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Brief Introduction to E-Invoicing

Despite considerable advancement in technology, paper invoices still seem to have a foothold within businesses, large and small. While former requiring physical copy of invoice because of antiquated practices waiting to be reconsidered by management, for latter, it might mean staying out of tax net.[1] Some businesses, especially the smaller ones, are okay with an image of the invoice or a copy of it in PDF format.[2] Nonetheless, businesses 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),[3] innovation or rather investment in it seems to be lacking. Probably, because of all the available dollars going to sales and marketing department before back office even gets a riff of it.

For India, it is all about to change, with the government introducing e-invoicing much like our neighbour China and counterparts in Europe and South America. Businesses, as early as January,[4] will have to start reporting their transactions to the government, even before it goes to the counter party! E-invoicing will fundamentally change the way business’s AR/AP department operate, offering an opportunity to move from archaic invoicing practices to all new electronic real time exchange of invoicing data. The transformation will not only help Government plug the GST gap but also businesses streamline their accounts operation, drive cost down and unlock other benefits. Therefore, in this article, I will explore e-invoicing in depth, picking up on its history, its implementation across different countries, and most importantly, evaluating what it means for India and Indian businesses.[5]

E-Invoicing: Development through years

While concept of invoicing might already be 1000s of years old,[6] e-invoicing has had a very brief history dating back to 1960s only. Some of the largest corporations, driven by efficacy of ‘paperless office’,[7] created Electronic Data Interchange or EDI. The primary goal was to establish efficient and reliable system to communicate with the supply chain, doing away with manual data entry by scores of accountants.[8]

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.[9] 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.[10] Smaller agents in the supply chain, due to time and money investment, remained isolated from its use. Despite its popularity and advantages,[11] lack of single global standard has resulted in limited adoption.

E-Invoicing

Tax administrators from LATAM region discovered E-Invoicing 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, so as to avert both the omission of sales and the inclusion of false purchases’.[12] E-invoicing, as a government mandate, 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).

LATAM countries such as Argentina, Brazil, Ecuador, Mexico, Peru and Uruguay have made considerable progress since then.[13] Denmark (2005) have been using e-invoicing for public procurement since 2005. Finland and Italy became forerunners in e-invoicing in 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 as well. While large corporates were the ones to develop e-invoicing, it seems that governments might be the rightful torch bearer of the e-invoicing movement.[14]

E-Invoicing

What is E-Invoicing?

E-Invoicing can be broadly referred to electronically generated bills exchange digitally with/without compliance component.[15] Generating an invoice through a software such as SAP and Oracle doesn’t amount to e-invoicing. It is important that a certain format is pre-agreed between the parties or government mandates the same and the bill is exchanged electronically between 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 it is passed on to the buyer either by the vendor or the government itself.

Benefits of E-Invoicing

Government and businesses can reap enormous benefits by moving from traditional invoicing to e-invoicing, although certain caveats exist.

For Businesses

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 insurmountable task. E-invoicing driven just by private actors might not result in 100% transition from traditional invoicing due to interoperability issue noted above and general aversion to change, therefore, limiting the advantages.

While businesses have used latest in 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, in some cases, the effort required to ensure accuracy might outweigh the cost advantages. Regardless, the adoption by large private enterprises continue to go up even in countries without any legislation mandating the same.

The story is completely 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 businesses. Moreover, no expensive software using AI is required to read invoices as machine readability and uniform interpretation of tax document is already ensured.

E-Invoicing

Cost

Businesses and countries that have adopted e-invoicing report reduced processing expense between 60-80% in comparison to paper and PDF invoices. Due to elimination of manual processing and automatic capture of invoice data in ERP system, businesses can depend on smaller AR/AP departments to deliver since task 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 case of e-invoicing based on clearance model.[16]

E-Invoicing

Chances of failing to claim Input Tax Credit (ITC) on invoices that do not go through AP department are also reduced. Example of such invoices would be employee expense such as airline ticket 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 government acting as an intermediary in e-invoicing and transmitting tax documents from vendor to buyer, and in 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 invoice in the ERP whereas paper invoices can take time to show up resulting in inaccurate forecasting and forward planning. Proper planning can help better manage treasury and ensure most efficient use of funds.

Improve supplier/customer relationship

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 discount may be introduced to improve cashflow, ultimately resulting in more business for entire supply chain.

Fraud and duplicates

Chances of fraud by vendor reduces significantly since government acts as the intermediary and, ensures that no duplicates or fakes are shared either intentionally or unintentionally.[18]

Save Environment

Better for Earth as e-invoicing eliminates exchange of billions of paper invoices. In India, 7.11 billion B2B invoices have been reported to the GSTN system till 11th November 2019.

For Government

In last two decades, governments across the world have shown considerable likeness towards e-invoicing because of its effectiveness in 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%.[19] Similarly, Columbian research also shows that it can also benefit from a 50% reduction in tax evasion if it implements e-invoicing clearing model.[20] It can also increase adoption for country’s tax regime if implementation ensures that taxpayers get a great user experience. It is important that government ensures the system is quick, reliable and secure.[21] In India, GSTN, the implementation agency, is trying to ensure that the taxpayers are not required to report same data multiple times for different purposes automatically transferring data to relevant systems, e.g. GST returns and E-Way Bill. Moreover, government can also benefit from all the advantages stated above for businesses since it also runs large public corporations that contribute significantly to the GDP.

Implementation Approach in India

Government document on E-invoicing Schema and Standard is very clear. It highlights the steps required to successfully generate the e-invoice. 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.[22] Invoice data must be converted into JSON format through an ERP or an accounting software and uploaded on the Invoice Registration Portal (IRP). First IRP will be NIC. Limit on JSON size, if any, is yet to be published by the government. Time limit for uploading the invoice to IRP also remains unknown.

E-Invoicing

[23]

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) (algorithm to be used to generate the hash/IRN remains unknow 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 to read more on the process here.

E-Invoicing

[24]

Process Flow: E-Invoicing

Businesses will have to purchase IT systems or modify/upgrade their existing ones that are capable of handling e-invoicing requirement. Businesses with invoices containing 100s of line item will need the software to sub divide 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-einvoices for record and payment purposes. Smaller businesses will have to switch to software first approach for creating and maintaining invoices. E-invoices can only be cancelled within 24 hrs of generation, otherwise amendment will have to be made on the GST portal. Proper process must be created to enable smooth transition to e-invoicing.

Will E-invoicing End Tax Evasion?

There are substantial benefits, however, even after implementation, risk of inaction runs. Implementing e-invoice does not stop 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). Government must also support small businesses to enable change otherwise there might be poor adoption leading to non-compliance. Something India has seen with 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,[25] identifying fake invoices and taking appropriate action on timely basis can generate results. Or Argentina, wherein until your business is verified, a business is only allowed to use Type M invoice wherein credit is not final until final verification. Once business is verified, it can issue Type A invoice. Adequate skill building through online and offline training workshops along with free software might help with MSMEs adoption.

Therefore, for India to be successful it must support 10 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.

Citations

[1] These days software sufficient to meet basic invoicing requirement are available for free and simple to use. Therefore, lack of software shouldn’t be a reason.

[2] Portable Document Format or PDF was created to be platform and device independent, so the content of file would look the same on screen as it would when printed. However, PDF files have resulted in countless hours of manual data entry, due to difficult machine readability of one. Lear more about its history at https://www.pdfpro.co/blog/history-pdf.

[3] Billentis report suggest about 550 billion invoices were generated globally in 2019 and the volume would be 5-15 times for invoice like documents such as bills. Bruno Koch, Billentis, ‘The e-invoicing journey 2019-2025’, May 2019.

[4] Current deadline for voluntary scheme is January, however, government might further delay it to April 2020 given the past experience with GST and e-Way Bill.

[5] I also have considerable interest in the topic as an entrepreneur helping businesses across the country automate their indirect tax reporting requirement as well as someone looking after company’s accounts department.

[6] Matt Vermeulen, Tradeshift, ‘What is an invoice: a brief history of the invoice’, June 2018.

[7] M.G. Hill, BizTalk Server 2000: A beginner’s Guide, ‘A brief history of Electronic Data Interchange’, June 2001

[8] M.G. Hill, BizTalk Server 2000: A beginner’s Guide, ‘A brief history of Electronic Data Interchange’, June 2001

[9] Early years of EDI was driven by large corporates and industry standards were developed later to increase adoption.

[10] Challenges in terms of cost and integration have been discussed below.

[11] E-invoicing has been deployed in private sector in North America and European Union using technology from companies such as SOVOS, Pagero, Comarch and many others.

[12] Alberto Barreix, Raul Zambrano (editors), ‘Electronic Invoicing in Latin America: English Summary of the Spanish Document’, 2018

[13] Other LATAM countries such as Costa Rica, Colombia, Guatemala, Panama and Paraguay have initiated some projects, whereas the Dominican Republic, El Salvador, Honduras and Venezuela have shown interest in national e-invoicing projects. Alberto Barreix, Raul Zambrano (editors), ‘Electronic Invoicing in Latin America: English Summary of the Spanish Document’, 2018

[14] Advantages over private model has been discussed below.

[15] OpenText Corp, www.einvoicingbasics.co.uk

[16] Bruno Koch, Billentis, ‘The e-invoicing journey 2019-2025’, May 2019.

[17] Intangible benefits such as getting 1st call for limited stock items to preferred vendor among class of vendors can result in tangible value generation for business.

[18] Simple e-invoicing implementation in itself doesn’t solve the challenge of fake invoices, so the government must actively take action to achieve results.

[19] Bruno Koch, Billentis, ‘The e-invoicing journey 2019-2025’, May 2019.

[20] Bruno Koch, Billentis, ‘The e-invoicing journey 2019-2025’, May 2019.

[21] M.G. Hill, BizTalk Server 2000: A beginner’s Guide, ‘A brief history of Electronic Data Interchange’, June 2001

[22] Debit note will be generated and uploaded by the buyer

[23] GSTN, ‘E-Invoice System concept note, Standard, Schema and Template’

[24] GSTN, ‘E-Invoice System concept note, Standard, Schema and Template’

[25] Alberto Barreix, Raul Zambrano (editors), ‘Electronic Invoicing in Latin America: English Summary of the Spanish Document’, 2018