A supplier’s bill for ₹3,29,928 lands on your desk on the 8th. Your godown says 10 coils of wire never arrived and 40 switches came broken. The bill charges for everything, at a rate ₹7 higher than you agreed on one item. If your accountant enters it as it stands, you pay ₹18,030 you do not owe and claim GST credit on goods you never received.
A three-way match stops that. Before a bill is entered for payment, you check it against two other documents: the purchase order (what you agreed to buy, at what rate) and the goods receipt note (what actually reached the godown, in what condition). You pay, and claim input tax credit, only on what all three agree on.
This guide is written for distributors and stockists running with a small team: one or two people in accounts, a godown in-charge, and an owner who signs the cheques.
What is a three-way match, and why should a small distributor bother?
Large companies run three-way matching inside an ERP with approval chains. A distributor with ten suppliers and a busy godown needs the same control in a lighter form, because the losses are the same kind: short supplies paid for in full, rate increases nobody approved, damaged cartons never claimed back, and the same bill entered twice.
The GST law adds a second reason. Under Section 16(2)(b) of the CGST Act, you can take input tax credit only on goods you have actually received. A bill-only workflow cannot tell you that. The goods receipt note can. So the match protects both your payment and your ITC claim.
What should each of the three documents show?
The match only works if the three documents carry the same reference points. Here is the minimum each one needs.
Document | Prepared by | Must show |
|---|---|---|
Purchase order (PO) | You (purchase desk or owner) | PO number and date, supplier and GSTIN, item and HSN, quantity, agreed rate, discount or scheme, delivery terms |
Goods receipt note (GRN) | Godown in-charge | GRN number and date, PO number, supplier invoice or challan number, quantity received, quantity rejected and why, e-way bill number if any |
Supplier bill (tax invoice) | Supplier | Invoice number and date, your GSTIN, item and HSN, quantity, rate, taxable value, GST rate and amount, PO reference |
The two fields that do the most work are the PO number on the GRN and the PO number on the bill. Ask your regular suppliers to quote your PO number on every invoice. Most will do it once asked.
How do you run a three-way match on a supplier bill?
Run this routine on every purchase bill before it goes into the purchase register as approved for payment:
Find the PO. Match the supplier and PO number. A bill with no PO goes to the owner for approval first, not straight to accounts.
Find the GRN. Match the supplier invoice or challan number written on the GRN. No GRN means the goods are not in your godown as far as your books are concerned.
Match quantity, line by line. Bill quantity should equal GRN accepted quantity. Anything billed but not received, or received but rejected, is a difference.
Match rate and discount. Bill rate should equal PO rate after the agreed trade discount. A higher rate is a difference unless someone approved it in writing.
Check the GST details. Your GSTIN, the supplier’s GSTIN, HSN, tax rate, and whether IGST or CGST plus SGST applies to the place of supply.
Decide. Approve the matched value for payment, put the difference on hold, and ask the supplier for a credit note or the missing goods the same day.
Note the order. Quantity comes before rate, because a rate dispute on goods you never received is a waste of a phone call.
Worked example: an electrical distributor’s ₹3.3 lakh bill
Say you run an electrical goods distributorship in Vadodara. On 2 November 2026 you raise PO-0412 on a manufacturer in Gujarat for three items, all assumed at 18% GST for this example. The goods arrive on 6 November with invoice INV-3381. Your godown records GRN-0918. Here is what the three documents say:
Item | PO qty and rate | GRN accepted | Bill qty and rate | Difference (taxable) |
|---|---|---|---|---|
Modular switch 6A | 2,000 at ₹42 | 1,960 (40 broken) | 2,000 at ₹42 | 40 × ₹42 = ₹1,680 |
MCB 32A | 300 at ₹185 | 300 | 300 at ₹192 | 300 × ₹7 = ₹2,100 |
Wire 1.5 sq mm, 90 m coil | 120 at ₹1,150 | 110 (10 short) | 120 at ₹1,150 | 10 × ₹1,150 = ₹11,500 |
Total | ₹2,77,500 | - | ₹2,79,600 | ₹15,280 |
Now the arithmetic.
Bill taxable value: ₹84,000 + ₹57,600 + ₹1,38,000 = ₹2,79,600. GST at 18% = ₹50,328. Bill total ₹3,29,928.
Matched taxable value (accepted quantity at PO rate): 1,960 × ₹42 = ₹82,320; 300 × ₹185 = ₹55,500; 110 × ₹1,150 = ₹1,26,500. Total ₹2,64,320. GST at 18% = ₹47,577.60. Matched total ₹3,11,897.60.
Difference: ₹15,280 taxable plus ₹2,750.40 GST = ₹18,030.40. Check: ₹3,29,928 minus ₹3,11,897.60 gives the same figure.
You enter the full bill as received, because it is the supplier’s legal document and it will appear in your GSTR-2B as issued. Then you approve ₹3,11,897.60 for payment and hold ₹18,030.40 against three specific reasons: 40 broken switches, an unapproved rate on MCBs, and 10 coils short. Send the supplier a debit note or return note for each, quoting INV-3381 and GRN-0918. Our note on credit and debit notes for wholesale businesses covers how each side records these.
How does the match decide how much ITC you claim?
This is the part most purchase guides skip. A three-way match is also your working paper for ITC, because Section 16(2) of the CGST Act sets conditions that line up with the three documents:
You hold a tax invoice (Section 16(2)(a)). That is the bill.
The supplier has reported it and it appears in your GSTR-2B (Section 16(2)(aa)).
You have received the goods (Section 16(2)(b)). That is the GRN, and the condition a bill-only workflow cannot check.
Tax has been paid by the supplier and you have filed your return (Section 16(2)(c) and (d)).
In the example, the 10 coils were never received. GST on them is 10 × ₹1,150 × 18% = ₹2,070. If the supplier has confirmed it will not send them and will issue a credit note, keep that ₹2,070 out of this month’s claim and take ₹50,328 minus ₹2,070 = ₹48,258.
If instead the supplier says the 10 coils will follow as a second lot against the same invoice, read the first proviso to Section 16(2): where goods against one invoice arrive in lots, credit is available on receipt of the last lot. Read strictly, that holds back the ITC on the whole invoice, including the coils you did receive, until they arrive. Ask the supplier to bill the balance separately instead; it keeps the credit clean.
The broken switches and the MCB rate are different. You did receive those goods, and tax was charged on the invoice. When the supplier issues credit notes for them (₹1,680 × 18% = ₹302.40 and ₹2,100 × 18% = ₹378), they reach you through IMS, and accepting them reduces your ITC by ₹680.40. Our guide to accepting, rejecting or keeping invoices pending in IMS explains what each action does to GSTR-2B. Together, ₹2,070 + ₹302.40 + ₹378 = ₹2,750.40, which is exactly the GST in the held amount.
What happens to the amount you hold back?
Holding money is easy. Closing the hold is where small teams slip. Three rules keep it tidy.
Every hold has an owner and a date. Put held bills on a short list with the reason, the supplier contact and a follow-up date. Review the list every week, not at year-end.
The 180-day clock still runs. Under the second proviso to Section 16(2) and Rule 37 of the CGST Rules, if you do not pay a supplier the value of supply plus tax within 180 days of the invoice date, the ITC on the unpaid part must be reversed, with interest. A disputed ₹18,030 that sits on hold for seven months, with no credit note from the supplier, becomes a reversal in your GSTR-3B. Either get the credit note or settle the dispute before day 180.
The ITC deadline does not wait either. Section 16(4) allows ITC on an invoice only up to 30 November following the end of the financial year, or the date you file the annual return, whichever is earlier. A bill from November 2026 that stays in dispute past 30 November 2027 can lose its credit for good.
The text of Section 16 and Rule 37 is on CBIC’s tax information portal.
What tolerances make sense for a small distributor?
A match that flags every one-rupee difference will be ignored within a month. Set a few simple tolerances and write them down:
Quantity: zero tolerance. Billed quantity must equal accepted quantity.
Rate: zero tolerance against the PO, unless the supplier sent a revised price list that the owner approved before dispatch.
Round-off: up to ₹1 per bill can be absorbed in a round-off ledger.
Freight and loading: only if the PO says freight is extra; otherwise it is a difference.
Schemes and cash discounts: check they are on the bill as agreed. A promised scheme missing from the bill is a difference, even if every other line matches.
For low-value repeat purchases, such as packing material from a local vendor, a two-way match (bill against GRN, no PO) is usually enough. Keep the full three-way match for your main stock suppliers.
Where hisabkitab fits in
The matching decision stays with your team. What hisabkitab removes is the typing and the second-guessing around it. AI-based OCR reads purchase bills and PDFs into the purchase register, so you are checking figures rather than keying them. The GST module flags wrong GSTINs and duplicate invoices, which catches the same bill sent twice by email and courier, and its GSTR-2B AI reconciliation shows which supplier bills have reached your 2B before you file GSTR-3B.
Ageing and outstanding reports show which bills are approaching the 180-day mark, and the audit trail records who changed what on each entry. If you run a stockist business, our page on accounting software for wholesale businesses covers the rest of the setup.
Frequently asked questions
What is the difference between two-way and three-way matching?
A two-way match compares the bill with the purchase order only. A three-way match adds the goods receipt note, so it confirms the goods actually arrived in the quantity and condition billed.
Can I claim ITC on a bill if part of the goods has not arrived?
Not on the part you have not received, because Section 16(2)(b) requires receipt of goods. If the balance will come as a later lot against the same invoice, ITC on that invoice is available on receipt of the last lot.
Should I enter a supplier bill I dispute in my purchase register?
Yes. Enter it as received, because it will show in your GSTR-2B, then record the dispute through a debit note or hold. Not entering it only creates a reconciliation gap later.
Who should prepare the goods receipt note?
The person who physically counts the goods at the godown, not the person who enters the bill. Keeping those two jobs separate is what makes the match a control.
Does a three-way match help with GST notices?
It helps you answer them. A notice on excess ITC often comes down to whether goods were received, and a GRN tied to the invoice and e-way bill is the evidence an officer asks for.
Want purchase bills, GSTR-2B and ITC in one set of books? Start a free trial or compare plans.
