Compliance, ITC, and Audit Survival

Most founders register for GST and hand it entirely to their CA. This is understandable. GST feels like a compliance task, not a business decision. Then, three years later, a demand notice arrives for ₹4.7 lakh in ITC reversal with 18% interest. The CA is apologetic. Nobody had explained that GST is a monthly operational discipline, not a one-time registration event.

This guide covers what you actually need to know about GST to run a compliant business, from registration through to filing, ITC management, and what happens when the department comes looking.

Who Needs to Register

Registration becomes mandatory when your turnover crosses specific thresholds. For service businesses, the limit is ₹20 lakh in a financial year (₹10 lakh for businesses in North-Eastern and certain special category states). For goods businesses, the limit is ₹40 lakh.

Inter-state supply changes the calculation. If you supply goods or services to customers in a different state from where your business is located, GST registration is mandatory regardless of turnover. Many early-stage startups miss this, a ₹5 lakh/month service business with clients across India is required to be registered even though it hasn't crossed the ₹20 lakh threshold on aggregate.

E-commerce operators face mandatory registration with no threshold exemption.

The case for registering early

Even if you're below the threshold, early voluntary registration often makes sense. Corporate clients frequently require a GSTIN to process vendor invoices. Without registration, you can't charge GST, which means your customers can't claim ITC on payments to you, making you a less attractive vendor to GST-registered businesses. You also cannot claim ITC on your own purchases if unregistered.

The Composition Scheme

Businesses with turnover below ₹1.5 crore (for goods) or ₹50 lakh (for services) can opt for the Composition Scheme. Under this scheme, you pay a fixed percentage of turnover as tax (1% for traders, 5% for restaurants, 6% for service providers), file quarterly returns, and avoid the complexity of regular GST compliance.

The significant trade-off: you cannot claim ITC on purchases, and you cannot issue a tax invoice to your customers (which means your customers can't claim ITC on what they pay you). For B2B businesses serving GST-registered clients, the Composition Scheme is almost never suitable.

The GST Filing Calendar

GST compliance has multiple return types, and each has a deadline. Missing them triggers late fees and, for GSTR-3B, interest on unpaid tax.

GSTR-1: Outward supply details

Filed monthly (by the 11th of the following month) for businesses with turnover above ₹5 crore in the prior year. Businesses below this threshold can file quarterly under the QRMP (Quarterly Return Monthly Payment) scheme.

GSTR-1 contains all your outward supply invoices: the customer's GSTIN, invoice number, date, value, GST amount, and HSN/SAC code. This data feeds your customers' GSTR-2B, their auto-generated ITC statement. If you don't file GSTR-1, your customers can't claim ITC on invoices from you.

GSTR-3B: Summary return with tax payment

Filed monthly for most businesses (or quarterly under QRMP). GSTR-3B reports your total output GST, your ITC claims, and the net tax payable. Tax payment is due by the 20th of the following month for monthly filers.

This is the return most closely linked to cash flow. Under GSTR-3B, you're paying the difference between your output GST (what you collected from customers) and your ITC (GST you paid to vendors).

GSTR-2B: Your ITC statement

Not a return you file, but a statement you must read. Generated automatically on the 14th of each month, GSTR-2B shows all ITC available to you based on what your suppliers have filed. Before claiming any ITC in GSTR-3B, reconcile your purchase register against GSTR-2B. ITC can only be claimed up to what appears here.

GSTR-9: Annual return

Filed by December 31 following the close of the financial year. GSTR-9 is a consolidated annual summary of all your GST activity, outward and inward supplies, tax paid, ITC claimed and reversed. For most small businesses it's a relatively mechanical compilation exercise, but discrepancies between GSTR-9 and your monthly returns can trigger scrutiny.

GSTR-9C: Reconciliation statement

Required for businesses with turnover above ₹5 crore in the prior year. This is a reconciliation between the GSTR-9 and your audited financial statements, signed off by a CA. It's the closest thing GST has to an annual audit.

Late fees and consequences

GSTR-1 or GSTR-3B late filing: ₹50/day (₹20/day for nil returns), capped at ₹10,000 per return
Once a return is late, the subsequent return is blocked until the outstanding one is filed. Missing one return creates a cascading compliance problem.
Interest on late tax payment: 18% per annum from the due date

Input Tax Credit: The Money You Can Recover

ITC is the GST you pay on business purchases, which you can offset against the GST you collect from customers. It is the mechanism that prevents cascading taxation through the supply chain.

The four conditions for claiming ITC

First, you must hold a valid GST tax invoice from the supplier. Second, the goods or services must have been received. Third, the supplier must have filed their return and paid the tax, which shows up in your GSTR-2B. Fourth, you must have filed your own return.

Missing any of these conditions disqualifies the ITC claim.

Blocked credits under Section 17(5)

The law explicitly prohibits ITC on certain categories. The most relevant for startups:

Food and beverages, outdoor catering, and restaurants (except where the business provides these as a statutory obligation)
Club memberships and health club fees
Motor vehicles with seating capacity of 13 or fewer passengers (with specific exceptions for vehicle rental, cab aggregation, and driver training businesses)
Works contracts for construction of immovable property (building or renovating office space)
Goods or services used for personal consumption

Many startups claim ITC on team lunches, car leases, and gym memberships without checking this list. The invoices are real. The GST paid is real. But the credit is blocked by statute.

The 180-day rule

If you claim ITC on a purchase but do not pay the vendor within 180 days of the invoice date, you must reverse the ITC and pay it back with 18% annual interest. The ITC can be reclaimed once payment is made. Monthly payables ageing reports are the only reliable way to catch this before it becomes a problem.

Proportionate ITC for mixed supply businesses

If your business makes both taxable and exempt supplies, you can only claim ITC on inputs used for the taxable portion. Rule 42 of the CGST Rules prescribes a formula for calculating proportionate ITC reversal each month. Businesses with a mix of GST-taxable and exempt revenue (common in financial services, education, and healthcare) must apply this monthly.

GST Notices: What Triggers Them and What to Do

ASMT-10: Scrutiny notice

Issued when the GST officer identifies discrepancies in your returns: mismatch between GSTR-1 and GSTR-3B, ITC claimed in GSTR-3B that doesn't match GSTR-2B, or turnover in GST returns that doesn't match income tax returns or bank statements.

You have 30 days to respond with documents and explanations. Don't ignore an ASMT-10. Ignored notices escalate to ex-parte assessments where the officer makes a determination without your input, and the resulting demand is difficult and expensive to reverse.

DRC-01: Demand notice

Issued after the officer has determined that tax is owed. You can accept the demand and pay (using DRC-03), or dispute it by filing a reply and, if needed, appealing to the GST appellate authority.

ADT-01: Audit notice under Section 65

A more serious intervention: the officer wants to examine your books, records, and returns for a specific period (can cover up to 5 years). You must make records available and cooperate with the audit. This is distinct from the annual return, it's an active examination of your compliance.

Common triggers for notices include GSTR-1 and GSTR-3B mismatches, ITC claims in GSTR-3B that don't appear in GSTR-2B, high ITC utilisation relative to output tax, turnover inconsistencies between GST returns and income tax returns, and large refund claims.

To avoid notices: reconcile GSTR-2B against your purchase register monthly before filing GSTR-3B; reconcile GST turnover against books quarterly; file GSTR-1 before GSTR-3B every month (the sequence matters); and don't claim ITC on invoices not confirmed in GSTR-2B.

Common GST Mistakes Founders Make

Not reconciling GSTR-2B before filing GSTR-3B. This is the single most common source of ITC notices. It takes 30 minutes monthly and prevents most scrutiny.

Claiming ITC on blocked expense categories. Team outings, car leases, and gym memberships are common culprits.

Missing the GSTR-9 annual return. The deadline is December 31. Missing it delays closure of the financial year's GST compliance and can attract scrutiny.

Not registering when inter-state supply begins. The threshold exemption disappears the moment you make a taxable supply across state lines.

Filing GSTR-3B without checking the data. Many businesses let the auto-population fill in numbers and file without verifying. Errors compounded over months become difficult to unwind.

Key Takeaways

GST registration is mandatory above ₹20L turnover for services (₹10L in some states), or at any turnover for inter-state supply.
GSTR-2B reconciliation before filing GSTR-3B is the most important monthly compliance habit. ITC is restricted to what appears in GSTR-2B.
Section 17(5) blocks ITC on specific categories including food, club memberships, motor vehicles, and building construction.
An unpaid vendor invoice triggers ITC reversal with 18% annual interest after 180 days.
A ASMT-10 scrutiny notice has a 30-day response window. Ignoring it escalates to ex-parte assessment.
GSTR-9 (annual return) is due December 31. Missing it doesn't close the year's GST compliance.

GST for Indian Startup Founders: Beyond Registration