Filing on Time Is Not the Same as Being in Control: Why Your Business Needs a GST Health Check and Internal Review
A client walked in last month with a DRC-01A intimation. His GST returns had never been filed late, and his accountant was diligent. Yet the ITC claimed in GSTR-3B had been running ahead of GSTR-2B for eleven months, and nobody had looked at the gap until the portal flagged it.
That is the difference between being compliant and being in control. Compliance asks whether the return was filed. Control asks whether the numbers inside it can survive a question two or three years from now. Most MSMEs I meet are excellent at the first and have never been tested on the second.
Where On-Time GST Filers Still Lose Money
A return goes through whether its contents are right or wrong. The GST portal accepts what you file, and the reckoning comes later. These are the gaps we find most often in businesses that believe their GST is "fully done":
| Gap | Legal Hook | What It Costs |
|---|---|---|
| ITC claimed in 3B but not in GSTR-2B | Section 16(2)(aa), Rule 36(4) CGST Rules | Reversal with interest under Section 50 |
| Eligible ITC sitting in 2B, never claimed | Section 16(4): lapses after 30 November of the following year | Credit permanently lost |
| Credit taken on blocked items (motor vehicles, food, personal use) | Section 17(5) | Reversal, interest, possible penalty |
| RCM expenses not identified (GTA, legal fees, rent from unregistered persons) | Section 9(3)/9(4) and the rate notifications | Tax paid twice: once under RCM, once as lost ITC timing |
| GSTR-1 liability higher than GSTR-3B | Rule 88C (DRC-01B) | System-generated intimation; pay or explain |
| 3B ITC exceeding 2B beyond prescribed limits | Rule 88D (DRC-01C) | Same |
| Books turnover not reconciling with GST returns | Annual return (GSTR-9/9C) | The most common trigger for scrutiny |
None of these stops a return from being filed. All of them eventually cost money as tax, interest, penalty, or the professional fees and management time spent defending a notice.
The Notice Is the Symptom. The Process Is the Disease.
In litigation practice, I see the same pattern repeatedly. A business replies to a notice, the matter closes, and the next year the identical mismatch appears again. The reply treated the symptom while the accounting process that caused it stayed untouched.
The time limits mean this damage compounds quietly. For FY 2024-25 onwards, notices are issued under Section 74A of the CGST Act. The proper officer can issue a show cause notice up to 42 months from the due date of the annual return in non-fraud cases. An error you make this month can surface in 2029. By then the vendor may have closed shop, the employee who booked the entry may have left, and the invoice may be untraceable.
A GST health check therefore has two jobs:
- Defensive: find what is already wrong and fix it while voluntary correction is still cheap.
- Preventive: change the process that produced the error so it stops recurring.
Internal Audit Isn't Only for Companies That Are Required to Have One
Under Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts) Rules, 2014, internal audit is mandatory for a private company only when turnover reaches ₹200 crore or borrowings reach ₹100 crore. Most MSMEs fall well below this, and conclude that internal audit "doesn't apply to us."
The law sets a floor, not a ceiling. A periodic internal review answers questions no statutory audit is designed to ask:
- Where is cash getting stuck?
- Which customers and products are actually profitable?
- Which processes depend on one person who could leave tomorrow?
- Which payments go out without anyone reviewing them?
Sometimes the Biggest Saving Isn't Tax
Clients ask me for tax-saving ideas every March. Often the larger saving is sitting in the receivables ledger.
Worked example: A trading business has annual sales of ₹12 crore and collects from customers in 120 days on average. It runs a cash credit facility at 10% interest.
| Particulars | Current | After Tightening Collections |
|---|---|---|
| Average daily sales (₹12 cr ÷ 365) | ₹3.29 lakh | ₹3.29 lakh |
| Collection period | 120 days | 75 days |
| Money locked in receivables | ₹3.95 crore | ₹2.47 crore |
| Cash released | — | ₹1.48 crore |
| Annual interest saved at 10% | — | ₹14.8 lakh |
That is ₹14.8 lakh a year, with no deduction claimed, no restructuring, and no tax risk. It comes simply from someone watching the ageing report every month instead of once a year.
There is a tax angle too. For FY 2025-26, Section 43B(h) of the Income-tax Act, 1961 disallows payments to micro and small suppliers that are made beyond the time limit in the MSMED Act. Poor payables discipline therefore hurts both supplier relationships and your tax computation.
Eight Numbers Every Owner Should See Every Month
You don't need fifty reports. You need a handful of numbers, delivered within ten days of month-end:
| KPI | Why It Matters |
|---|---|
| Gross margin % | The first number to fall when pricing or costs slip |
| Receivables ageing (0–30, 30–60, 60–90, 90+ days) | Shows who is using your money |
| Inventory days | Stock bought faster than it sells means more borrowing |
| Cash flow from operations | Profit is not the same as cash |
| Borrowings and interest cost | Tells you whether growth is funded or financed |
| Customer and product profitability | Shows which sales are worth having |
| GST reconciliation status (Books vs 1 vs 3B vs 2B) | Catches exposure before Rule 88C/88D does |
| Statutory dues status (GST, TDS, PF, ESI) | Late deposits carry interest and permanent disallowances |
This is what a Virtual CFO arrangement should deliver. It shouldn't be more bookkeeping. It should turn accounting data into decisions.
A Practical Review Calendar
| Frequency | What to Do |
|---|---|
| Monthly | GSTR-2B vs purchase register; GSTR-1 vs 3B; statutory dues; receivables ageing; KPI pack |
| Quarterly | RCM and blocked-credit review; vendor compliance check; credit notes and amendments; internal review of one key process |
| Half-yearly | Books vs GST turnover reconciliation; MSME vendor payments review |
| Annually (before GSTR-9) | Full GST health check; document trail test on high-value invoices; close out open audit observations |
The Takeaway
Pick one month this quarter and get three things reconciled by someone other than the person who files your returns: GSTR-2B against your books, GSTR-1 against GSTR-3B, and your receivables ageing. Whatever that exercise uncovers will tell you whether you need a full health check. It costs far less to find a gap yourself than to have the department find it in a notice.
CA Praneeth Thunuguntla | Thunuguntla & Associates | Income Tax & GST Advisory
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