Analysis of practical challenges with e-invoicing under India GST
After successful implementation in more than 100 countries globally including France, Australia, Sweden, South Korea, Singapore, Brazil, Germany, Italy, e-invoicing has finally made its entry in India. The new compliance reform is expected to bring about a paradigm shift in indirect tax administration in the country. Obviously, no reform is without its fair share of challenges.
Check out our whitepaper which highlights some of the difficulties of e-invoicing under the Goods and Services Tax (GST) in India and how automated GST technology solutions integrated with business systems like ERP, accounting and billing software can help.
With phase II of e-invoicing roll out from January 1, 2021, there is an urgency for organisations meeting the new turnover threshold need to acquaint themselves with its mechanism, transition their invoice as well as GST management process and also address any potential bottlenecks arising in the process.
E-invoicing in India so far
In a nutshell, e-invoicing is the electronic authentication of a tax invoice generated by businesses within their existing invoicing or accounting or billing systems. Once the Invoice Registration Portal or IRP validates an invoice, a unique invoice registration or invoice reference number (IRN) is assigned to each invoice. This number is later used as a means of cross-referencing details of transactions when a taxpayer files GST returns. It also cross-links to the e-way bill portal, facilitating faster movement of goods and fewer pit stops at checkpoints.
It is mandatory for businesses that are eligible for e-invoicing, update their existing billing systems with the e-invoice schema provided by the government and generate e-invoices with the unique invoice registration number (IRN) for applicable transactions. Although the implementation of e-Invoicing was deferred several times, the government authorities finally rolled out e-invoicing under GST on October 1, 2020. They focused on business to business (B2B) transactions of companies having an annual turnover exceeding ₹500 crores. On the first day of implementation of mandatory e-Invoicing, a whopping 8.4 lakh e-invoices were raised. This number has rapidly accelerated to a little under 5 crores e-invoices that have been raised by 27,000 taxpayers in October 2020 alone. Starting January 2021, companies with an annual turnover under ₹500 crores but exceeding ₹100 crores in the previous financial year will also be required to practice e-Invoicing. This purview is highly likely to be extended to all business to business transactions from the next financial year.
But the question remains, why is e-invoicing essential, and how does it benefit the taxpayer as well as the tax administration?
E-invoicing is expected to do a lot more than bringing uniformity and standardisation in the existing invoice management system. Invoice data can be shared electronically from one software to another, and anyone can easily read the invoice data. There are several functional benefits of e-invoicing. For starters, e-invoicing improves the turnaround time to avail of the input tax credit as it allows suppliers to accept or reject transactions in real-time. It also eliminates the need to manually file and repeatedly re-enter the same transaction details over and over. Once a taxpayer electronically authenticates a tax invoice, the transaction data will be auto-populated while filing GST returns and e-way bills, thereby reducing the possibility of manual data entry errors, reducing invoice reconciliation errors or disputes, avoiding duplication of data and eventually making filing of GST returns and generation of e-way bills seamless.
It is also said to improve payment cycles, reduce invoice processing cost and time by eliminating the requirement of delivering a physical invoice to the recipient. The current system requires a taxpayer to carry multiple copies of an invoice for various purposes, and there are difficulties in sharing the invoice data due to non-standardised machine-to-machine communication, increasing invoice processing cost. At present, transporters are required to carry valid tax invoices along with the e-way bill with them for inspection at various checkpoints. This practice is likely to be eliminated in the future as the unique Invoice Reference Number, and QR code will be sufficient for the movement of goods.
Since its implementation in July 2017, the Goods and Services Tax has been riddled with tax evasion. Reports suggest a revenue loss close to ₹70,000 crores in the last three years. However, that number may be far from the actual truth. Another report states that the Fifteenth Finance Commission and the International Monetary Fund have separately approximated India's revenue loss through evasion and frauds at over ₹5 lakh crore (40% of GST collections) annually. E-invoicing will allow tax authorities greater oversight over business transactions and will help them keep a check on tax evasion in real-time. Since each tax invoice has to be validated, tax administrators will be able to intercept any bogus invoice in real-time, thereby reducing fake invoice generation and input tax credit fraud. Additionally, because the government will be allowing data sharing among various tax enforcement agencies, taxpayers are likely to adhere to compliance requirements with greater efficiency.
Let's look at some of the challenges with e-invoicing
Our country is learning on the go and enforcing a brand new tax reform at a point when the country is still getting the hang of GST. Such a scenario can be challenging for both - taxpayers and tax administration. Most businesses are expected to face inevitable hiccups while generating e-invoices either manually or from their existing business systems.
1. Need time for understanding: The lack of a standardised method for generating e-invoices could prove to be an initial bottleneck as it has led to much confusion among taxpayers. Some taxpayers believe that they have to create the tax invoice directly from the invoice registration portal,
2. Impact on business operations: Even though the GST authorities have arrived on a standardised e-invoice schema, taxpayers who are preparing for the upcoming phases need time to be fully aware of the compliance implications based on discussions with their ERP or IT, finance, sales, logistics/procurement/supply chain or legal teams. Taxpayers also need to evaluate the touchpoints where there will be maximum impact and make appropriate changes. This is probably one of the reasons why e-invoicing is being implemented in a phased manner. Any further glitches or hiccups can be sorted for the next batch of taxpayers who will be integrating e-invoicing into their business operations.
3. Manual entry for tax invoice: Currently, there is no standard invoice management system, which means businesses have to enter invoice data into their ERP manually. - a time consuming and error-prone task.
4. Purchase invoices: The sales invoice data must be uploaded into the GST portal as well as the e-way bill portal as per GST compliance requirements. However, there is no option to upload purchase transactions and reconcile them with the input tax credit (ITC). This can lead to a wrong availment of ITC.
5. Data sanitisation and validation: Taxpayers need to accurately validate and authenticate various mandatory input field data before uploading them to invoice registrations portal and GSTN. These steps will help them ensure that they do not run into disruptions if their uploaded data gets rejected later. These errors mainly include duplicate invoice data, incorrect tax break up in terms of IGST, CGST, SGST; incorrect or invalid HSN code, invalid GSTIN; discrepancies in tax rates or tax amount.
6. Training for internal teams: Since e-invoicing is a digital initiative, it will take some time to understand its mechanism fully, and, understandably, several common errors are likely to occur in its initial stages. Businesses need to train their employees to ensure that there is clarity regarding the process to generate e-invoices. Similarly, tax authorities must undergo training to be able to answer any questions by taxpayers.
7. Invoice schema updates: Many businesses started their preparation by updating the invoice schema when the GSTN released it early in 2020. However, there have been many recent updates in the invoice schema rendering the previous efforts moot.
8. Segregation of B2B and B2C invoices: Presently, e-invoicing is mandatory for B2B invoices and not B2C invoices. For B2C transactions, the transporter ID needs to be mentioned at the source wherever an e-way bill is required. Hence, sorting of B2B and B2C invoices need to be automated to some extent, without which a lot of time will be invested in a manual effort.
9. Cancel and amend e-invoices: An e-invoice cannot be updated or modified or corrected. Even for a small change, it needs to be cancelled entirely. An e-invoice can be cancelled on the IRP within 24 hours from the time of generation, provided that there is no e-way bill generated for it. Taxpayers cannot cancel an e-invoice after 24 hours on the IRP; it needs to be done using the GST portal. Once an e-invoice is cancelled, the IRN cannot be generated on the same invoice. The taxpayer will have to revise the invoice number in addition to fixing the errors, raise a new invoice on their system and repeat the whole process of generating an e-invoice on the IRP.
10. Storage of e-invoice data: E-invoice data will remain on the IRP only for 24 hours. Thus, an alternate arrangement needs to be set up by taxpayers for archiving and record purposes.
11. Issues with scalability: The system decides the upload capacity of invoices for e-invoice generation based on a rough estimate of your invoice volume uploaded on GSTR-1 over the last two years. Hence, if there is a surge in number of users or invoice volume, there is a high chance that businesses will get impacted negatively. GSTN authorities will have to take a note of it and should be prepared to ensure minimum downtime.
12. Invoice content formats: Businesses usually number their invoice documents, starting 001, which is easy for humans to understand. However, such a practice is not allowed while generating an e-invoice
13. Paucity of time for ERP integration and technology readiness: If businesses want to avoid the manual generation of e-invoices, they must integrate their ERP systems with the IRP either directly through an API or through an e-invoicing solution provider like Avalara for seamless flow of invoice data between the IRP and the ERP system. If businesses are implementing in-house solutions, their IT teams need to make system changes, carry out UAT and stress tests before going live.
14. E-invoice data reconciliation with GSTR-1 and e-way bill: Once the invoice has been uploaded to the IRP and simultaneously GSTR-1 is also updated, this data will be available with GST Network system and if they don't match, there can be non-compliance implications. This is why the taxpayer should take the support of powerful tools or utility to ensure reconciliations between e-invoices, GSTR-1 and e-way bills.
15. More compliance burden: For a taxpayer who performs GST compliance-related tasks manually, the introduction of e-invoicing is one more compliance burden they need to fulfil. After gst.gov.in for GST returns and ewaybillgst.gov.in for e-way bills, einvoice1.gst.gov.in is another portal that taxpayers need to become familiar with by regularly logging in.
16. More time spent on reconciliations: Businesses are already facing many invoice reconciliation challenges under GST compliance and finance teams are spending days in a bid to match GSTR-1, GSTR-3B and GSTR-2A data along with GSTR-1 and e-way bill data. With the introduction of e-invoices, there's more reconciliation burden where businesses have reconcile
- e-invoices (B2B), and regular invoices (B2C) vs GSTR-1
- e-invoices and regular invoices received vs GSTR 2A
- e-invoices vs IRN generated
- e-invoices vs e-way bills.
17. Challenges arising due to unprecedented situations: COVID-19 outbreak has forced businesses to change the way they operate almost overnight. In such a scenario, it is not unusual for taxpayers to fret about what they would do if there's no electricity or internet, in case the government portal is down or in extreme cases where there is a flood, calamity, protest, bandh.
How can GST compliance SaaS solutions help in smooth implementation of e-invoicing?
The Government of India has offered several different ways to generate e-invoices keeping in mind the resources available to all sizes of businesses in the country. Companies can create e-invoices manually using an offline tool together with the invoice registration portal (IRP). They can also choose a GST automation solution provider who can either integrate their existing invoice generation system through API for real-time e-invoice generation or provide a single web interface for alternative methods like SFTP or web upload.
The offline tool for generating e-invoices is available for anyone to download and authenticate their invoice data. However, this manual process is quite cumbersome since they have to raise the GST invoice in their existing accounting system and upload the same invoice data in the offline utility to generate JSON files. Once the JSON file is generated, it is then uploaded on Invoice Registration Portal (IRP) to generate final e-invoice with Invoice Registration Number (IRN), digital signature & QR code. While a manual process is suitable for managing lower volumes of invoices, it is not sustainable for businesses generating bulk or high volumes of invoices every day.
GST compliance technology providers can offer comprehensive solutions for smooth and efficient integration of not just e-invoicing but also smart invoice reconciliation, GST returns and e-way bill automation. This is done by integrating the existing business systems through API for real-time e-invoice generation and by providing close to alternative real-time methods like SFTP or web upload.
GST compliance SaaS solution providers are known to play a vital role in the successful implementation of e-invoicing as they have the infrastructure to scale systems as per a business's seasonal invoice volumes. They also have integrations with multiple GSPs and Invoice Registration Portals to provide enterprises with a fail-safe environment for e-invoice generation.
A SaaS solutions provider is ideal for businesses with a large volume of transactions as they have the resources to stay agile and keep up with the dynamic landscape of the Goods and Services Tax. Firms who tend to build in-house systems overlook the fact that these SaaS solutions are being updated and maintained by a team of experts with massive technology infrastructure. A significant benefit is that they can sign up with these platforms on a subscription basis and save money by avoiding the cost and time of setting up an entire system in-house.
E-invoicing SaaS solutions enable businesses to perform all necessary e-invoicing functions including:
- e-invoice generation with IRN and QR-code
- e-invoice cancellation
- bulk upload of e-invoices
- storage of e-invoices beyond 24 hours
- upload of invoice data in various file formats like Excel or CSV
They also help businesses customise their e-invoices, generate PDF files of e-invoices, add their business logo to PDF files, and send them to the recipient. These SaaS platforms can help sanitise, validate invoice data with intelligent mechanisms and segregate invoices for which e-way bills and e-invoices or both are required. Such comprehensive e-invoicing solutions also help in pulling purchase invoice data from GSTN through GSTR-2A and provide smart mechanisms for easy invoice reconciliations. With these mechanisms in place, finance teams can complete their reconciliation in no time.
At present, e-invoicing is applicable for a particular set of businesses for specific transactions. This makes them susceptible to manual tasks for transactions which do not fall under the purview of e-invoicing. Since such e-invoicing solutions also automate GST returns and e-way bills, businesses do not need to visit Government portals to generate e-way bills and file GST returns manually. They can seamlessly automate their entire GST compliance process including e-way bills, GST returns and e-invoicing under one single platform.
Way forward for e-invoicing in India
Globally, several countries have implemented e-invoicing and have been successfully using the tax reform to their benefit for many years now. India too is gradually on the road to better tax administration and seems to be learning by example. Seeing its efforts over the last few years, it is quite clear that India is keen on bringing about a tax revolution led by technology. This is reflected in its various technology-led tax initiatives including e-way bills, FasTag, Turant Customs, and now, e-invoicing. These initiatives are likely to improve India's international standing as a business-friendly country while simultaneously enhancing its rank on various indices, including the Ease of Doing Business (63) and Compliance Complexity (115). Once its creases are ironed out, e-invoicing is expected to not only streamline tax administration but also place India on the global map as a technology-driven indirect tax administrator.
Avalara's India GST e-Invoicing Solution is a comprehensive solution which helps businesses connect multiple data sources like ERP, e-commerce platforms, accounting systems through API integration as well as SFTP or web upload through various data formats like Excel, CSV. We will ensure that you are thoroughly prepared with your e-invoicing and GST compliance technology stack for the upcoming Phase II roll-out of e-invoicing on January 1, 2021.
Get in touch with us to:
- Understand your specific business scenario
- Assess your e-invoicing requirements
- Evaluate your ERP updates and integration needs
- Propose the right approach
- Set up your e-invoicing solution
- Automate GST returns and e-way bills
- Make invoice reconciliation a cakewalk
- Integrate GST calculation engine, if required
- Help with GST registration, if required
Reach out to us for a free consultation session.
Don't forget to check out our India GST e-Invoicing solution announcement.