GST for Small Business India 2026: Compliance Guide

The ₹1 Lakh GST Notice: How a Small Mistake Cost Big

Scenario: Sanjay runs an electronics shop in Delhi

Mistake: Filed GSTR-3B late by 15 days for 6 months

Penalty Calculation:

Late fee: ₹50/day per return (CGST + SGST = ₹100/day) 6 months × 15 days × ₹100 = ₹9,000 late fee Interest: 18% p.a. on tax amount ₹2L tax × 18% × (90 days/365) = ₹8,876 interest

Total Damage: ₹17,876 + ₹2L tax = ₹2.17L

Lesson: GST compliance isn't optional - one mistake can wipe out monthly profit.

Calculate your liability: GST Calculator Business Loan Calculator Profit Margin Calculator

GST Registration: When & How

Mandatory Registration Thresholds (FY 2026-25)

CategoryThresholdStates

Goods₹40 LakhsGeneral Goods₹20 LakhsSpecial (NE, Himachal, Uttarakhand) Services₹20 LakhsGeneral Services₹10 LakhsSpecial states E-commerce₹0 (mandatory)All India

Voluntary Registration Benefits

Example: ₹18L annual turnover (below ₹20L threshold)

Without GST: Can't claim input credit on ₹2.5L purchases Can't sell to B2B clients (they need GST invoice) Limited to local/unregistered buyers

With GST: Claim ₹45k input credit (₹2.5L × 18%) Can sell to corporates (bigger orders) Professional credibility

Decision: Register voluntarily if >50% sales are B2B

Registration Process

Documents Needed:

PAN card

Aadhaar card

Business address proof (rent agreement/property deed)

Bank account statement

Business registration proof (if company/LLP)

Photographs

Timeline: 7-15 days (if documents correct)

Cost: ₹0 (free on GST portal)

GST Return Filing: The Critical Deadlines

Regular Scheme Returns

ReturnFrequencyDue DatePurpose

GSTR-1Monthly11th of next monthOutward supplies (sales) GSTR-3BMonthly20th of next monthSummary + tax payment GSTR-9Annual31st Dec (next FY)Annual return

Composition Scheme Returns

ReturnFrequencyDue Date

CMP-08Quarterly18th of month after quarter GSTR-4Annual30th April (next FY)

Late Filing Penalties

GSTR-1 Late: ₹50/day (max ₹10,000)

GSTR-3B Late: ₹50/day per Act (CGST + SGST = ₹100/day) Max: ₹5,000 if nil tax, ₹10,000 if tax due

Example: 20 days late, ₹50k tax due Penalty: 20 × ₹100 = ₹2,000 Interest: ₹50k × 18% × (20/365) = ₹493 Total: ₹2,493

Critical: NEVER miss 20th (GSTR-3B) - blocks input credit for buyers

Input Tax Credit (ITC) Optimization

What is ITC?

Example: Wholesaler selling phones

Purchase: ₹1,00,000 + ₹18,000 GST (₹1.18L paid) Sale: ₹1,50,000 + ₹27,000 GST (₹1.77L collected)

Without ITC: Pay ₹27,000 GST (govt keeps ₹45k total - ₹18k + ₹27k)

With ITC: Pay ₹27,000 - ₹18,000 = ₹9,000 (claim ₹18k credit)

Savings: ₹18,000

ITC Eligibility Conditions

✅ Can Claim ITC:

Goods/services used for business

Vendor is GST registered

Invoice available

Payment made within 180 days

Return filed by vendor

❌ Cannot Claim ITC:

Personal expenses (car for director's personal use)

Food & outdoor catering

Health/life insurance (unless for employees)

Rent-a-cab services

Goods lost/stolen/destroyed

ITC Mistakes to Avoid

Mistake 1: Claiming on Cash Purchases

Bought ₹50k goods cash from unregistered vendor GST ₹9k (if assumed 18%) ITC: ₹0 (no vendor GST registration)

Fix: Buy only from GST-registered suppliers

Mistake 2: Not Reconciling GSTR-2A

You claim ₹2L ITC in GSTR-3B But vendor filed only ₹1.5L in their GSTR-1 Mismatch: ₹50k ITC blocked (until vendor corrects)

Fix: Download GSTR-2A before filing 3B, verify invoices

Mistake 3: Delayed Payment

Bought goods ₹3L + ₹54k GST on 1 Jan Claimed ₹54k ITC immediately Paid vendor on 15 Aug (227 days later, > 180 days)

Penalty: Reverse ₹54k ITC + 18% interest from 1 Jan

Fix: Pay suppliers within 180 days OR reverse ITC temporarily

Composition Scheme: Best for Small Retailers

Eligibility

✅ Can Opt:

Turnover < ₹1.5 Cr

Trading/manufacturing business

Supplying within same state

❌ Cannot Opt:

Inter-state sales

E-commerce sales

Service providers (except restaurants)

Manufacturer of ice cream, pan masala, tobacco

Tax Rates

Business TypeGST Rate

Trading1% Manufacturing2% Restaurants5%

Composition vs Regular: Example

Scenario: Grocery store, ₹80L annual turnover

Regular Scheme:

Sales: ₹80L × 5% GST = ₹4L collected Purchases: ₹65L × 5% GST = ₹3.25L paid ITC: ₹3.25L Net GST: ₹4L - ₹3.25L = ₹75,000

Composition Scheme:

Sales: ₹80L × 1% = ₹80,000 (no ITC) Purchases: ₹65L + ₹3.25L GST (absorbed, can't claim) Total Cost: ₹68.25L + ₹80k = ₹69.05L

Winner: Regular Scheme saves ₹5,000 (but composition has lower compliance)

Best For: Retailers with thin margins, minimal ITC availability

Limitations

❌ No input tax credit ❌ Can't issue regular tax invoices ❌ Can't sell to other businesses needing ITC ❌ Limited to ₹1.5Cr turnover

Exit If: Business grows >₹1.5Cr OR need to sell B2B

Compare strategies: GST Calculator | Profit Margin Calculator

E-Invoicing: Mandatory for Larger Businesses

Applicability (FY 2026-25)

Mandatory for: Businesses with turnover > ₹5 Crore

Effective Date: Started from ₹500Cr (2020) → lowered to ₹5Cr (2023)

What is E-Invoice?

Old: Generate invoice in Tally → Upload manually to portal

New: Generate via IRP (Invoice Registration Portal) → auto-upload to GST + E-way bill systems

Benefit: One-time upload = GSTR-1 auto-filled + E-way bill auto-generated

E-Invoice Process

Step 1: Generate invoice in accounting software Step 2: Upload JSON to IRP via API Step 3: IRP returns signed invoice with IRN (unique ID) Step 4: Print QR code invoice + send to buyer

Penalty if Not Done: Invoice considered invalid → Buyer can't claim ITC → Lose customer

E-Invoicing Software

Free: Government IRP portal (manual upload, tedious for >50 invoices/month)

Paid (Integrated):

Tally Prime: ₹1.5k/month addon

Zoho Books: ₹800/month

Busy: ₹2k one-time + ₹500/month

ROI: Saves 15-20 hours/month for 500+ invoices

Common GST Mistakes & How to Avoid

Mistake 1: Wrong HSN/SAC Code

Example: Coffee beans (HSN 0901) vs Coffee powder (HSN 2101)

GST Rate Difference: 0901 = 5%, 2101 = 18%

Impact: ₹10L sales, used wrong code Underpaid: ₹1.8L - ₹50k = ₹1.3L Penalty: ₹1.3L + 18% interest + ₹10k penalty = ₹1.45L

Fix: Verify HSN codes on GST portal, consult CA for ambiguous products

Mistake 2: Not Separating Interstate Sales

Scenario: Total sales ₹60L

Delhi sales: ₹40L (CGST 9% + SGST 9%) UP sales: ₹20L (IGST 18%)

Wrong: Filed ₹60L × 18% SGST = ₹10.8L Correct: ₹40L × 9% SGST + ₹20L IGST = ₹3.6L SGST + ₹3.6L IGST

Mismatch: ₹7.2L SGST excess, ₹3.6L IGST short

Penalty: Interest on ₹3.6L + manual correction hassle

Fix: Separate invoices series for local vs interstate

Mistake 3: Reverse Charge on Imported Services

Example: Bought $1000 Google Ads (₹83k)

Mistake: Treated as zero-rated (no GST)

Correct: Reverse charge applies (you pay GST as buyer) ₹83k × 18% = ₹14,940 GST (payable by you, not Google)

Fix: Identify all overseas vendors, check reverse charge list, pay GST under RCM

Mistake 4: Mixing Personal & Business Expenses

Personal car fuel: ₹30k + ₹5.4k GST (18%) Claimed ₹5.4k ITC

During Audit: Officer disallows (personal use) Penalty: ₹5.4k ITC reversal + ₹972 interest + ₹500 penalty

Fix: Maintain separate accounts, only claim business-use expenses

GST Audit & Assessment

Who Gets Audited?

Mandatory Audit: Turnover > ₹2 Crore (FY 2023-24)

Random Selection: 2-3% of businesses below ₹2Cr (risk-based)

Audit Red Flags

🚩 High ITC claims (ITC > 80% of tax liability) 🚩 Sudden turnover spike (₹40L → ₹2Cr in one year) 🚩 Multiple late filings (>5 months in a year) 🚩 Mismatched GSTR-1 vs GSTR-3B (>10% difference) 🚩 Frequent amendments in returns

Audit Documents to Prepare

Financial:

Audited financials

Bank statements

Sales register

Purchase register

GST Specific:

All GSTR returns filed

GSTR-2A reconciliation

E-way bills

Invoices (sales + purchase)

Critical: If audited, hire GST practitioner (₹15-25k fee worth it vs ₹5L penalty risk)

Frequently Asked Questions

Q1: Can I get GST refund if exports?

YES, exports are zero-rated (0% GST)

Example:

Exported ₹50L goods (₹0 GST charged) Paid ₹7L GST on raw materials Refund: ₹7L (within 60 days if docs correct)

Process:

File shipping bill + invoice

File GSTR-1 with export details

File refund claim (RFD-01)

Refund in 60-90 days

Critical: Maintain LUT (Letter of Undertaking) to export without IGST payment

Q2: What if my vendor doesn't file returns?

Impact: Your ITC blocked (even though you paid GST)

Fix:

Short-term: Ask vendor to file ASAP (your GSTR-2A will reflect within 2 days)

Long-term: Switch to compliant vendors, check their filing track record

Legal: Can file complaint on GST portal (but damages business relationship)

Q3: Should I register under composition or regular?

Composition If:

90%+ sales to unregistered customers (retail)

<₹1.5Cr turnover

Single-state business

Thin margin (5-10%)

Regular If:

>50% sales to GST-registered businesses

High input cost (can claim big ITC)

Want interstate expansion

Service-based business

ROI Calculation: Composition saves time (4 returns/year vs 12) Regular saves money if ITC > (Regular GST - Composition GST)

Q4: Can I claim ITC on office rent?

YES, if rent > ₹5000

But: Landlord must be GST registered (most individuals aren't)

Workaround: Pay under RCM (you pay GST as receiver) ₹30k rent × 18% = ₹5.4k GST (you pay) + claim ₹5.4k ITC (net zero)

Reality: 80% of small businesses don't claim rent ITC (landlords unregistered)

Q5: What happens if I miss GST registration deadline?

Penalty: ₹10,000 OR 10% of tax due (whichever higher)

Example: Crossed ₹40L in June, didn't register till December 6 months sales: ₹30L GST due: ₹5.4L (18%)

Penalty: ₹54k (10% of ₹5.4L) Plus: ₹5.4L GST + 18% interest (₹48,600) Total: ₹6.42L

Lesson: Register WITHIN 30 DAYS of crossing threshold

Q6: How to handle customer returns in GST?

Scenario: Sold ₹1L + ₹18k GST, customer returned ₹20k goods

Step 1: Issue credit note for ₹20k + ₹3.6k GST Step 2: Reduce output tax by ₹3.6k in GSTR-1 Step 3: Refund ₹23.6k to customer

Critical: Issue credit note within 30 days OR in September following FY (whichever earlier)

Mistake: Refunding ₹23.6k cash but not issuing credit note = you pay ₹18k GST on returned goods

Q7: Can I have multiple GST numbers?

YES, if multiple states

Example: Delhi warehouse: 07AXXXX (Delhi GSTIN) Mumbai office: 27AXXXX (Maharashtra GSTIN)

Separate: Registration, returns, compliance for each state

Benefit: Can claim ITC on interstate transfers between own branches

Cost: 2x compliance (₹10-15k/year accountant cost per state)

Key Takeaways

✅ Register timely: Within 30 days of crossing ₹20L/₹40L ✅ File punctually: 20th every month (GSTR-3B), NEVER skip ✅ Claim ITC wisely: Only from registered vendors, verify GSTR-2A ✅ Reconcile monthly: GSTR-1 vs GSTR-2A vs books ✅ Composition for retail: If 90%+ B2C sales ✅ E-invoice mandatory: If turnover >₹5Cr ✅ Audit preparedness: Keep ALL invoices, even after 6 years

GST compliance isn't complex - it's CONSISTENT. Set calendar reminders, automate where possible, and never let deadlines slip.

Plan GST compliance: Business Loan Calculator