Despite considerable technological advancement, paper invoices still seem to have a foothold and E invoicing applicability within businesses, large and small. While the former requires a physical copy of the invoice because of antiquated practices waiting to be reconsidered by management, for the latter, it might mean staying out of the tax net. Some businesses, especially the smaller ones, are okay with an invoice image or a copy of it in PDF format. Nonetheless, enterprises continue to exchange invoices in methods and formats they see fit. Interestingly, despite being a vital task for any business (550 billion invoices exchanged globally in 2019), innovation or investment seems to be lacking. Probably, because of all the available dollars going to the sales and marketing department before the back office even gets a riff of it, E invoice GST should be preferred. For India, it is all about to change, with the government introducing GST E invoice much like our neighbour China and counterparts in Europe and South America. Businesses, as early as January, will have to start reporting their transactions to the government, even before it goes to the counterparty! invoice (electronic invoicing) will fundamentally change how business’s AR/AP department operates, offering an opportunity to move from archaic invoicing practices to all new electronic real-time exchange of invoicing data. What is E invoice in GST is defined. The transformation will help the Government plug the GST gap and help businesses streamline the operation of their accounts, drive cost down, and unlock other benefits. Therefore, this article will explore E invoice under GST in-depth, picking up on its history, its implementation across different countries, and most importantly, evaluating what it means for India and Indian businesses.
While the concept of invoicing might already be 1000s of years old, e-invoicing has had a very brief history dating back to the 1960s only. Some of the largest corporations, driven by the efficacy of ‘paperless office’, created Electronic Data Interchange or EDI. The primary goal was to establish an efficient and reliable system to communicate with the supply chain, doing away with manual data entry by scores of accountants.
Companies/industries created EDI with their unique proprietary standards, such as ANSI, EDIFACT, TRADACOMS and ebXML, and these further had many different versions, e.g., ANSI 5010 or EDIFACT version D12, Release A. With no single standard and lack of interoperability, significant efforts were required to integrate with each new buyer or vendor that was either not familiar with the standard or was using another standard. Due to time and money investment, small agents in the supply chain remained isolated from its use. Despite its popularity and advantages, lack of a single global standard has resulted in limited adoption.
Tax administrators from the LATAM region discovered e invoicing under GST about 3 decades later and sought to use it in their fight against tax evasion as ‘an instrument of documentary control over the invoicing process to avert both the omission of sales and the inclusion of false purchases’. As a government mandate, E-invoicing was first seen in Chile in 2004 (although, first e-invoice was generated on 1st January 2005 and e-invoicing for business was made compulsory in 2014 only).
Since then, LATAM countries such as Argentina, Brazil, Ecuador, Mexico, Peru, and Uruguay have made considerable progress. Denmark (2005) have been using e-invoicing for public procurement since 2005. Finland and Italy became forerunners in e-invoicing in a European context by making e-invoicing compulsory for all B2B transaction this year. Kazakhstan (2019), Uzbekistan (2020) and Kyrgyzstan (2020) in Central Asia have also moved to e-invoicing to plug the tax gap. There are projects underway in countries such as South Korea, Angola, and Kenya. While large corporates were the ones to develop e-invoicing, it seems that governments might be the rightful torchbearer of the e-invoicing movement.
E-Invoicing can be broadly referred to electronically generated bills exchange digitally with/without compliance component. Generating an invoice through a software such as SAP and Oracle doesn’t amount to e-invoicing. A certain format must be pre-agreed between the parties or government mandates. The bill is exchanged electronically between the AR and AP departments of the vendor and buyer, respectively. In case of ‘with compliance’, e-invoices may need to be reported first to the government system to be validated against e-invoicing guidelines before passing on to the buyer.
Although certain caveats exist, governments and businesses can reap enormous benefits by moving from traditional invoicing to e-invoicing.
Shifting to e-invoicing is a cost bearing, cumbersome exercise. Getting the entire vendor and buyer base to accept a standard invoice format and enable electronic sharing can seem like an impossible task. E-invoicing driven by private actors might not result in a 100% transition from traditional invoicing due to the interoperability issue noted above and general aversion to change, limiting the advantages.
While businesses have used the latest technology such as AI to digest financial documents from supply chain agents unwilling to change. However, it is still not possible to read the documents with 100% accuracy without requiring some custom development. Hence, the effort required to ensure accuracy might outweigh the cost advantages in some cases. Regardless, the adoption by large private enterprises continues to go up even in countries without any legislation mandating the same.
The story is entirely different when a government mandates e-invoicing through legislation for all businesses. It then becomes necessary for all software vendors to adopt a specified standard and provide the same to companies. Moreover, no expensive AI software is required to read invoices as machine readability and uniform interpretation of tax documents is already ensured.
Businesses and countries that have adopted e-invoicing reports reduced processing expenses between 60-80% compared to paper and PDF invoices. Due to the elimination of manual processing and automatic capture of invoice data in ERP system, businesses can depend on smaller AR/AP departments to deliver since tasks generally associated with traditional invoicing are either eliminated such as postage, storage, reprint request and lost invoices or reduced such as customer service call and data entry mistakes. Corporates also see reduction in tax compliance cost by 37-39% in e-invoicing based on the clearance model.
Chances of failing to claim Input Tax Credit (ITC) on invoices that do not go through the AP department are also reduced. Example of such invoices would be employee expenses such as airline tickets eligible for ITC claim, but for which no PO is issued and hence, do not go through AP department from get-go. In some cases, invoices might also get lost only to resurface later by which deadline to claim ITC has already passed. However, with the government acting as an intermediary in e-invoicing and transmitting tax documents from vendor to buyer, and in the Indian context, even planning to send it to appropriate tax return will ensure that no available ITC remains unclaimed.
Managers can benefit from Increased visibility because of immediate receipt of invoices in the ERP. In contrast, paper invoices can take time to show up resulting in inaccurate forecasting and planning. Proper planning can help manage treasury and ensure the most efficient use of funds.
Efficient AR/AP department can help build trust among suppliers and buyers and prove to be a strategic advantage. Businesses can ensure on-time payments to avoid late fees and receive contractually negotiated discounts. Finance options such as Buyer based early payment or bank-led discounts may be introduced to improve cash flow, ultimately resulting in more business for the entire supply chain.
Vend fraud is significantly reduced since the government acts as the intermediary and ensures that no duplicates or fakes are shared intentionally or unintentionally.
Better for Earth as e-invoicing eliminates the exchange of billions of paper invoices. In India, 7.11 billion B2B invoices were reported to the GSTN system until 11th November 2019.
In the last two decades, governments worldwide have shown considerable likeness towards e-invoicing because of its effectiveness in the fight against tax evasion. Brazil has seen an increase of $58 billion in tax revenue, while Chile and Mexico have reduced their VAT gaps up to 50%. Similarly, Columbian research also shows that it can benefit from a 50% reduction in tax evasion if it implements an e-invoicing clearing model. It can also increase adoption for the country’s tax regime if implementation ensures that taxpayers get a great user experience. Government must ensure the system is quick, reliable and secure. In India, GSTN, the implementation agency, ensures that the taxpayers are not required to report the same data multiple times for different purposes, automatically transferring data to relevant systems, e.g. GST returns and E-Way Bill. Moreover, the government can benefit from all the above advantages for businesses since it also runs large public corporations that contribute significantly to the GDP.
The government document on E-invoicing Schema and Standard is very clear. It highlights the steps required to generate the e-invoice successfully. Therefore, I will only provide a brief summary here. The supplier must generate an e-invoice that meets the schema requirement as published by GSTN. Invoice data must be converted into JSON format through an ERP or accounting software and uploaded on the Invoice Registration Portal (IRP). The first IRP will be NIC. If any, limit on JSON size is yet to be published by the government. Time limit for uploading the invoice to IRP also remains unknown.
Mandatory Fields for E-Invoice
Once the data has been uploaded, IRP shall create an IRN based on Supplier GSTIN, supplier’s invoice number, and Financial year (YYYY-YY) (the algorithm used to generate the hash/IRN remains unknown currently). IRP will also digitally sign the invoice, generate a QR Code and send it to the sender. It will also send the e-invoice to the recipient based on the detail mentioned on the invoice. I would recommend reading more on the process here.
Process Flow: E-Invoicing
Businesses will have to purchase IT systems or modify/upgrade their existing ones capable of handling e-invoicing requirements. Businesses with invoices containing 100s of line items will need the software to subdivide the invoice into 100 line-item each (limit for each e-invoice upload) and share it with the government. Software must then track such sub-invoices for record and payment purposes. Smaller businesses will have to switch to a software-first approach for creating and maintaining invoices. E-invoices can only be cancelled within 24 hrs of generation; otherwise, amendments will have to be made on the GST portal. Proper processes must be created to enable smooth transition to e-invoicing.
Implementing e-invoice does not stop the generation of fake invoices (invoices that might look real but do not correspond to any real business activity and are only designed to get undue tax credit or lower profits). The government must also support small businesses to enable change; otherwise, poor adoption might lead to non-compliance. Something India has seen with the implementation of GST. Therefore, advance analytics and on-time action will be needed on e-invoicing data to really benefit the state. Like Mexico EFOS and EDOS mechanism, identifying fake invoices and taking appropriate action on a timely basis can generate results. Or Argentina, wherein until your business is verified, a company can only use Type M invoice wherein credit is not final until final verification. Once the business is confirmed, it can issue a Type A invoice. Adequate skill-building through online and offline training workshops and free software might help with MSMEs adoption.
Therefore, for India to succeed, it must support ten million-plus taxpayers to adopt e-invoicing. It is also pertinent that it takes an active approach in weeding out fraudulent tax evasion practices by registered businesses. Otherwise, such a massive tax transformation exercise might be in vain.