Background
Goods and Services Tax (GST) is India’s comprehensive indirect tax framework, introduced on 1 July 2017 to subsume a large number of Central and State taxes into a single, unified tax on the supply of goods and services. GST is a destination-based, multi-stage tax levied on value addition at each stage of the supply chain. The legislative framework consists of the Central Goods and Services Tax Act, 2017 (CGST Act); the Integrated Goods and Services Tax Act, 2017 (IGST Act) governing inter-State and import/export supplies; the respective State Goods and Services Tax Acts (SGST Acts); and the Union Territory Goods and Services Tax Act, 2017 (UTGST Act). These are supplemented by the Central Goods and Services Tax Rules, 2017 (CGST Rules) and a large body of notifications, circulars, and orders issued by the GST Council and the Central Board of Indirect Taxes and Customs (CBIC).
Applicability
The compliance obligations covered in this blog apply to all persons registered under the GST Act — including companies, firms, LLPs, partnerships, individuals, and other entities engaged in the supply of goods or services or both in India, with an aggregate turnover exceeding the applicable registration threshold. Specifically, the obligations cover: suppliers of goods and services (invoicing, valuation, credit note and debit note obligations); exporters and merchant exporters (LUT conditions, exchange rate requirements, concessional rate procedures); recipients of goods and services (RCM obligations, self-invoicing, ITC maintenance and reversal); entities making deemed supplies under Schedule I (cross-charge, gifts, asset transfers); and all registered persons subject to GST officer summons and audit obligations. Both the supplier and the recipient bear independent GST compliance obligations, and failure by either party may expose both to demand, interest, and penalty proceedings.
Compliance Requirement Under the act in Accordance with the Rules & Regulations:
Every registered person must not issue any invoice or delivery challan without an actual supply of goods or services. The entity must ensure reconciliation of all invoices with the outward supply register. Issuing invoices without corresponding actual supply — whether to fraudulently pass on Input Tax Credit to another person or for any other reason — constitutes a serious criminal offence under GST law.
Every registered person issuing a tax invoice must ensure that invoices are issued with consecutive serial numbers, not exceeding sixteen characters, in one or multiple series — containing a combination of alphabets or numerals or special characters (hyphen or dash and slash), unique for a financial year. All cancelled invoices must be accurately reported in the applicable GST returns. The responsibility for ensuring consecutive numbering, proper reporting of cancelled invoices, and maintenance of invoice records lies entirely with the taxpayer issuing the GST invoices.
A supplier must issue a GST debit note whenever charging interest or late fees on a taxable supply, and must ensure timely issuance of such debit notes. Under Section 15(2)(d), the value of a supply shall include interest or late fee or penalty for delayed payment of any consideration. Under Section 34, a registered person who has issued a tax invoice in relation to a supply of goods or services may issue a debit note to increase the taxable value or the tax charged in the original invoice. The debit note must be declared in the return for the month during which it is issued.
For taxable goods, the rate of exchange for determination of value shall be the applicable rate of exchange notified by the Board under Section 14 of the Customs Act, 1962, for the date of time of supply of such goods in terms of Section 12 of the GST Act. For taxable services, the rate of exchange for determination of value shall be the applicable rate of exchange determined as per the generally accepted accounting principles (GAAP) for the date of time of supply of such services in terms of Section 13 of the GST Act. In both cases, the entity must use the prescribed exchange rate basis and not any internally determined rate.
In case of exports under a Letter of Undertaking (LUT), goods must be exported within 90 days from the date of invoice, failing which the benefit of zero-rated supply under LUT shall not be available. Zero-Rated Supply means export of goods or services, or supply of goods or services to a Special Economic Zone (SEZ) developer or SEZ unit, which is taxable under GST but effectively taxed at zero rate, with full eligibility to claim Input Tax Credit and refund, subject to prescribed conditions. If goods are not exported within the prescribed 90-day window, the registered person shall be liable to pay the applicable GST along with interest from the date of invoice, and the LUT benefit for that supply shall be treated as lapsed.
For merchant exports to be eligible for the concessional GST rate of 0.1%, the following procedure must be strictly followed: (a) the merchant exporter must intimate the supplier of the purchase order before procurement of goods; (b) the merchant exporter must intimate the supplier about the dispatch of goods within 48 hours of dispatch; and (c) the merchant exporter must submit proof of export to the supplier within 90 days of the date of invoice. Failure to follow this procedure or failure to export within the prescribed period will disentitle the supplier and merchant exporter from the concessional rate, and the applicable GST at the standard rate shall become payable.
Registered persons must issue a Bill of Supply for all transactions involving exempt supplies — i.e., supplies on which GST is not chargeable. A Bill of Supply is mandatory when GST cannot be charged on the supply, and must contain all prescribed particulars as specified under Rule 49 of the CGST Rules, clearly stating that tax is not applicable. Where applicable, the Bill of Supply must also be correctly documented in the e-invoice system. A Bill of Supply shall not be issued for intra-State supplies where the value does not exceed two hundred rupees, subject to prescribed conditions.
Registered persons making supplies to Special Economic Zone (SEZ) developers or SEZ units under a Letter of Undertaking (LUT) must ensure that invoices for such supplies are authenticated and comply with all requirements under Rule 89 for claiming refund of accumulated Input Tax Credit. The procedure for filing refund applications for zero-rated supplies — including supplies to SEZs — under LUT must be followed strictly, with all supporting documents including invoices, shipping bills, and endorsements as required.
An entity must pay GST on recoveries from vendors or employees that qualify as a ‘supply’ under Section 7 of the GST Act. All such transactions must be reported in the monthly GSTR-3B return. Under Section 7, ‘supply’ includes all forms of supply of goods or services or both — including sale, transfer, barter, exchange, licence, rental, lease, or disposal — made or agreed to be made for a consideration by a person in the course or furtherance of business. Recoveries that constitute consideration for any form of supply — such as notice pay recovery, canteen recovery, or vendor recovery for losses — are therefore subject to GST and must be appropriately disclosed and discharged.
An entity must reverse Input Tax Credit (ITC) when assets on which ITC was availed are permanently transferred between business locations or distinct persons, as such transfers constitute ‘deemed supply’ under Schedule I. Permanent transfer or disposal of business assets where ITC has been availed is treated as supply even if made without consideration. The registered person must discharge GST on the transaction value of such assets and reverse the proportionate ITC availed, and report the same in the applicable GST returns.
An employer must pay GST and report a deemed supply where the total value of gifts to an employee exceeds ₹50,000 in a financial year. Where the aggregate value of gifts from an employer to an employee during a financial year does not exceed ₹50,000, the supply is excluded from the definition of ‘supply’ under Schedule I. Once the threshold is crossed, the entire value of gifts — and not just the excess — is treated as a deemed supply, and GST must be paid on the transaction value. The same must be reported in GSTR-3B in the month of supply.
GST must be paid on cross-charge transactions between distinct GST registrations of the same legal entity — for example, supply of services such as manpower, rent, management fees, or shared services between the head office and branch offices or between two branch offices registered under different GSTINs. Such supplies between distinct persons as specified in Section 25(4) and (5) of the GST Act — even when made without consideration — are treated as deemed supply under Schedule I and are subject to GST at the applicable rate. The taxable value shall be determined as per the valuation rules under Section 15 and Chapter IV of the CGST Rules.
An entity must maintain all required physical and digital records supporting Input Tax Credit (ITC) claims as per law. Under Section 16(2), ITC shall be available only if the registered person is in possession of a tax invoice or debit note issued by a supplier registered under GST, or any other document prescribed; has received the goods or services; the tax charged in respect of such supply has actually been paid to the Government; and the registered person has furnished the relevant return. All supporting documents for ITC must be preserved and made available for inspection by GST authorities.
ITC must be reversed on goods that are lost during storage or transportation, stolen, destroyed in any manner, or issued as free samples, gifts, or written off in the books of accounts. Under Section 17(5)(e), ITC is not available in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. Where ITC has already been availed on such goods, it must be reversed in the applicable GST return, along with applicable interest at 18% per annum from the date of original credit to the date of reversal.
GST must be paid directly by the recipient under the Reverse Charge Mechanism (RCM) for specified services and goods notified by the Central Government. Under RCM, the liability to pay tax shifts from the supplier to the recipient, who is required to pay GST directly to the Government. Services subject to RCM under Notification No. 13/2017-Central Tax (Rate) include: Goods Transport Agency (GTA) services, Advocate services, Sponsorship services, services received from the Government or a local authority, fees paid to Directors of a company, cab hire/rent-a-cab services, Import of services, and Guarantee Fees. The recipient must discharge GST on such services in cash (no ITC offset permitted for RCM liability) and report in GSTR-3B monthly.
A self-invoice must be prepared by the recipient for services received under the Reverse Charge Mechanism (RCM) from unregistered persons, to enable ITC to be availed on such inward supplies. Under Section 31(3)(f), a registered person who is liable to pay GST under RCM shall issue an invoice in respect of goods or services received from an unregistered person. Under Rule 36(1)(b), ITC on inward supplies from unregistered persons is available only on the basis of a self-invoice issued by the recipient. The self-invoice must contain all prescribed particulars and be issued at the time of receipt of goods or services.
Complete details of all debit notes and credit notes — including the reason for issuance, the corresponding original invoice number and date, and the taxable value and tax differential — must be maintained. A debit note or credit note must contain all particulars prescribed under Rule 53 and must be declared in the return for the tax period in which it is issued. Under Rule 53(1A), a consolidated credit note may be issued for multiple invoices issued during a month, subject to prescribed conditions.
Input Tax Credit (ITC) on a credit note against a sales invoice can be availed only if the credit note is issued on or before the 30th of September of the financial year following the year in which the corresponding sales invoice was issued. A Credit Note is a document issued by a supplier to reduce the value of a previously issued tax invoice — where the taxable value or tax charged was excess, goods are returned, services are found deficient, or consideration is partially or fully refunded. Credit notes issued after the prescribed time limit shall not be eligible for ITC claim by the recipient, and any ITC already availed on such credit notes must be reversed.
Every registered person (or any other person deemed necessary) must appear before the GST officer when summoned under Section 70, and must respond to questions and produce all books, documents, and other records as required. Section 70 empowers the proper officer to summon any person whose attendance is considered necessary to give evidence or to produce a document or any other thing in any inquiry. The summoned person is bound to attend the inquiry in person or through an authorised representative and shall be bound to state the truth upon any subject in respect of which they are examined.
Penalty & Consequences
The following penalty provisions apply across the compliance obligations covered in this blog.
Section 132 — Criminal Penalty for Tax Evasion (Fake Invoices and Related Offences)
Where tax evaded exceeds ₹5 crores — punishable with imprisonment up to 5 years and fine. Where tax evaded is between ₹2 crores and ₹5 crores — punishable with imprisonment up to 3 years and fine. Where tax evaded is between ₹1 crore and ₹2 crores — punishable with imprisonment up to 1 year and fine. Applicable for offences including issuance of invoice without actual supply, fraudulent availment or utilisation of ITC, and collection of tax but failure to deposit with the Government.
Section 122 — General Penalty for Contraventions
Any registered person who supplies goods or services without issuing an invoice or issues a false invoice, issues an invoice without actual supply, fails to account for an invoice, fails to issue a debit/credit note as required, fails to furnish information/documents, obstructs GST officer, fails to maintain proper records, or fails to appear before a GST officer on summons — shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded or the amount of ITC wrongly availed or utilised, whichever is higher.
Differential Tax with 10% Penalty and 18% Interest — Sections 73, 74, 50
Where any tax short-paid, not paid, or erroneously refunded, or where ITC has been wrongly availed or utilised — the proper officer may issue a show cause notice. For cases not involving fraud or wilful misstatement: penalty of 10% of the tax amount, subject to a minimum of ₹10,000 (Section 73). For cases involving fraud, wilful misstatement, or suppression: penalty equal to the tax amount (Section 74). Interest at 18% per annum is payable under Section 50 on delayed or short payment of tax, computed from the day after the due date of payment.
Full Tax Amount with 18% Interest — LUT/Zero-Rated/Deemed Supply Contraventions
Where goods are not exported within 90 days under LUT, or supplies to SEZ are made without proper authentication, or deemed supply obligations (cross-charge, permanent transfer of assets, gifts above ₹50,000) are not discharged, or ITC is not reversed as required under Section 17(5): the full applicable tax amount becomes payable along with interest at 18% per annum from the date of supply or the date of original ITC availment, as the case may be, and a penalty of 10% of the tax amount subject to a minimum of ₹10,000.
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