Introduction
Onboarding third-party vendors, suppliers, or distributors is an important aspect of business operations, particularly in sectors such as e-commerce, manufacturing, and retail. As a business expands its supply chain or distribution network, ensuring that these third parties comply with all financial and regulatory requirements becomes a thing of extreme importance.
Verifying GST returns and bank statements during the onboarding process plays a key role in mitigating financial risks and ensuring business integrity. These documents not only help in verifying the third party’s legitimacy but also ensure compliance with national regulations.
Understanding GST Returns
What are GST Returns?
GST returns are filed by businesses to report their sales, purchases, tax collected, and tax paid to the government under the Goods and Services Tax (GST) Act in India. There are different types of GST returns, each serving a specific purpose:
- GSTR-1: Reports all outward supplies (sales).
- GSTR-3B: A summary return filed monthly or quarterly, reporting tax liability and paid taxes.
- GSTR-9: An annual return consolidating all transactions during the year.
- GSTR-2A/2B: A self-generated return reflecting purchases and input tax credits available.
Why Verifying GST Returns Is Crucial During Onboarding
- Tax Compliance Check: Verifying a third party’s GST returns ensures that they are fulfilling their tax obligations.
- Input Tax Credit (ITC) Verification: By examining the GST returns, businesses can verify whether a third party is eligible for input tax credits, which can have a direct impact on the cost structure, especially in B2B transactions.
- Identifying Non-Compliance Risks: Non-compliant vendors or suppliers might have discrepancies in their GST filings. Verifying GST returns helps identify any potential tax evasion or fraud.
For example, a manufacturing unit may onboard a new supplier. Verifying the supplier’s GST returns ensures that the supplier is adhering to tax laws, which ultimately impacts the pricing and credit claims for the buyer. If the supplier is not compliant, the buyer could face penalties or loss of input tax credits.
What Are Bank Statements?
A bank statement is a detailed record of all financial transactions that have taken place in a company’s bank account during a given period. This document lists both incoming and outgoing payments, including transactions with clients, suppliers, and employees.
Key Components Of A Bank Statement:
- Deposits (Receipts): Payments received from customers or other sources.
- Withdrawals (Expenditures): Payments made to suppliers, employees, or for other business expenses.
- Closing Balance: The final balance in the account at the end of the period.
Why Verifying Bank Statements Is A Must In Third-Party Onboarding:
- Financial Health Assessment: By verifying bank statements, businesses can assess the financial stability of their vendors or suppliers. A supplier who regularly faces overdraft charges or delayed payments may indicate financial instability.
- Tracking Transaction Accuracy: Verifying bank statements ensures that the payments made to vendors match the amounts invoiced. Discrepancies here may highlight potential fraud or operational inefficiencies.
- Ensuring Authenticity: Third-party vendors or suppliers who cannot provide clean, consistent bank statements may indicate that their financial operations are not well-managed, posing a risk to business relationships.
For example, a logistics company onboarding a new distribution partner can verify the partner’s bank statements to ensure that the partner’s financial transactions are transparent and the payment history aligns with the company’s invoicing practices. Discrepancies here could be a red flag for potential payment issues or financial instability.
GST Returns vs Bank Statements: Key Differences And Similarities
Aspect | GST Returns | Bank Statements |
Purpose | Verifies tax compliance and eligibility for input tax credits | Reflects the actual flow of cash, demonstrating financial health |
Frequency | Monthly/Quarterly/Annually (depends on the type of return) | Typically monthly |
Issued By | Government of India (GST portal) | Banks or financial institutions |
Data Reflected | Sales, purchases, tax collected and paid | Deposits, withdrawals, bank charges, balances |
Legal Requirement | Mandatory for businesses registered under GST | Not mandatory, but essential for business financial health |
Key Insights | Tax liabilities, GST credits, tax paid | Cash flow, financial stability, and payment history |
Why Verifying GST Returns & Bank Statements Is Important For Compliance
Compliance is at the heart of successful third-party onboarding, especially in India, where regulations are strict, and penalties for non-compliance can be very harsh.
- Preventing Fraud and Evasion: Both GST returns and bank statements help identify discrepancies that could point to fraudulent activity, such as incorrect reporting of tax liabilities or irregular financial transactions.
- Ensuring Transparency and Integrity: When businesses verify both GST returns and bank statements, they ensure the third-party vendor or supplier is operating within legal frameworks. This reduces the likelihood of engaging with entities involved in tax evasion or financial misconduct.
- Minimising Risk in the Supply Chain: By conducting a thorough verification process, businesses can minimise risks in their supply chain, ensuring they are not unknowingly partnering with unreliable or non-compliant entities.
How Third-Party Onboarders Can Leverage GST And Bank Statement Verification
Third-party onboarding professionals in India can use these verification processes to ensure that vendors, suppliers, or distributors meet the required standards of financial and tax compliance.
- Step 1: Collect GST Returns and Bank Statements:
Ensure that all third-party vendors provide these key documents, ensuring they are complete, accurate, and up-to-date. - Step 2: Cross-Check GST Returns for Compliance:
Verify the GST registration status, check for matching sales and purchases, and ensure the vendor has paid the required taxes. - Step 3: Examine Bank Statements for Financial Stability:
Look for consistent payments and receipts, and confirm there are no major discrepancies or signs of financial mismanagement. - Step 4: Conduct Risk Assessment:
Using these documents, perform a risk assessment to determine the financial and operational health of the third party.
Conclusion
In India, verifying GST returns and bank statements is not just about adhering to tax regulations. It is a key practice to ensure that the third-party vendors, suppliers, or distributors you onboard are financially stable, trustworthy, and compliant with the law. This process significantly reduces the risk of fraud, tax evasion, and financial instability that can lead to reputational damage or operational disruptions.
For businesses looking to onboard third parties in India, the importance of these documents cannot be overstated. They play a critical role in protecting the integrity of your supply chain and ensuring your compliance with India’s ever-evolving regulatory landscape.
