What to do if Purchase return is added to GST turnover in 2018-19

When purchase returns are incorrectly treated as sales or improperly reported in GST filings, it creates a discrepancy between your actual business activity and the reported tax liability. In the context of the 2018-19 financial year, here is how the situation is typically handled:

1. Understanding the Error

• The Issue: A purchase return is not a supply; it is a reversal of an inward supply. Under GST, the supplier of the original goods is the one required to issue a Credit Note under Section 34 of the CGST Act to adjust their output tax liability.

• The Mistake: If a buyer treats a purchase return as a "sale" (by paying tax on it instead of reversing the Input Tax Credit) or fails to adjust their turnover correctly, it misrepresents the business's actual turnover and tax liability.

2. Corrective Actions

If you are currently facing this issue for the 2018-19 period, consider the following steps:

• Reconciliation Statement: Prepare a detailed reconciliation statement that clearly maps the transactions. Document the original purchase, the return of goods, the incorrect tax payment, and the specific entries made in your GSTR-1 and GSTR-3B.

• Form DRC-03: Any additional tax liability arising from corrections (or errors made in previous filings) should be paid using Form GST DRC-03. When filing, select the reason as "Annual Return" or "Reconciliation Statement" as applicable.

• Reporting in Annual Returns: Since you are looking at the 2018-19 period, you may need to reflect these adjustments in your GSTR-9 (Annual Return). GSTR-9 allows you to declare additional liabilities not reported in your monthly GSTR-3B filings.

• Consult a Tax Professional: Because 2018-19 is a past financial year, the standard time limits for making amendments in monthly returns (GSTR-1/3B) have long since passed. Professional advice is crucial to determine if the Department will accept the "benefit" of the tax already paid or if you are at risk of a demand notice for incorrect reporting.

3. Will the Department give the "benefit"?

The GST department generally expects compliance with the law as written.

• Admissibility: Simply paying tax on a transaction that shouldn't have been taxed (like a purchase return treated as a sale) is often viewed as an error. If you have "claimed" ITC on a sale return that was actually a purchase return, the department may view this as an inadmissible claim or an incorrect reversal of ITC.

• Risk: If the department audits your 2018-19 filings, they may demand that you pay the tax correctly (by reversing ITC) and potentially impose interest and penalties for the misclassification of the transaction, even if you technically "paid" tax in the wrong category.

Recommendation: Do not assume the department will automatically grant you the "benefit" of your mistake. You should proactively prepare a reconciliation statement and, if the tax liability is significant, consult a Chartered Accountant to assess whether to file a disclosure or wait for a potential scrutiny notice.

Summary: Treating purchase returns as sales is incorrect under GST law. For the 2018-19 period, you cannot amend past monthly returns. You should prepare a reconciliation statement for your records, pay any necessary adjustments via Form DRC-03, and be prepared to explain the discrepancy if questioned by tax authorities. Consult a tax professional to evaluate your specific risk.