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GST E-Invoicing Phase 2: The Challenges, Dos and Don’ts For Small and Medium Enterprises

Bloomberg Quint |
Gunjan Prabhakaran, Partner and Leader
Indirect Tax

26 December 2020

India is gearing up to roll out the second phase of mandatory electronic invoicing under the goods and services tax regime from the start of next year.

Registered businesses having turnover above Rs 100 crore will have to issue electronic invoices for notified business-to-business transactions. To recall, this system was first implemented in October for entities having a turnover above Rs 500 crore after several modifications and deferrals by the government.

Compared to the 7,000+ firms earlier, the second phase will encompass a much larger number of taxpayers, mostly medium and small scale enterprises.

Experts pointed out that e-invoicing can prove a challenge for such businesses on three fronts — integration or upgradation of their existing IT systems, invoicing practices and the need for imparting training to their personnel.

Here’s how businesses can gear up...

Challenges On The ERP Front

The GST system requires companies to upload invoice-related data from their in-house ERP software to a dedicated web portal. This data must be transferred in a fixed format to the electronic schema — a form prescribed by the GST department—which will capture data relating to the supplier and receiver along with the invoice details, applicable rate of GST and HSN number etc.

The dedicated portal will then process such details and generate an Invoice Reference Number, which must be printed on the final invoice. Uploading and processing invoice related data will prove a challenge for firms which generate large number of invoices.

To be sure, businesses can upload data to the e-invoicing portal through different mechanisms like direct integration, manual upload of data or by utilising services from a GST Suvidha Provider. A direct integration may come as a challenge for small business due to required costs and resources.

Gunjan Prabhakaran, partner and leader for indirect taxes at BDO India LLP, told BloombergQuint that the key challenge faced by small and mid-size companies is lack of a robust IT infrastructure and well-defined processes.

Given the paucity of time and financial constraints, business can first do integration into the existing ERP or application to avoid business disruption and then choose a new ERP best suited to their business needs, she said.

If the volume of B2B invoices is not significant, companies should resort to manual generation of IRN and QR code and simultaneously commence ERP integration. Choosing the mode for transmission of data will play the most important role in the implementationGunjan Prabhakaran, partner and leader- indirect taxes, BDO India LLP

Mahesh Jaisingh, partner at Deloitte India, pointed out that businesses must focus on extensive testing for all kind of scenarios. “In our experience, companies that have focussed on extensive testing in the sandbox environment were able to better handle the transition into e-invoicing,” he said.

Inability of vendors and suppliers to provide invoices or key data can also impact the business cycle for companies.

Jaisingh said that MNCs which have already started e-invoicing must shift focus on extending support to their vendors or dealers.

Industries in the auto and FMCG sector have a common billing platform where a large business enables e-invoicing functionality at the company level for benefit of its dealers or vendors. Supporting them for the phase-2 will ensure that the company’s own business does not come to a standstill due to lack of e-invoicing.Mahesh Jaisingh, partner, Deloitte India

Invoicing Practices

Another major area that will need a rethink from Jan. 1 relates to the invoicing practices or methods followed by businesses, which often vary across industries. For instance, the services sector follows a monthly invoicing model, while factories generate a final invoice on a per supply basis.

To recall, the government had initially proposed a 48-hour deadline for generation of invoice but suspended its implementation later.

Dhruva Advisors’ Ritesh Kanodia explained the impact of e-invoicing on the services sector. Service providers close books of accounts in the subsequent month as data on timesheets and work done for a past month can only be provided once that month is over, he said.

If the 48-hour timeline gets notified, service providers will have to rethink their strategy as they at present take 3-7 days to process the information and may backdate their invoices sometimes. This may no longer be possible on a going-forward basis if e-invoices are disallowed to be generated beyond 48 hours.Ritesh Kanodia, partner, Dhruva Advisors

As data from electronic invoice will be auto reported in GSTR-1 form, any delay will have unintended effects for taxpayers.

Kanodia said that the GST system captures any e-invoice generated within the past 24 hour in GSTR-1 form. Let’s say that an invoice dated Jan. 31 is raised after 27 hours (but within 48 hours) from the day. In such cases, the transaction will be reported in the next month’s GST return, leading to reconciliation issues and delays, he said.

Employee- And Vendor-Related Changes

Companies will also need to impart proper training to their employees and change operational protocols to ensure a smooth rollout. This will require a greater co-ordination of various functions within an organisation.

Prabhakaran said that companies must revisit entire e-invoicing process right from data entry to printing and mailing an invoice to the customer, segregation of transactions into categories like B2B, B2C, Bill of Supply etc. to ensure that no transaction requiring an e-invoice is missed out.

Jigar Doshi, partner at TMSL LLP, said that the tax division of a company must work in real time with other business functions as its role under e-invoicing regime will be much wider as compared to the earlier period.

Jaisingh agreed. He pointed out that businesses must also revisit indemnity clauses in contracts to address cases of non-compliance with e-invoicing requirements by vendors.