, depending upon the nature of the allegation. For FY 2024-25 onwards, demand proceedings are governed principally by Section 74A of the CGST Act. |
Thus, before preparing a reply, the taxpayer must first determine whether the communication is merely an intimation, scrutiny notice or formal demand notice.
1. GSTR-1, GSTR-3B, GSTR-9 and Books of Account Not Matching
One of the most common areas of GST scrutiny is the reconciliation of turnover and output tax.
The Department may compare:
| • turnover appearing in the financial statements; | • trial balance and sales register; |
| • GSTR-1; | • GSTR-3B; |
| • GSTR-9; | • e-invoice data; and |
| • e-way bill information. |
A difference does not automatically mean suppressed turnover. Differences may arise because of credit notes, advance receipts, non-GST income, branch transactions, sale of fixed assets, amendments, timing differences or year-end accounting adjustments.
| Example
Turnover as per financial statements: Rs. 10 crore The Department may seek an explanation for the difference of Rs. 30 lakh. The taxpayer should provide a proper reconciliation explaining whether the difference relates to non-GST income, accounting adjustments, amendments or transactions already reported in another period. |
Relevant provisions: Sections 37, 39, 44 and 61 of the CGST Act.
2. ITC Claimed in GSTR-3B Exceeding GSTR-2A/GSTR-2B
Input Tax Credit continues to be one of the most frequently scrutinised areas under GST.
The Department compares ITC claimed in GSTR-3B with credit appearing from supplier-side information in GSTR-2A/GSTR-2B.
However, every difference does not necessarily represent ineligible ITC. Differences may arise because of:
| • delayed filing by suppliers; | • amendments by suppliers; | |
|---|---|---|
| • incorrect GSTIN entered by the supplier; | • debit notes; | |
| • imports; | • ISD credit; | |
| • timing differences; or | • credit pertaining to another return period. | |
| Example
ITC claimed in GSTR-3B: Rs. 12,00,000 Before accepting the Rs. 80,000 as inadmissible, the taxpayer should identify the individual invoices forming part of the difference and determine whether the statutory conditions for ITC were fulfilled during the relevant period. |
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Relevant provisions: Sections 16, 38 and 41 of the CGST Act, read with the applicable Rules.
3. ITC From Cancelled, Non-Filing or Non-Compliant Suppliers
A more serious issue arises where ITC has been claimed on invoices issued by suppliers who subsequently:
| • failed to file GST returns; | • failed to discharge tax; |
| • were found non-existent; | • had their GST registration cancelled; or |
| • had their registration cancelled retrospectively. |
In such cases, the Department may examine the genuineness of the underlying purchase itself.
The recipient should therefore preserve:
| • tax invoice; | • purchase order; | |
|---|---|---|
| • e-way bill; | • transporter documents; | |
| • goods receipt note; | • proof of receipt of goods/services; | |
| • bank payment; and | • correspondence with the supplier. | |
| Example
Goods worth Rs. 5,00,000 plus GST of Rs. 90,000 are purchased from a registered supplier. Subsequently, the supplier’s GST registration is cancelled retrospectively. The Department may question the Rs. 90,000 ITC. The recipient would then need to establish the genuineness of the transaction and compliance with the conditions prescribed under the GST law. |
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Relevant provision: Section 16(2) of the CGST Act.
4. Ineligible ITC and Failure to Reverse Common Credit
Merely because an invoice appears in GSTR-2B does not automatically mean that the related ITC is legally admissible.
Credit may still be questioned because of:
| • blocked credit under Section 17(5); | • non-business expenditure; | |
|---|---|---|
| • personal consumption; | • common expenses relating to taxable and exempt supplies; | |
| • failure to reverse proportionate common ITC; | • non-fulfilment of Section 16 conditions; or | |
| • non-compliance with Rules 42 and 43. | ||
| Example
A taxpayer makes: Taxable supplies: 80% Exempt supplies: 20% If common input-service ITC is claimed entirely without reversing the proportion attributable to exempt turnover, the Department may calculate and demand the reversal required under Section 17(2) read with Rule 42. Similarly, where common capital goods are used for both taxable and exempt supplies, Rule 43 may become applicable. |
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Relevant provisions: Sections 16 and 17 of the CGST Act read with Rules 42 and 43 of the CGST Rules.
5. Wrong GST Rate, HSN Classification or Exemption
Not every GST notice arises from a numerical mismatch. In many cases, the Department questions the fundamental tax treatment adopted by the taxpayer.
The Department may allege that:
| • an incorrect HSN/SAC was used; | • GST was paid at a lower rate; | |
|---|---|---|
| • a taxable supply was wrongly treated as exempt; | • a supply was incorrectly treated as non-GST; | |
| • conditions of an exemption notification were not satisfied; or | • a composite or mixed supply was incorrectly classified. | |
| Example – Wrong GST Rate
A product is classified by the taxpayer under an HSN attracting GST at 5%. The Department considers another classification applicable which attracts GST at 12%. The dispute would therefore relate to the differential 7% GST along with applicable interest and penalty. |
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| Example – Wrong Exemption
A service provider treats receipts of Rs. 50 lakh as exempt under a particular exemption notification. If the Department concludes that one of the essential conditions of the exemption notification was not fulfilled, it may propose GST on the entire Rs. 50 lakh. |
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Relevant provisions: Sections 7, 9 and 11 of the CGST Act, relevant rate/exemption notifications and corresponding provisions of the IGST Act.
6. Post-Sale Discounts, Dealer Incentives and Credit Notes
Year-end discounts, turnover discounts, dealer incentives and post-sale discounts are another important area of GST scrutiny.
The Department may examine whether a taxpayer was legally entitled to reduce taxable value or GST liability on account of:
| • year-end discounts; | • volume discounts; |
| • dealer incentives; | • secondary discounts; |
| • price reductions; or | • credit notes. |
An important distinction must be maintained between a commercial/financial credit note and a GST credit note through which the supplier seeks to reduce its output tax liability.
| Example
Goods worth Rs. 1 crore are sold to a dealer during the financial year. At year-end, a Rs. 5 lakh turnover discount is granted. If the supplier reduces its GST liability, the Department may examine whether the conditions prescribed under Section 15(3) and Section 34 have been satisfied. |
Relevant provisions: Sections 15 and 34 of the CGST Act and applicable CBIC circulars.
7. Reverse Charge Mechanism Liability Not Discharged
The Department may also analyse expense ledgers to determine whether GST was required to be paid under the Reverse Charge Mechanism.
Depending upon the nature of supply, relevant period and applicable notification, common areas may include:
| • legal services; | • director services; | |
|---|---|---|
| • GTA; | • sponsorship services; | |
| • import of services; | • specified renting transactions; | |
| • certain Government services; and | • sector-specific payments such as royalty. | |
| Example
A company incurs an expense of Rs. 10 lakh for a service covered under RCM but merely books the expenditure without discharging GST. If GST is applicable at 18%, tax of Rs. 1.80 lakh may become payable under reverse charge together with applicable interest. Businesses should therefore conduct an expense-ledger-wise RCM reconciliation rather than relying solely on GST returns. |
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Relevant provisions: Sections 9(3) and 9(4) of the CGST Act and Sections 5(3) and 5(4) of the IGST Act, read with applicable notifications.
8. Transactions Between Different GST Registrations, ISD and Cross-Charge
A business may have several GST registrations under the same PAN.
However, under GST law, separately registered establishments are generally treated as distinct persons.
Scrutiny can therefore arise where:
| • the head office receives services for various branches; | • one GST registration bears expenses relating to other registrations; | |
| • entire ITC is claimed in one State; | • common input services are not appropriately distributed; | |
| • internal services between registrations are not properly accounted for; or | • ISD/cross-charge provisions are not correctly followed. | |
| Example
A company has GST registrations in Delhi, Haryana and Maharashtra. An annual software licence of Rs. 30 lakh is billed entirely to the Delhi GSTIN but the software is used by employees at all three locations. The GST treatment of the common input service and allocation/distribution of the corresponding ITC should therefore be examined. |
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Relevant provisions: Sections 20 and 25 of the CGST Act, Schedule I, and applicable ISD and valuation Rules.
9. SEZ Supplies, Exports and GST Refund Claims
Zero-rated supplies and export refund claims are highly documentation-driven areas.
The Department may verify:
| • whether the supply actually qualifies as zero-rated; | • validity of LUT/Bond; | |
| • SEZ endorsement; | • shipping documentation; | |
| • export realisation documents, wherever applicable; | • refund computation; | |
| • treatment of imported inputs; | • export incentive benefits; and | |
| • restrictions applicable during the relevant tax period. | ||
| Example
Goods worth Rs. 25 lakh are supplied to an SEZ unit without payment of IGST under LUT. If the taxpayer cannot produce the prescribed documentation supporting the zero-rated nature of the transaction, the Department may question the benefit claimed. |
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Relevant provisions: Section 16 of the IGST Act, Section 54 of the CGST Act and applicable refund Rules and notifications.
10. E-Way Bill and Goods-in-Transit Violations
Not all GST proceedings originate from scrutiny of returns.
Goods in movement may be intercepted, and proceedings may arise where the prescribed documents are absent, invalid or inconsistent with the goods being transported.
The authorities may verify:
| • tax invoice; | • e-way bill; | |
|---|---|---|
| • validity period of e-way bill; | • vehicle number; | |
| • quantity and description of goods; | • place of dispatch; | |
| • destination; and | • physical goods vis-a-vis accompanying documents. | |
| Example
Goods worth Rs. 8 lakh are transported from Delhi to another State, but the e-way bill has expired before interception. Proceedings relating to detention of goods or conveyance may arise depending upon the applicable statutory provisions and facts. |
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Relevant provisions: Sections 68 and 129 of the CGST Act and applicable e-way bill Rules.
Why GST Notices Are Increasingly Data-Driven
GST administration is becoming progressively data-driven because substantial information relating to a taxpayer and its suppliers is already available electronically.
The Department can compare:
| GSTR-1 -> GSTR-3B -> GSTR-2B -> GSTR-9 -> E-Invoice Data -> E-Way Bill Data -> Supplier Compliance -> Import/Customs Data -> Books of Account and Financial Statements |
A discrepancy identified in one database can therefore lead to examination of the same transaction through several independent sources.
Consequently, businesses should move away from viewing GST reconciliation as merely a year-end compliance exercise. It should increasingly form part of a continuous internal GST review mechanism.
What Should a Taxpayer Check Immediately After Receiving a GST Notice?
| Step | Point to Examine |
|---|---|
| 1 | Identify the exact notice/form received |
| 2 | Determine the financial year and tax period involved |
| 3 | Identify the precise discrepancy alleged |
| 4 | Determine whether the issue is factual, accounting, documentary or legal |
| 5 | Reconcile GST returns with books and supporting records |
| 6 | Collect invoices, contracts, e-way bills, payments and other evidence |
| 7 | Examine whether taxability, classification or exemption itself is disputed |
| 8 | Verify computation of tax, interest and penalty |
| 9 | Check whether the correct statutory provision has been invoked for the relevant period |
| 10 | Reply allegation-wise and support each explanation with documentary evidence |
Conclusion
The recent GST notice environment demonstrates that taxpayers need to look beyond the mere filing of monthly and annual returns.
The major areas presently requiring attention broadly include turnover reconciliation, ITC mismatch, supplier compliance, eligibility and reversal of ITC, classification and exemption, discounts and credit notes, RCM, transactions between separate GST registrations, zero-rated supplies/refunds and goods-in-transit compliance.
Most importantly, a difference identified by the GST system should first be understood and reconciled before being accepted as an actual tax liability.
A mismatch between two sets of GST data may arise because of genuine tax short-payment, but it can equally arise because of timing differences, amendments, accounting treatment, supplier reporting or documentation. On the other hand, matters such as classification, exemption, RCM or ITC eligibility require examination of the underlying statutory provisions and cannot be resolved merely through numerical reconciliation.
With GST administration becoming increasingly data-driven, the strongest protection against future notices is not merely preparing a reply after receiving a show-cause notice. It is maintaining proper transaction-level documentation, return-wise reconciliations and periodic GST compliance reviews before the discrepancy is identified by the Department.
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