Five Checks Before You Pay a New Vendor

Most tax mismatches and payment frauds in a vendor ledger begin on the day the vendor was created. Someone forwarded a PDF, someone else typed the bank details from a photo of a cancelled cheque, and nobody checked whether the PAN was operative or the GSTIN was still active. Months later, the same vendor turns up in a GST notice, a TDS short deduction demand or a year-end disallowance.

This article sets out the checks a finance team should run before a vendor is approved, why each one matters under current GST and income tax law, and a simple process that makes them routine.

Why onboarding is a compliance issue, not an admin task

A vendor record is not just a name and an account number. It decides the TDS rate you apply, whether you can claim input tax credit, when you must pay, and where the money goes. Four costs follow from getting it wrong.

• Higher TDS on an inoperative PAN: A PAN that has become inoperative, for example because it was not linked with Aadhaar, is treated as not furnished. TDS must then be deducted at a higher rate, generally 20%, under Section 397(2) of the Income-tax Act, 2025 (Section 206AA of the 1961 Act). If you deducted at the normal rate, the shortfall becomes your liability, with interest.
• Lost input tax credit: Under Section 16(2)(aa) of the CGST Act, credit is available only when the invoice reflects in your GSTR-2B. A supplier whose GSTIN is cancelled or suspended, or who simply does not file, leaves you with credit you cannot claim, however genuine the purchase.
• Deductions pushed to a later year: Under Section 15 of the MSMED Act, micro and small enterprises must be paid within 15 days, or within the agreed period where there is a written agreement, capped at 45 days. If an amount is still unpaid beyond that limit at the end of the year, the deduction shifts to the year of actual payment (Section 37 of the Income-tax Act, 2025, which carries forward Section 43B(h) of the 1961 Act). You can only manage this if you know the vendor's Udyam status from the first invoice.
• Money paid to the wrong account: One wrong digit in an account number, or a fraudulent email asking you to update bank details, sends a real payment to the wrong party. Recovering it is slow and often impossible.

The Five Checks

1. PAN: Operative and in the right name

Confirm that the PAN is valid and operative, and that the name on it matches the legal name on the vendor's invoices. For a proprietorship, the PAN belongs to the individual, so record the trade name separately. The operative status decides your TDS rate, so it is worth checking again before the first payment of each year.

2. GSTIN: Active, linked to the same PAN, and filing

The third to twelfth characters of a GSTIN are the holder's PAN. If they do not match the PAN you have collected, stop and ask why. Then check that the registration is active, that the legal name matches, that the state code fits the place of supply, and that returns are being filed. A vendor who files late every month will cost you credit every month.

3. Udyam registration: Category and activity

Record the Udyam registration number, the category (micro, small or medium) and the activity (manufacturing, services or trading). The 45-day rule covers only micro and small enterprises, and generally not traders. Classification can change each year with turnover and investment, so treat this as a yearly check, not a one-time check.

4. Bank account: verified, not just collected

A cancelled cheque or a letter on the bank's letterhead only shows what the vendor chose to send you. A penny drop check credits ₹1 to the account and returns the account holder's name as the bank records it. Compare that name with the PAN and GST names. Repeat the check every time bank details change, and confirm any change request on a phone number you already have, never by replying to the email that asked for it.

5. Declarations and documents

Collect what you will need at audit: an MSME status declaration, a lower or nil TDS certificate if the vendor holds one, a related party declaration where relevant, and copies of the PAN card, GST certificate, Udyam certificate and bank proof. Keep them attached to the vendor record, not scattered across inboxes.

A simple onboarding process

1. Collect details from the vendor directly, through a form or link they fill in, instead of attachments your team retypes.
2. Verify the PAN, GSTIN, Udyam registration and bank account against the issuing source.
3. Flag any mismatch between the names on the PAN, GST registration and bank account.
4. Approve on a maker-checker basis: the person who creates a vendor cannot approve it.
5. Create the vendor in your accounting system only after approval, and allow purchase orders and payments only to approved vendors.
6. Refresh PAN status, GSTIN status and MSME classification at least once a year, ideally before the year end close.

Doing it at scale

A team that adds a few vendors a year can run these checks by hand on the government portals. It gets harder when dozens of vendors are added every month, across several entities or for several clients. That is where vendor onboarding software with GST, PAN and bank verification earns its place: the vendor fills in their own details through a one-time link, each number is checked at source, mismatches are flagged, and nothing reaches your books until someone approves it.

Whatever process you use, the principle is the same. Check at the point of entry, because that is the cheapest place to catch a wrong number.

Quick checklist

• PAN valid, operative and matching the legal name
• GSTIN active, containing the same PAN, and returns being filed
• Udyam number, category and activity recorded
• Bank account verified by penny drop, holder name matched
• Declarations and documents collected and stored with the vendor record
• Approval by someone other than the person who created the vendor
• Annual refresh of PAN, GSTIN and MSME status

The author is the chief of staff, working with finance teams on vendor onboarding, accounts payable controls and compliance. 

Disclaimer: This article is for general information and does not constitute professional advice. Readers should consult a qualified professional before acting on it. Section references reflect the Income-tax Act, 2025 in force from 1 April 2026, with the corresponding 1961 Act sections for reference.