What is e-Invoicing? Definition, Steps, Process, Benefits of e-invoice under GST and its Applicability

E-Invoicing, commonly known as electronic invoicing, has become increasingly important for large as well as small businesses. Even though a few organizations are still dependent on the physical copies of invoices due to outdated practices, converting to e-invoicing can lead to numerous benefits, specifically for smaller businesses that want to ensure compliance with tax regulations. Smaller businesses are more likely to be satisfied with invoice images or PDF copies, while larger businesses still prefer their maintained practices.

This article aims to provide a comprehensive understanding of e-invoicing and its significance in the context of the GST law. It defines e-invoicing under the GST framework in various countries, particularly its implications for India and Indian businesses.

What Is E-invoicing Under GST?

E-Invoicing is electronic invoicing that can be broadly referred to as electronically generated bills or invoice exchange digitally with/without a compliance component. E-invoicing is a system, where B2B invoices are electronically authenticated by GSTIN for further use like during GST filing on the common GST Portal. The full form of e-invoicing is electronic invoicing.

In the 35th meeting of the GST council, a decision was made that a new system of invoicing would be implemented, covering all the significant details & categories of a person and big businesses. Although, later they included mid-sized and small-sized businesses as well.

Generating an invoice through 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.

An identification number is issued against every invoice,  by the Invoice Registration Portal or IRP, which is managed by the GST network. The need for manual data entry while filing GSTR-1 returns and generation of part-A of the e-way bills, is then eliminated as all the invoice information gets transferred from this portal to both the GST portal and the e-way bill in very less time.

The invoice is exchanged electronically between the Accounts Receivables and Accounts Payables 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.

The Need for a Standard E-invoicing System

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 rupees 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.

e-Invoicing or electronic invoicing transformation will help the Government plug the GST gap and help businesses streamline the operation of their accounts, drive costs down, and unlock other benefits.

Businesses, as early as January, will have to start reporting their transactions to the government, even before it goes to the counterparty. E-invoicing or electronic invoicing will fundamentally change how a 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.

History of E-Invoicing 

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 a ‘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 e-invoicing use. Despite its popularity and advantages, the 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 e-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, the 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) has 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 transactions 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.

Who Must Generate E-Invoice and Its Applicability?

E-invoices or electronic invoicing have been made compulsory by the government to curb GST evasion. During the 1st Committee in May 2019 to calculate the implementation and e-invoicing use in India, following the globe-wide developments. Afterwards, the panel listed several drafts before the final e-invoice scheme could be made in January 2020. The e-invoicing software was made compulsory from April 1st, 2020 but was delayed by the Council of GST.

Take a glance at the Turnover criteria:

It must be duly noted that If the turnover in the last five years was below the threshold limit, but increased beyond the threshold limit in the current year, then e-Invoicing would apply from the beginning of the next financial year i.e. FY 2023-24.

Let’s look at the instance:

Suppose, ltd XYZ's aggregate turnover was as follows-

• FY 2017-18: Rs 05 crore
• FY 2018-19: Rs 07 crore
• FY 2019-20: Rs 11 crore
• FY 2020-21: Rs 09 crore
• FY 2021-22: Rs 08 crore

XYZ Ltd shall mandatorily generate e-invoices from 01.04.2022 irrespective of the current year’s aggregate turnover as it has crossed the Rs 10 crore turnover limit in FY 2019-20.

Benefits of E-Invoicing for Businesses:

• Cost Savings: E-invoicing significantly reduces costs associated with paper-based invoicing, including printing, postage, and storage. Automation also reduces manual data entry errors, minimizing the need for corrections and associated costs.
• Faster Payments: E-invoicing accelerates the invoicing process, leading to quicker payment cycles. Timely receipt and processing of invoices result in improved cash flow for businesses.
• Enhanced Accuracy: Automated data entry reduces the likelihood of errors that can occur during manual invoice processing. This accuracy helps prevent payment disputes and facilitates smooth transactions.
• Improved Productivity: With streamlined processes and reduced manual intervention, businesses can allocate resources more efficiently, allowing staff to focus on strategic tasks rather than repetitive administrative work.
• Real-Time Tracking: E-invoicing provides real-time visibility into invoice status, allowing businesses to track payments, manage outstanding invoices, and make informed financial decisions.
• Compliance and Transparency: E-invoicing ensures adherence to tax regulations and compliance requirements, reducing the risk of penalties and legal issues. Transparent and accurate invoicing practices build trust with customers and stakeholders.
• Reduced Environmental Impact: The shift to electronic invoices reduces paper usage, contributing to environmental sustainability and aligning with corporate social responsibility goals.

Challenges of E-Invoicing for Businesses:

• Implementation Costs: Transitioning to an e-invoicing system may require an upfront investment in software, technology upgrades, training, and integration with existing systems.
• Change Management: Employees and stakeholders may resist adopting new processes, necessitating change management strategies to ensure smooth implementation and user acceptance.
• Interoperability Issues: E-invoicing systems must be compatible with trading partners' systems, which can be challenging when dealing with a diverse ecosystem of vendors and customers.
• Data Security and Privacy: Safeguarding sensitive financial data is crucial. E-invoicing systems need robust security measures to prevent unauthorized access and data breaches.
• Vendor and Customer Adoption: Encouraging all trading partners to adopt e-invoicing may take time, especially when dealing with businesses that have varying levels of technological readiness.
• Technical Challenges: Integrating e-invoicing systems with existing ERPs and accounting software may pose technical challenges, requiring expert support and customization.
• Regulatory Changes: E-invoicing regulations and standards may evolve, requiring businesses to stay up-to-date and make necessary adjustments to remain compliant.

Transactions and Documents Criteria

Who Need Not Comply With E-invoicing?

Following are the business, person, documents or transactions, not they are not complying to generate e-invoices irrespective of their turnover.

Systems Before & After E-invoicing

Before the e-invoicing process was implemented, businesses relied on manual invoicing processes that included physical paperwork or invoicing and manual data entry. Invoices were typically generated with the help of software, but to exchange invoices , what often required was mailing, printing, or scanning documents, leading to delays in generating and potential errors too. It was time-consuming and there was a strong possibility of making errors, increasing the risk of discrepancies in tax calculations and reporting.

However, with the release of e-invoicing, the invoicing process has become more sub-structure, fast and efficient. E-invoicing eliminates the need for physical paperwork which saves time & paper, allowing businesses to generate, exchange, and proofread invoices electronically. Overall, the new landscape of invoicing, that is e-invoicing, has improved transparency and simplified tax compliance leading to improved productivity. 

Time Limit to Generate E-invoice

Effective 30th April 2023, the GST systems didn’t set any time limit for generating e-invoices. However, it was made compulsory that starting from 1st May 2023, the taxpayers that have an Annual Aggregate Turnover equal to or more than INR 100 crore are obliged to generate e-invoices for tax invoices and credit-debit notes within the 7 days of the invoice date and failure follow the rule will lead to consideration as the non-compliant status of such invoices and CDNs.

The other taxpayers are currently relieved from any such kind of time limit. It is advised that these taxpayers should generate the e-invoice at least a week prior, before filing the GSTR-1 returns, as it needs estimated T+3 days for the details to be filled automatically into the GSTR-1 form.

However, it must be duly noted that on 6th May 2023, the department postponed the time limit of 7 days for reporting old e-invoices on the Invoice Registration Portal by three months. The new implementation date will be updated soon.

How to Generate an E-invoice Under GST?

The Einvoicing process is very clear. It highlights the steps required to generate the e-invoice successfully. Therefore, we will only provide a brief summary here.

• The supplier must generate an e-invoice that meets the schema requirement as published by GSTIN.
• 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, the limit on JSON size is yet to be published by the government. The time limit for uploading the invoice to IRP also remains unknown.

Electronic Invoicing IRN Generation via ERP And IPR

There are several ways by which the ERP software of any business interacts with the IPR for IRN generation: 

• Businesses taking aid of GSPs: Businesses can generate passwords and usernames using the GSPs and get into arrangements to use the API with GSP’s Customer Secret and Customer ID. 
• Businesses have direct API access: In this situation, the taxpayer can form a password and username to access the API via client secret and ID. 
• Enterprises Using ERPs: The business can make a password and username and tie it up with the ERPs to access the APIs with the ERP offerer’s Client Secret and ID. 
• The business has access to the electric-way bill APIs: If the business has access already to the e-way API bills, they can utilize the same information to access the e-invoice system. 

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 a smooth transition to e-invoicing.

How E-invoicing Can Curb Tax Fraud?

Implementing e-invoices 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 an 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, advanced analytics and on-time action will be needed on e-invoicing data to really benefit the state. Like Mexico EFOS and EDOS mechanisms, 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 invoices 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.

As the invoices have to be compulsory generated from the GST portal which are often done before the transactions , the chances of fake gst invoices are diminished.

Benefits of Having an E-invoicing System for Businesses or MSMEs

The main aim of a reduced e-invoicing limit is to decrease fraudulent invoicing and reduce tax evasion. Now, businesses must align their units with the e-invoicing portal IRP (Invoice Registration Portal) for an easy generation of IRN (Invoice Reference Number) for all B2B bills. They need to get their accounting systems to adapt changes for obeying the e-invoice structural outline. Although certain caveats exist, governments, businesses, and MSMEs can reap enormous benefits by moving from traditional invoicing to e-invoicing.

E-Invoicing Benefits for MSMEs

The e-invoice or electronic invoicing generation will impact the MSME processes in the following ways: 

• Faster Loan Approvals: Receiving a business loan is quite a task for MSMEs due to too much paperwork. Luckily, with the latest e-invoicing system, lenders can rate MSMEs as per their e-invoices, making it better and quicker for enterprises to get loans. 
• Recording The Details: Relevant businesses must keep customer and supplier data to cover additional invoice details like GSTIN, payee details, and bank accounts for precision.
• Improved Business Performance: The major problem that MSMEs may face is engaging in real-time creation and IRN capture. Retailers coming under this turnover range make thousands of B2B invoices on a daily basis. Moreover, they may not keep the clients on hold for such a long time until the e-invoice is generated. Such MSMEs must use the GSP services for easy implementation.   
• Easy Invoice Tracking: The business unit must now check transactions that are disposed of by e-invoice and separate them from the remaining agreement. 

E-Invoicing Benefits for Businesses

Shifting to e-invoicing or electronic 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 the 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.

Improve Supplier/Customer Relationship

An efficient AR/AP department can help build trust among suppliers and buyers and prove to be a strategic advantage.[17] 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.

Fraud and Duplicates

Vend fraud is significantly reduced since the government acts as the intermediary and ensures that no duplicates or fakes are shared intentionally or unintentionally.[18]

Save Environment

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.

For Government

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 by 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.

Cost

Businesses and countries that have adopted e-invoicing reports reduced processing expenses by between 60-80% compared to paper and PDF invoices. Due to the elimination of manual processing and automatic capture of invoice data in the 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. Corporations also see a 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. An 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 the AP department from the get-go.

In some cases, invoices might also get lost only to resurface later by when the deadline to claim ITC has already passed. However, with the government acting as an intermediary in e-invoicing and transmitting tax documents from the vendor to the buyer, and in the Indian context, even planning to send it to the 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.

What Are the Mandatory Fields of an E-invoice?

Broadly, the E-Invoice contains two types of fields:

1. Mandatory fields and
2. Optional fields.

Here, the mandatory fields are those columns that imperatively form an essential part of the invoices under the e-invoice standard.

On the other hand, the optional fields are columns that are not mandatory to generate a valid e-invoice bill format. The option to fill these fields is at the discretion of the taxpayer/business entity.

As per the latest GST E invoice format, notified on 30th July 2020, there are

12 Sections - In these 5 are mandatory.

The mandatory sections are:

• Basic details
• Supplier information
• Recipient information
• Invoice Item details
• Document total

6 annexures - In this 2 are mandatory.

The mandatory annexures are:

• Item details
• Document total details

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.

The Compulsory Details to Be Mentioned in the E-invoice:

Format of Sample E-invoice

The e-invoice format notified is as follows:

How Does Masters India E-invoicing Software Help?

Masters India e invoice Software is designed to make the process of creating, sending, and receiving digital invoices easy and efficient from ERP to e invoice portal.

Our E-invoicing Software software is a secure platform for businesses to manage their E invoices quickly and efficiently. Masters India e invoice software has an intuitive interface, you can manage your E invoicing requirement with ease.

Masters India E Invoice Software Can Easily Integrate with your ERP and Sync Data to E Invoice Portal from ERP Easily. With our product, you can sync data across multiple platforms such as e invoice in tally prime, SAP, Oracle, and other customs ERPs to ensure accuracy and reliability.