E-Invoices – The Next Step in Indian GST Reforms
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Govt of India is expected to push new GST reforms forward and e-Invoices are clearly the next step.
The original technology framework, previously used by large enterprises or government bodies was EDI (Electronic Data Interchange). With public networks coming alive, the standards moved to EDIFACT (Electronic Data Interchange For Administration, Commerce and Transport). In the last decade, XML (eXtensible Markup Language) has taken over, while PDF (Portable Document Format) is a very well accepted technology standard for Invoices by SMEs. While large enterprises have lot of structured data, SMEs do not.
In the last few years, India has seen a jump in registered SME’s from 50 lakhs to 1 Crore, and the number is growing every day. Automating SMEs, as such is not a small task. But why is the government now pushing for the automation of the SME and MSME sector?
The New Way
Though plugging tax evasion is a key driver, it also brings in transparency and efficiency at scale. It provides the government with a rich data pool enabling policy makers and regulatory bodies with an unmatched level of accuracy of all economic activities.
With the introduction of GST the government aimed to consolidate all taxes under one roof, but with the recent revelations in GST tax evasion schemes, it is important to not just consolidate taxes but to be able to track and evaluate the movement of businesses.
In such a case it became necessary to introduce a system that could help streamline the business processes. Currently, most business transactions happen on paper. In any transaction, there are structured documents, unstructured documents and regulatory compliant documents (Invoices) that get transferred between parties.
Typically, invoices are created in a billing or accounting or ERP system, and then transmitted through paper or email to the counter party who in turn repeats the process all over again, checking against his records. While some such businesses are being automated through RPAs, these are mainly processed manually.
Companies spend between Rupees 10 and 5000 per invoice on such overheads and deploy lot of labour to manage these. One European study, on automated invoicing, estimated the cost saving per invoice to be at 6.4 Euros. Larger the number of Invoices processed, larger the savings.
There are three key considerations for the regulator to keep in mind while looking at technology requirements for e-Invoicing:
Interoperability - Or any to any formatting. Hundreds of software are used by companies large and small. It should be possible for everyone to participate and transact with each other. There should be easily available export and import tools to facilitate easy data movements.
Cost - The cost of converting data from their existing systems to the formats desired by the regulator should be minimum or nil. If there is a large one-time cost to upgrade systems to be ready for e-Invoices, it is a strong deterrent, especially for SMEs
Tamper Proof - The invoices should be completely tamper proof, both authenticity and integrity should be maintained for a reasonable amount of time which supports audit. Equal Treatment or Catch all method made it clear that paper and electronic were treated equally.
E-Invoicing provides the regulator a real time visibility into all commercial activities in the market. In an ideal scenario, an e-Invoice would capture all line item level details of an invoice, and all critical elements of the invoice which determines the tax applicable like HSN Codes, Material or Service descriptions, quantity and unit of measure, etc. If all the invoices on both sell and buy side of a business are e-invoices, the need for separate GSTR filings does not arise.
So by definition, an Electronic Invoice will be defined as an Invoice that is issued and received in electronic format. During the life cycle of the invoice, i.e., from the issuance of the invoice until the end of the archiving period the invoice must remain legible. Non-Repudiation of the invoice is critical - an Assurance that someone cannot deny something.
Clearly e-Invoices are the way ahead to plug in the loopholes and enable SMEs and SMBs to be regulatory compliant with minimal efforts and time, freeing them up to focus more on their core business.