How to Recover GST and TDS Shortfalls From a Customer

Can you recover GST and TDS shortfalls from a customer?

Yes, if the customer still owes it. Think about what GST on your invoice actually is. It's part of the price they agreed to. You've most likely deposited it with the government already, too. So a customer that pays the base and skips the GST hasn't paid the whole bill, and you can recover the gap like any other dues. TDS works the same way when it was cut from your payment and then never deposited. Money that didn't reach the income tax department hasn't discharged anything. That part of the bill is still unpaid.

Other gaps aren't really debts. Suppose the customer took too much TDS, at a rate higher than the law requires, or worked it out on the GST portion as well. If it deposited every rupee against your PAN, the government is holding that money for you. It shows as credit when you file your return. Anything extra comes back as a refund. Annoying, yes. A cash-flow problem. But you solve it with tax filings and a call to their accounts team, not a suit.

So the first job is sorting the shortfall into those two piles. The rest of this guide shows you how, what the customer is allowed to argue, and how to recover the part that's a genuine debt. For the wider process, see our page on unpaid invoice recovery.

The five shortfalls suppliers keep running into

• GST withheld. They pay the taxable value and sit on the GST, usually saying your invoice isn't showing in their GSTR-2B or their input tax credit is blocked.
• TDS deducted but not deposited. They cut tax at source and pay you the net, but never deposit the tax, or never file the TDS statement. Either way, nothing shows up in your Form 26AS.
• TDS at the wrong rate, or on the wrong base. Maybe they've applied the professional fees rate when you provide technical services. Or they're deducting on the gross figure, GST included.
• GST TDS by a government buyer. A department, local authority or notified body deducts GST TDS under Section 51 of the CGST Act and then doesn't file its return, so the credit never lands in your electronic cash ledger.
• Nothing paid, but you've paid the GST. The customer hasn't paid the invoice at all, and you've already deposited the GST on it out of your own pocket.

GST not paid by the buyer: why you take the hit first

Under GST, your liability to pay tax arises at the time of supply. For most deals that's the earlier of the invoice date, the date of supply, or the date you got paid (Sections 12 and 13 of the Central Goods and Services Tax Act, 2017). Once you raise the invoice and report it in your GSTR-1, you have to pay the tax in that period's GSTR-3B, whether or not the customer has paid you. So when the buyer doesn't pay the GST, you've effectively funded the government on its behalf.

GST has no general bad debt relief. You can't just lower your output tax because a customer didn't pay. A credit note under Section 34 of the CGST Act cuts your tax liability only where the invoice was genuinely wrong, the goods came back, or the value was revised. It also has to be issued in time, which is now by 30 November following the end of the financial year in which you made the supply. Don't issue a credit note just because the customer refused to pay. It tells everyone your invoice was overstated.

The upshot is simple. Unpaid GST is cash straight out of your pocket. It's also a perfectly good claim against the customer. They agreed to buy at a price plus tax, so the tax is part of the consideration. A suit for the invoice amount includes the GST component, and courts treat it that way.

When they'll only pay GST once it shows in their GSTR-2B

You'll hear this one more than any other. And to be fair, it's sometimes true. Section 16(2)(aa) of the CGST Act lets a buyer claim input tax credit only after the supplier has reported the bill in GSTR-1 and those details have reached the buyer. GSTR-2B is where the buyer sees them. A late GSTR-1, the wrong GSTIN, a typo in the value, and the buyer's credit is stuck. You can see why they'd hold the tax back until you've fixed it.

Look at your own filings before you blame them. Open your GSTR-1 for each month in dispute. Is every bill there, against the right GSTIN? Big customers usually work on e-invoices, so match the IRN details as well. If the error's yours, correct it in the next return or by amendment. Then write to the customer saying what you've fixed, and ask to be paid as soon as it shows. Keep a copy. You'll want it.

If your filings are correct and the invoices are sitting in the customer's GSTR-2B, the excuse is gone. Now they're just holding on to money they owe. In these files, Advocate B.K. Singh attaches a screenshot of the customer's GSTIN search and your GSTR-1 filing acknowledgment to the demand letter. It stops the accounts team from repeating the 2B line without checking it.

The 180-day rule: a buyer who doesn't pay puts its own credit at risk

The second proviso to Section 16(2) of the CGST Act, read with Rule 37 of the CGST Rules, deals with buyers who sit on payment. If a buyer has taken input tax credit but hasn't paid the supplier the value of the supply plus tax within 180 days from the invoice date, it has to reverse that credit, with interest. It can take the credit back once it pays. The rule doesn't apply to supplies under reverse charge.

Use that, gently. If they've claimed credit on your bills and let more than 180 days go by without paying, the law expects them to reverse it and pay the government interest. Their GST auditor will spot it at year end in any case. Put it in your demand letter in a sentence or two, framed as a reason it suits them to pay you. In our experience that line gets read by the finance head. Purchase teams tend to ignore everything else.

Stay factual, though. Don't threaten to report the customer to the GST department to squeeze out payment. It reads as pressure. It rarely helps settlement. And it won't get your money back, because any reversal goes to the government, not to you.

TDS not deposited by the customer: what it means and what you can do

Deducting is only half the customer's job. The tax then has to reach the government, usually by the 7th of the following month, though March gets a later date. Every quarter there's a TDS statement to file as well. Until both happen, nothing appears against your PAN in Form 26AS or the Annual Information Statement. One change to keep in mind. For payments made from 1 April 2026, non-salary TDS is in Section 393 of the Income-tax Act, 2025. Anything paid up to 31 March 2026 is still governed by the old Act, through Sections 194C (contractors), 194J (professional and technical fees), 194Q (purchase of goods) and the rest.

So what happens when the deduction never gets deposited? Look at it from two sides. Tax first. You're protected here. Section 205 of the old Act and Section 401 of the 2025 Act don't let the department come after you for tax that was already cut from your income. The catch is the software. The department's computers only give you credit for what's in Form 26AS, so a mismatch notice or a trimmed refund can land on you while this drags on. Now the civil side. The customer handed you the net figure and held on to the TDS. Nobody has received that money. It's still owed to you, and you can sue for it.

Your first move is a written request. Ask for the BSR code, the challan serial number and the deposit date for each deduction, plus the quarterly TDS certificate. A customer that genuinely paid can send all of it the same day. Sometimes the money did go in but the statement carries a mistake, a wrong PAN for instance. That's fixable. The customer files a revised statement. No challan at all? Then the tax was never paid, whatever the accounts team tells you on the phone. Two more things you can do. File a grievance through the income tax e-filing portal. And write to the TDS officer who has jurisdiction over the customer, whose details you'll find against its TAN.

TDS at the wrong rate, or on the GST component

Service contracts are full of this. An IT firm doing technical work gets hit at the higher professional fees rate. A transporter gets a rate that was never meant for it. Then there's GST. Under CBDT Circular No. 23 of 2017, if your invoice shows GST as a separate line, TDS is to be worked out on the figure without GST. Plenty of accounting software ignores that. It deducts on the gross total. Every bill, too much.

If the excess was deposited properly against your PAN, the money isn't lost. It shows in your Form 26AS, you claim it as credit in your return, and the excess is refunded. You're short on cash flow, not on what you'll eventually get. For a business on thin margins that's still a real cost. Raise it with the customer in writing, cite the correct provision, and ask them to deduct correctly from the next payment.

If the customer keeps getting it wrong, you can apply to the income tax department for a lower or nil deduction certificate. Once issued, the customer has to deduct at the certified rate. A recovery suit for over-deducted TDS that was properly deposited is rarely the right tool. The customer will say it paid that money to the government on your account. And broadly, it'll be right.

GST TDS cut by government departments and PSUs

Section 51 of the CGST Act makes government departments, local authorities, government agencies and certain notified bodies deduct GST TDS at 2 percent when the total value of supply under a contract is over Rs 2.5 lakh. That's 1 percent CGST and 1 percent SGST, or 2 percent IGST on inter-state supplies. The deductor deposits it and files GSTR-7. You then accept the credit, it lands in your electronic cash ledger, and you can use it to pay tax.

It goes wrong when GSTR-7 isn't filed at all, or goes in under someone else's GSTIN, or the 2 percent is worked out on the wrong figure. You've then received 2 percent less and have no credit for it. Don't rush to court. Write first, to the drawing and disbursing officer who handles the contract, giving the contract details and asking for the GSTR-7 particulars. Go higher in the department if nobody answers. Government accounts sections usually do correct these. Someone just has to be asked by name.

If a government buyer hasn't paid at all, or has held back more than just tax, that's a bigger question. Our guide on recovering business dues from a government department or PSU covers the notice to government under Section 80 of the Code of Civil Procedure and the other routes.

The provisions that decide a GST or TDS shortfall claim

Recovering a GST or TDS shortfall, step by step

Most shortfalls get settled in the first three steps, once both sides' accountants are looking at the same numbers. The later steps are for customers who won't engage.

1. Reconcile three ways

   Match your ledger for the customer against your Form 26AS and Annual Information Statement for TDS, and against your GSTR-1 and the customer's GSTIN for GST. List every invoice, with the GST shortfall and the TDS shortfall in separate columns.

2. Fix whatever's wrong on your side

   Correct late or wrong GSTR-1 entries and e-invoice errors. Then tell the customer in writing what you corrected and when it'll reflect.

3. Send a reconciliation letter

   Send the customer an invoice-wise statement of GST and TDS shortfalls. Ask for challan details and TDS certificates for every deduction, and for payment of the GST withheld on invoices that now show in its GSTR-2B.

4. Push the tax side for TDS

   No challan details? Raise a grievance on the income tax e-filing portal and write to the jurisdictional TDS officer for the customer's TAN. Keep copies of everything.

5. Send a legal notice for the debt part

   For GST withheld and TDS deducted but not deposited, send a legal notice demanding payment with interest within about 15 days. Add the principal dues if those are unpaid too.

6. Mediate, or go to the MSME Council

   If the total claim is Rs 3 lakh or more, apply for pre-institution mediation under Section 12A of the Commercial Courts Act. A registered micro or small supplier can refer the dispute to the MSME Facilitation Council instead.

7. File the claim

   File a commercial suit, or an ordinary civil suit if it's below Rs 3 lakh, for the full shortfall with interest. Attach the reconciliation and the tax records.

Put everything from the same account into one suit. Order II Rule 2 of the Code generally bars a second suit for parts of a claim you left out of the first one.

Time and costs, from reconciliation to recovery

Papers to pull together for a GST or TDS shortfall claim

• Tax invoices showing the taxable value, GST rate and GST amount as separate figures
• The PO, contract or email that shows the price was agreed plus applicable GST
• Your GSTR-1 and GSTR-3B filings for the months concerned, with the acknowledgments
• E-invoice IRN records, if you're on e-invoicing
• Your ledger for the customer, showing payments received net of TDS
• Form 26AS and the Annual Information Statement for the years in question
• TDS certificates you did get, and your written requests for the ones you didn't
• Emails about GSTR-2B mismatches, and proof of what you corrected
• For a government buyer, the contract, the payment advice showing GST TDS, and the GSTR-7 credit status on your portal
• Your Udyam registration certificate, if you're a micro or small enterprise
• Any lower or nil deduction certificate issued to you

Where do you file, and are small shortfalls worth a case?

Per bill, these gaps look minor. Added up, they rarely are. You need a specified value of Rs 3 lakh or more for a commercial suit. Delhi divides the work by value. Claims up to Rs 2 crore are for the District Judge (Commercial Court) of whichever district has territorial jurisdiction, so Tis Hazari, Saket, Karkardooma, Rohini or Dwarka, depending on the area. Above that, you're in the Commercial Division of the Delhi High Court. The district ceiling may change, as a revision has been under consideration, so confirm it first. Ghaziabad, Gautam Buddh Nagar, Gurugram and Faridabad each have a court designated as the district's Commercial Court. Under Rs 3 lakh, file in the ordinary civil court. Which city? Section 20 of the Code answers that. Wherever the customer carries on business, or wherever the cause of action arose. The value and territory rules are laid out on our page about which court will hear your case.

So should you bother over a small gap? It depends. A customer that pays everything else and has simply mismatched a few entries isn't worth suing. The suit would eat more than it recovers. A sharp letter from your CA usually ends it, or failing that, a legal notice. It's different when the GST gap is one symptom of a customer that's slow on everything. Then put it all into a single claim. Registered micro and small enterprises have one more option. The MSME Facilitation Council takes claims of any size. And Section 16 of the MSMED Act, 2006 gives you compound interest at three times the RBI bank rate, which turns even a modest claim into one worth making.

In the shortfall files Advocate B.K. Singh sees, amounts that look trivial invoice by invoice often add up to several lakh over two or three years. That's especially true where the customer has quietly held back GST on every bill. Add it up across the whole relationship before you decide it isn't worth chasing.

How it differs for goods suppliers, service firms, MSMEs and marketplace sellers

Goods suppliers mostly face GST withholding tied to GSTR-2B mismatches, and the 180-day rule matters most to them. Big buyers with automated payment systems often hold the GST until the invoice matches. So filing GSTR-1 on time and correctly is the best prevention there is. Service firms get more TDS trouble. Wrong-rate deductions, deductions on GST, deductors who file their TDS statements late. Agencies, consultants and IT vendors should look at Form 26AS every quarter. Once a year isn't enough.

If you're a registered micro or small enterprise, remember this. Under the MSMED Act, the amount due within the agreed period (45 days at most) is the whole invoice, GST and all. Interest runs on all of it, not just the base. Marketplace sellers live with different deductions. The platform collects TCS under Section 52 of the CGST Act, and there's income tax TDS on top. When those don't tally, it's mostly a matter of reconciling with the platform. See our guide on recovering payment from e-commerce marketplaces and aggregators for that.

Across Delhi, UP and Haryana the tax rules are identical. What changes is the court fee schedule, and which state gets the SGST on intra-state supplies. A supplier in Noida billing a customer in Gurugram charges IGST. Get the GSTIN wrong there and the credit can end up sitting in the wrong state. Check that early.

What to do this week

Get your 26AS and AIS downloaded. Pull up your GSTR-1 returns. Now go bill by bill against the customer's ledger. You'll end up with two lists. On the first, the real debts, such as GST they kept, TDS they never deposited, bills not paid at all. On the second, the credit and rate problems, like extra TDS that did reach the government. Correct your own errors. After that, write to the customer for the challan details and for the GST that's now visible in its GSTR-2B. Two weeks of silence? Legal notice. Our guide on sending a legal notice for recovery of money explains what it should say, and our unpaid invoice recovery page shows how we take it further. If the customer is behind on principal dues too, our money recovery suit page covers the full claim. The interest on unpaid dues guide explains what interest you can add.

Want your GST and TDS reconciliation and invoices checked before you write to the customer? Or updates when tax and recovery law change? You can contact Advocate B.K. Singh's team through the contact page.