Introduction
In recent months, a growing number of taxpayers have received notices from the Goods and Services Tax (GST) department regarding discrepancies between GSTR-3B (Summary Return of Outward Supplies) and GSTR-7 (TDS Return under GST). These notices allege that the turnover reported in GSTR-3B is lower than the taxable value reflected in GSTR-7, suggesting possible underreporting of sales and tax liability.
However, such comparisons are fundamentally flawed because GSTR-3B and GSTR-7 serve distinct purposes and cover different datasets. GSTR-3B represents the total taxable turnover reported by the supplier, whereas GSTR-7 only captures payments on which TDS has been deducted by specific notified entities. The tax authorities’ attempt to correlate the two returns often leads to erroneous demands and unnecessary litigation.
This article aims to comprehensively analyze the nature of GSTR-3B and GSTR-7, the various scenarios leading to differences, and how taxpayers can legally defend themselves against department notices by leveraging GST laws, judicial precedents, and logical arguments.
Understanding the Nature of GSTR-3B and GSTR-7
1. GSTR-3B: Summary Return of Outward Supplies
GSTR-3B is a summary return filed by registered taxpayers to report:
- Total taxable outward supplies,
- Input Tax Credit (ITC) claims,
- Tax liability payments, and
- Any adjustments related to previous periods.
GSTR-3B is filed monthly or quarterly, depending on the taxpayer’s turnover and opted scheme. It serves as a self-assessment return, and the turnover reported here should ideally align with the taxpayer’s GSTR-1 (Statement of Outward Supplies).
2. GSTR-7: TDS Return under GST
GSTR-7 is filed by notified deductors (such as government departments, PSUs, local authorities, and other specified entities) who deduct TDS at 2% (1% CGST + 1% SGST) on payments to registered suppliers for contract-based supplies exceeding ₹2.5 lakh.
- The deductor must deposit the TDS amount with the government and report it in GSTR-7.
- The supplier (taxpayer) receives credit for the deducted TDS in their electronic cash ledger, which can be utilized for tax payment.
- TDS is applicable only to intra-state taxable supplies and not on inter-state transactions (IGST supplies).
Since GSTR-7 only reflects turnover subject to TDS and excludes all non-TDS transactions, comparing it with GSTR-3B is conceptually incorrect.
Why GSTR-3B and GSTR-7 Cannot Be Compared Directly
Several structural differences make it impractical to compare these two returns:
| Parameter | GSTR-3B | GSTR-7 |
|---|---|---|
| Purpose | Reports self-assessed taxable turnover and tax liability | Reports payments subject to TDS under GST |
| Filed by | Supplier (Taxpayer) | Deductor (Government/PSU/Notified Entity) |
| Covers | Entire taxable turnover | Only the portion where TDS was deducted |
| Taxpayer’s Role | Self-assessment of tax liability | Passive receiver of TDS deduction details |
Since GSTR-7 does not include turnover from private sector sales, B2C sales, exports, exempt supplies, inter-state supplies, or services under RCM, it is incorrect to assume that GSTR-7 represents a taxpayer’s total turnover.
Common Reasons for Mismatches Between GSTR-3B and GSTR-7
Several legitimate factors can cause differences between turnover reported in GSTR-3B and the taxable value reflected in GSTR-7:
1. GSTR-7 Captures Only TDS-Deducted Transactions, Not Total Turnover
- Not all transactions attract GST-TDS; only payments made by notified deductors (government, PSUs, etc.) for intra-state taxable supplies qualify.
- Transactions with private entities or B2C sales are not subject to TDS and hence do not appear in GSTR-7.
2. Inter-State (IGST) vs. Intra-State (CGST+SGST) Transactions
- GST-TDS applies only to intra-state supplies (CGST+SGST), meaning that inter-state supplies (IGST transactions) do not reflect in GSTR-7.
- If a taxpayer makes both intra-state and inter-state supplies to the same deductor, only the intra-state component appears in GSTR-7.
3. Delayed or Erroneous Reporting by Deductor
- Sometimes, TDS deductors fail to file GSTR-7 correctly or on time, leading to discrepancies in auto-populated data in the supplier’s TDS credit records.
- Errors in deductor filings may overstate or understate values, creating artificial mismatches.
4. Credit Notes and Post-Sale Adjustments
- If a taxpayer issues credit notes for discounts, sales returns, or price corrections, the net taxable turnover reduces in GSTR-3B.
- However, since GSTR-7 captures TDS on the original invoice value without considering credit notes, this can create mismatches.
5. Reverse Charge Mechanism (RCM) Transactions
- Supplies on which tax is paid under RCM do not attract GST-TDS because the recipient pays tax, not the supplier.
- RCM transactions are reported in GSTR-3B but do not appear in GSTR-7, leading to discrepancies.
6. Advance Payments vs. Invoice-Based Reporting
- TDS in GSTR-7 is deducted on actual payments, whereas turnover in GSTR-3B is reported on an invoice basis (accrual concept).
- Timing differences between billing and payment can lead to variations.
How to Defend Against GST Notices on GSTR-3B vs. GSTR-7 Differences
Legal Arguments & Judicial Precedents
- “GSTR-7 does not define taxable turnover”
- Under Rule 66(2) of the CGST Rules, GSTR-7 merely records TDS details and cannot determine the total taxable turnover of a taxpayer.
- Reliance on Legal Maxim: “Lex Non Cogit Ad Impossibilia”
- This maxim means “The law does not compel the impossible.”
- Since only specific deductors file GSTR-7, a taxpayer cannot be expected to match total turnover to GSTR-7 alone.
- Supreme Court Precedent on Indirect Tax Assessments
- The Supreme Court has ruled in past indirect tax cases that different statutory returns serve different purposes and should not be directly compared for tax assessments.
Steps for Taxpayers to Respond to GST Notices
- Prepare a Reconciliation Statement
- Compare taxable turnover from GSTR-3B, GSTR-1, and Books of Accounts with TDS values in GSTR-7.
- Highlight non-TDS transactions (exports, inter-state sales, B2C transactions, credit notes, RCM supplies).
- File a Legal Reply to the GST Notice
- Provide a detailed explanation citing GST laws, rules, and case laws.
- Attach supporting documents (TDS certificates, sales ledgers, invoices).
- Engage in Escalation & Appeal
- If the officer continues with an unjustified demand, the taxpayer should escalate the issue to the First Appellate Authority under Section 107 of the CGST Act.
Conclusion
The practice of comparing GSTR-3B and GSTR-7 is inherently flawed and leads to erroneous tax notices. Taxpayers must proactively prepare reconciliations, rely on legal precedents, and submit robust replies to counter such claims.
By adopting a structured legal and factual defense, businesses can effectively combat wrongful tax demands and ensure compliance with GST laws while safeguarding their interests against arbitrary departmental actions.
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