GST compliance in India has undergone a fundamental transformation. What began as a self-declaration system has evolved into one of the most automated, data-matched tax frameworks in the world. The system no longer waits for a human officer to detect errors — mismatches are flagged automatically, notices are system-generated, and ITC is restricted at source. For Indian SMEs, the risks are more immediate and consequential than ever before.

This blog covers the five most critical GST compliance risks in FY 2025-26 and FY 2026-27, with accurate references to the current law as amended through Finance Act 2025 and CBIC notifications up to the date of publication.

Risk 1 — Late GSTR Filing: Cascading Consequences Beyond Late Fees

Most SMEs view late filing as a minor issue — a small late fee and nothing more. The reality is far more serious.

When GSTR-1 is filed late, your outward supply invoices are not available to your buyer in their GSTR-2B for that period. Under the amended Section 16(2)(aa) of the CGST Act (effective 1st January 2022), your buyer can claim ITC only if your invoice appears in their GSTR-2B. A late GSTR-1 means your buyer’s ITC is blocked — affecting their working capital, triggering follow-up calls, and straining business relationships.

On the seller’s side, interest at 18% per annum applies on any tax paid after the due date. Late fees for GSTR-1 and GSTR-3B accumulate at ₹50 per day (₹25 CGST + ₹25 SGST) for taxable returns, and ₹20 per day for nil returns. For businesses with turnover above ₹5 crore, the late fee is capped at ₹10,000 per return.

Risk 2 — ITC Restricted to GSTR-2B: No Provisional Credit Since January 2022 + New IMS Rules

This is the most widely misunderstood and most frequently litigated GST compliance issue. Many SMEs and even some advisors still operate on the assumption that some percentage of provisional ITC — 10% or 5% — can be claimed even without GSTR-2B matching. This assumption has been legally incorrect since 1st January 2022.

The CBIC amended Rule 36(4) vide Notification No. 40/2021-Central Tax dated 29th December 2021, completely removing provisional ITC. From 1st January 2022, a registered person can claim ITC only to the extent that the invoice or debit note appears in their GSTR-2B. Not a rupee more.

From 1st October 2025, the Invoice Management System (IMS) introduced a further layer. Under the amended Section 38 of the CGST Act, ITC is now available only in respect of invoices that the recipient has explicitly ACCEPTED in the IMS. Invoices that are rejected or kept pending do not flow into the eligible ITC computation in GSTR-2B.

Additionally, Section 16(4) imposes a hard deadline on ITC claims: ITC on any invoice must be claimed no later than the due date for filing the return for November of the financial year following the year to which the invoice relates, or the actual date of filing the annual return for that year — whichever is earlier. Missing this deadline results in permanent ITC lapse with no remedy.

Risk 3 — E-Invoicing: IRN Mandatory + 30-Day Upload Limit Now Applicable

E-invoicing — the mandatory generation of an Invoice Reference Number (IRN) from the Invoice Registration Portal (IRP) — is applicable to all registered businesses with Aggregate Annual Turnover (AATO) exceeding ₹5 crore in any preceding financial year.

As per Rule 48(4) of the CGST Rules read with relevant e-invoicing notifications, an invoice requiring IRN but issued without valid IRN is not treated as a valid tax invoice. Your buyer cannot claim ITC on such an invoice. Penalty exposure under Section 122 may extend to ₹10,000 or the tax amount involved, whichever is higher.

Effective 1st April 2025, a critical new restriction applies for businesses with AATO of ₹10 crore and above: e-invoices must be reported on the IRP within 30 days of the invoice date. Invoices uploaded after the 30-day window are rejected by the IRP and cannot be assigned an IRN. This means the invoice cannot be used for ITC by the buyer and cannot be included in GSTR-1 for that period.

Risk 4 — Credit Note Compliance: New Mandatory ITC Reversal from October 2025

This is the newest and least-known GST compliance obligation as of the date of publication. Under the amended Section 34(2) of the CGST Act, effective 1st October 2025, when a registered supplier issues a credit note to a registered recipient who has availed ITC on the original invoice, the recipient must now explicitly reverse the corresponding ITC in their GSTR-3B.

Prior to this amendment, the credit note reduced the supplier’s GST liability but the corresponding ITC reversal by the recipient was technically required but procedurally unclear. The amended provision makes it an explicit mandatory condition for the supplier’s credit note to be valid for tax liability reduction.

With the IMS now operational, credit notes issued by suppliers appear in the recipient’s IMS inbox. The recipient must take a specific action — accept the credit note and reverse ITC — for the credit note to be processed. Ignoring or rejecting a credit note without ITC reversal will trigger a mismatch that the system will flag.

Risk 5 — Wrong HSN Classification: Demand + Interest + Penalty

Every B2B invoice issued by a registered person must carry the correct HSN (Harmonised System of Nomenclature) code. The HSN code directly determines the applicable GST rate. An incorrect HSN code that results in a lower rate of tax than applicable exposes the supplier to a demand for the rate differential, interest at 18% per annum from the date of original supply, and a penalty of up to 100% of the tax amount under Section 122 of the CGST Act.

Businesses should ensure compliance with applicable HSN digit requirements prescribed under current GST notifications, including mandatory 6-digit/8-digit reporting where applicable, and 8-digit HSN is required for goods covered under the Government’s specified list. The GST portal cross-validates reported HSN codes against the rate schedule database — mismatches generate automated alerts and can delay GSTR-1 filing.

Common misclassification patterns: software products incorrectly reported as services (different rate treatment), food items across 0%, 5% and 12% brackets, construction-related materials and services (works contract vs. pure supply), and composite supplies incorrectly split into components.

Key Takeaways

• Section 16(2)(aa) — ITC is only available if the invoice appears in GSTR-2B. There is zero provisional ITC since 1 January 2022. The old 10%/5% Rule 36(4) is repealed.
• IMS — From 1 October 2025, only ACCEPTED invoices in the Invoice Management System form part of eligible GSTR-2B ITC. Review your IMS inbox every month.
• E-invoicing — Mandatory for AATO > ₹5 crore. From 1 April 2025, businesses with AATO ≥ ₹10 crore must upload to IRP within 30 days of invoice date — no exceptions.
• Credit notes — From 1 October 2025, Section 34(2) mandates explicit ITC reversal by the recipient for any credit note received from a supplier. This is now a legal prerequisite for the supplier’s tax liability reduction.
• Section 16(4) — ITC has a hard deadline: November of the next financial year or annual return filing, whichever is earlier. Missed ITC lapses permanently.
• Wrong HSN codes attract demand + 18% interest + up to 100% penalty. Businesses must comply with applicable 4-digit / 6-digit / 8-digit HSN reporting requirements as prescribed under current GST notifications.

Frequently Asked Questions