18 March 20267 min readFiled under GSTGST / Startup / Compliance

GST for founders: the three mistakes that trigger scrutiny

Most GST notices to early-stage companies trace back to the same three structural errors — input credit mismatches, place-of-supply slip-ups, and reverse-charge oversights.

CA Rahul Dang

Founder & Practice Lead

GST for founders: the three mistakes that trigger scrutiny

Three out of four GST scrutiny notices we see at RDA originate from the same structural errors. Founders building rapidly tend to treat GST as a return-filing exercise rather than a continuous structural discipline — and it shows up six months later in a system-flagged ASMT-10.

Here are the three patterns that account for most of our scrutiny defenses, ordered by frequency.

Mistake #1: Input tax credit mismatches

Your GSTR-2B doesn’t match what’s in your books, and you haven’t reconciled monthly. This is the single largest source of notices — the GST system’s automated matching has gotten very good, and the days of catching up at year-end are over.

The discipline:

Reconcile GSTR-2B vs. purchase register every month.
Follow up immediately on supplier non-uploads.
Don’t claim ITC on invoices not appearing in 2B — even if you have the physical invoice.
Keep section-wise reconciliation: 16(2)(a) supplier non-payment is a different defense from a missing invoice.

Mistake #2: Place of supply errors on services

IGST instead of CGST/SGST — or vice versa — on consultancy, training, and event-based services. The penalty for the wrong tax head is not nominal: you pay the correct tax plus interest, and recovery of the wrongly-paid tax requires a separate refund claim that may or may not succeed.

For each service line, document the place-of-supply rule that applies in writing. Section 12 vs. Section 13 is where most errors live.

Mistake #3: Reverse charge oversights

Particularly in: legal fees paid to advocates, sponsorship payments, rent paid to unregistered landlords, and any service from outside India. RCM is invisible to your bookkeeper if not flagged at the invoice-receipt stage.

We see startups discover ₹15–30 lakh of unpaid RCM at the Series A diligence stage. This is an entirely preventable problem if the policy is set on day one.

The fix isn’t complicated

These three patterns share a root cause: GST is treated as a filing exercise rather than a structural exercise. Founders should either build internal capability for monthly reconciliation, or outsource to a firm that runs reconciliation as a recurring engagement rather than a one-time project.

Either path works. The path that doesn’t work is filing nil-tax returns and assuming the system isn’t looking.

Common questions

Frequently asked.

What triggers a GST scrutiny notice?

The department's system flags mismatches — most commonly a gap between outward supplies in GSTR-1 and the tax paid in GSTR-3B, input tax credit in GSTR-3B that exceeds the eligible credit auto-populated in GSTR-2B, and a difference between GST turnover and the turnover in the income-tax return. A scrutiny notice in Form ASMT-10 then asks you to explain.

How long do I get to reply to an ASMT-10?

You are generally given 30 days from the notice to respond in Form ASMT-11, explaining the discrepancy or paying the tax with interest. A weak or missed reply can escalate to a demand under Section 73 or 74, so the reply stage is where most cases should be resolved.

What is the GSTR-1 versus GSTR-3B mismatch?

GSTR-1 reports your invoice-level outward supplies while GSTR-3B is the summary return through which you pay tax. If the tax on supplies declared in GSTR-1 is more than the tax discharged in GSTR-3B, the system reads it as short payment. Reconcile the two every month and correct the difference before year-end.

How do I avoid an input-tax-credit mismatch?

Claim input tax credit only to the extent it appears in your GSTR-2B, keep valid tax invoices, make sure the supplier has actually filed and paid, and reverse credit where you have not paid the supplier within 180 days. Claiming more ITC than GSTR-2B reflects is the single most common scrutiny point.

Can a scrutiny notice become a demand?

Yes. If your reply does not satisfy the officer, the case moves to a show-cause and demand under Section 73 (non-fraud) or Section 74 (fraud or suppression), with interest and penalty. Addressing the ASMT-10 properly and on time is the cheapest place to close it.

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