Risk and Consequences for the Difference in tax liability reported in GST Returns

Reconciliation helps in calculating accurate tax liability needs to be paid at the time of filing. Reconciling GSTR1 vs GSTR3B is essential for businesses as it can minimize the chances of receiving a show cause notice (SCN) from the GST authorities. If the liability declared in GSTR1 does not match the liabilities paid in GSTR3B, GST authorities can issue an SCN in this situation. Recently GST authorities have issued the functionality of DRC- 01B. If, due to a mismatch in GSTR1 and GSTR3B, a taxpayer receives a DRC-01B notice, not responding to such a notice will result in a blockade of GSTR1 filing in any successive tax period, and a taxpayer may not be able to file for returns.

What is GSTR-1?

GSTR-1 is a compulsory financial statement that must be filed on a monthly/quarterly basis by all regular, and casual, registered individuals who are involved in the supply of goods and services. This form provides tax authorities with detailed information of what is being supplied and till where.

What is GSTR 3B?

GSTR-3B serves as a condensed summary return, enabling taxpayers to report and clear their GST obligations for a designated tax period in a simplified manner. It is mandatory for regular taxpayers to file for GSTR-3B returns for each tax period to ensure proper compliance with all GST laws and regulations and avoid any risks of fines or penalties.

Differences between GSTR1 and GSTR3B

What are the reasons for Mismatches between GSTR1 and GSTR3B?

1. The difference between when the invoices for GSTR-1 and GSTR-3B are uploaded.
2. GSTR1 only takes zero-rated invoices into consideration while GSTR3B invoices consider B2B, Nil rated and exempted invoices.
3. The time difference between the issuance of an invoice and the issuance of a debit/credit note.
4. Supplies made to unregistered people or businesses across states are not reported in GSTR-3B but are declared in GSTR-1.
5. RCM purchases entered as B2B sales.

What is DRC – 01B?

 Recently the GSTN has introduced a functionality form called DRC – 01B as per notification No.26/2022. Now, the rule 88C requires an explanation for discrepancies between GSTR1 and GSTR3B.

1. DRC – 01B is an automated facility available on the GST portal which identifies cases of inconsistency between GSTR1 and GSTR3B and issues notices where the liability discharged in GSTR 3B is lesser than a specific percentage as compared to what is disclosed in GSTR1 (% has not been notified yet).
2. The indication shall be made via both the portal and an email.
3. Upon receiving the intimation in Form DRC-01B Part A, taxpayers are required to furnish their response using Form DRC-01B Part B.
4. This applies to a wide range of taxpayers encompassing regular taxpayers, (including SEZ units and SEZ developers), casual taxpayers, and those who have chosen to be part of, or be excluded from, a composition scheme.
5. Response for the same need to be filed within 7 days, either through payment of a differential liability or by providing an explanation.
6. In case no response has been filed, the taxpayer will not be able to file the GSTR1 for the next month.
7. It can also be checked on the GST portal via the following procedure: 

Navigate to Services > Return compliance > Liability Mismatch (DRC- 01B).

8. Detailed information regarding GST can further be found on https://tutorial.gst.gov.in/downloads/news/return_compliance_in_form_drc_01b.pdf.

Before

• Inconsistencies between GSTR-1 and GSTR-3B resulted in loss of revenue.
• Notices were issued to the taxpayers leading to long-drawn litigation.

Now (with Form DRC – 01B):

• Taxpayers are informed of discrepancies through the auto-generated Form DRC -01B. 
• Taxpayers are required to explain the differences between GSTR-1 and GSTR-3B and why they occurred or pay the differential tax. 
• The goal is to minimize notifications for valid disagreements.
• Failure to respond to Form DRC – 01B can impact filing GSTR-1 for the following month.