Why do GST credit mismatches surface in due diligence?

Two weeks into a Series A diligence, the investor's accounting firm sends a spreadsheet. It has three columns for each month of the last two financial years: input tax credit in the company's books, credit claimed in its GSTR-3B returns, and credit available in GSTR-2B, the statement generated from what suppliers reported. The columns don't agree, and the difference over two years comes to around ₹23 lakh. There are twelve follow-up questions.

The founder's first reaction is usually surprise, followed by an assumption that the accountant must have it under control. Sometimes that's right, and the gap is explainable timing. Often it isn't, and part of the gap is credit the company claimed but wasn't entitled to.

Either way, it's one of the most predictable findings in Indian startup diligence, and one of the most avoidable. Almost every company that has bought goods or services for a couple of years has some version of this gap. The difference is whether it has been measured and explained before anyone else looks.

How input tax credit is supposed to work

When your company buys goods or services, suppliers charge GST. Your company can usually set that GST off against the GST it owes on its own sales. That's the input tax credit.

The catch is that the credit depends on your supplier doing their part. Under the GST law, credit can only be taken for an invoice the supplier has reported in their own return, so that it appears in your GSTR-2B. There are further conditions: you must have received the goods or services, hold a valid tax invoice, and the tax must actually have been paid to the government. Some credits are blocked outright, such as those on most food and beverages, club memberships and certain vehicles. Credit relating to exempt supplies has to be reversed. And if you don't pay a supplier within 180 days of the invoice, the credit has to be reversed until you do.

There's also a deadline. Credit for a financial year generally has to be claimed by 30 November of the following year, or the date you file the annual return if that's earlier. Credit discovered after that is usually lost.

So the credit a company is entitled to isn't simply the GST on its purchase invoices. It's that amount, filtered through what suppliers filed, what was paid, what's blocked and what's time-barred.

Where the mismatches come from

• ·Suppliers who didn't file, filed late or reported the invoice in a later month. The credit isn't in your GSTR-2B when you expected it.
• ·Invoices issued to the wrong GSTIN. Common with hotels, travel and events, where the invoice carries the GSTIN of another state or no GSTIN at all.
• ·Credit claimed on blocked items, such as staff meals, gifts or club memberships, because the expense was booked with GST like everything else.
• ·Suppliers unpaid for more than 180 days, with no reversal.
• ·Credit relating to exempt supplies not reversed, which matters for businesses with both taxable and exempt revenue, such as some healthcare companies.
• ·Credit claimed in GSTR-3B above what GSTR-2B showed, on the basis that the supplier would file eventually.
• ·Duplicate bookings of the same invoice, or credit notes from suppliers never recorded.
• ·Multiple state registrations where purchases for one state were claimed in another.

Most of these are small individually. They accumulate because nobody reconciles them monthly, and by the time diligence arrives, two years of small gaps have become a number that needs explaining.

Why investors treat it as a liability

Credit claimed without entitlement can be recovered by the tax department, with interest and potentially penalties. For credit wrongly availed and used, interest runs at a high rate from the date it was used. Tax authorities also run automated matching on exactly these gaps, so the risk of a notice isn't theoretical.

An investor buying into the company is buying into that exposure. So the diligence report quantifies it, and the legal documents deal with it, usually through a specific indemnity from the company or founders, a condition to regularise it before completion, or occasionally a price adjustment.

There's a second reason investors care, which is less about the money. A company that can't reconcile its GST credit usually can't reconcile a lot of other things either. Diligence teams run this reconciliation early precisely because it's quick, it's mechanical, and it tells them how much to trust the rest of the finance function.

A reconciliation, worked through

Here's an illustrative year for an invented company. Input credit recorded in the books is ₹84 lakh. Credit claimed across the year's GSTR-3B returns is ₹81 lakh. Credit available in GSTR-2B is ₹72.5 lakh. The ₹8.5 lakh gap between what was claimed and what was available breaks down like this.

• ·₹2.2 lakh of invoices suppliers reported in the following financial year. Timing, supportable, as long as it's documented and the claim was within the deadline.
• ·₹3.1 lakh from suppliers who never filed at all. Not supportable. Needs reversing unless the suppliers can be persuaded to file.
• ·₹1.4 lakh of hotel and travel invoices carrying another state's GSTIN. Not supportable in this registration.
• ·₹1.1 lakh of credit on staff meals and gifts. Blocked. Needs reversing.
• ·₹0.7 lakh relating to suppliers unpaid for more than 180 days. Needs reversing until they're paid.

Of the ₹8.5 lakh, a diligence team would treat about ₹6.3 lakh as exposure, plus interest, and the ₹2.2 lakh as timing to be evidenced. The separate ₹3 lakh between the books and the returns needs its own explanation, usually credit that was booked but never claimed, some of which may now be time-barred.

The amounts in this example are modest. The pattern is what matters: most of the gap is fixable, some of it is money genuinely owed back, and all of it is far easier to handle when the company found it first.

What changed with IMS and the July 2026 lock

The Invoice Management System, introduced on the GST portal in late 2024, lets a buyer accept, reject or keep pending each invoice suppliers report, before GSTR-2B is generated. Invoices left without any action are treated as accepted. Rejected or pending invoices don't flow into that month's GSTR-2B.

Then, according to published advisories and practitioner guidance, from the July 2026 tax period the input credit auto-filled into GSTR-3B from GSTR-2B can no longer be edited upwards manually. The practical effect is that the old habit of claiming credit ahead of supplier filings, and sorting it out later, is largely closed off. Credit now follows what's in the system.

For diligence this cuts both ways. Returns filed from July 2026 onwards should show fewer overclaims. But the months and years before still carry whatever gaps they carried, and a company that isn't actively reviewing invoices in IMS each month may be accepting incorrect invoices by default or losing credit it's entitled to. Confirm how these rules apply to your filings with your CA.

The other side: revenue against GSTR-1

Diligence teams also reconcile output GST. Revenue in the books is compared with the taxable value reported in GSTR-1 and the tax paid in GSTR-3B. Differences usually come from exports reported inconsistently, credit notes issued to customers but not reported, advances received, or revenue recognised in the books in a different month from the invoice.

Some of these are normal timing differences. But unexplained gaps between books and returns raise an obvious question: which revenue number is right? If an investor has just been shown ARR and revenue growth in a deck, that question goes well beyond tax.

How to clean it up before a round

1. 01Reconcile books, GSTR-3B and GSTR-2B every month, not at year end. With IMS, review supplier invoices in the portal before GSTR-2B is generated.
2. 02Chase suppliers who haven't filed. Many will once asked; the ones who won't are worth reconsidering as suppliers.
3. 03Clean the vendor master: correct GSTINs, correct states, and a rule that travel and hotel bookings use the right registration.
4. 04Build the blocked credit rules into how expenses are booked, so staff meals and gifts never carry claimable GST.
5. 05Track supplier payments against the 180-day rule and reverse credit where needed.
6. 06For past gaps, work with your CA to reverse unsupported credit and pay interest where it applies. It's almost always better to regularise than to explain.
7. 07Reconcile revenue in the books against GSTR-1 monthly and document the timing differences.
8. 08Make sure the annual return and reconciliation statement tell the same story as the monthly returns.

Who should own this inside the company

In most startups, GST returns are filed by an external accountant or CA firm, and that's sensible. But filing and reconciling aren't the same job. A firm filing returns for dozens of clients will usually file what the books and the portal show. Whether the company should have claimed a particular credit, whether a supplier needs chasing, whether an expense policy is creating blocked credits: those questions need someone inside the business, or someone senior working closely with it, to own them.

The practical arrangement that works for most companies is simple. The accounting firm prepares the monthly reconciliation of books, GSTR-3B and GSTR-2B, including the IMS review. A named person in the company reviews it, decides on follow-ups and reversals, and signs it off. The founder sees a one-line summary in the monthly MIS: credit claimed, credit supported, and anything outstanding.

What a clean data room looks like

When diligence begins, the strongest thing a company can put in the data room isn't a set of returns. It's the reconciliations that explain them.

• ·A month-by-month reconciliation of input credit across books, GSTR-3B and GSTR-2B for each financial year under review, with every difference labelled.
• ·A schedule of timing differences, showing where each invoice was eventually reported.
• ·A record of credits reversed, with the reason and the date, and interest paid where it applied.
• ·A reconciliation of revenue in the books with GSTR-1 and GSTR-3B, with timing differences explained.
• ·Annual returns and reconciliation statements for each year, consistent with the monthly returns.
• ·Copies of any notices received and how they were resolved.

A diligence team that finds this already prepared usually spends a day checking it rather than two weeks building it. That changes the tone of the whole process.

When there's still a gap at diligence

Sometimes there isn't time to fix everything before a data room opens. In that case, the best position is disclosure with numbers. Show the reconciliation, explain which parts are timing and which are exposure, quantify the exposure including interest, and describe what's being done. Investors deal with known, quantified tax issues all the time. What slows a round down is an issue the diligence team discovers that the company didn't know about, because it raises the question of what else is unknown.

Founders sometimes treat GST as their accountant's problem. In a round, it becomes theirs. A monthly reconciliation that takes a few hours is one of the cheapest pieces of diligence preparation a company can do.

Who wrote this

Shafneed is the founder of Simplify, a finance clarity and investment readiness practice working with founders across India. He writes about the questions founders bring before a decision, not after it.