By Ravi Kiran Edara
October 1 onwards businesses with a turnover above Rs 500 crore will start ‘e-invoicing’ their B2B supplies and exports. But what is an e-invoice? Currently, businesses use one or the other ERP solution or accounting/billing software to create and manage invoices. This will continue in e-invoicing, but invoices will be sent in a standard digital format (called ‘schema’) to the Invoice Registration Portal (IRP).
The portal gives back a signed invoice along with an Invoice Reference Number (IRN). It will also give a QR code containing key particulars of the invoice (including IRN). This ‘machine-to-machine’ exchange of data happens in a split second. Then the supplier issues invoice to the buyer by adding the QR code on the invoice copy. This process is called ‘e-invoicing’. It is specified in rules that, where applicable, an invoice issued without obtaining IRN is not an invoice at all.
Advantages: E-invoicing appears to be another layer of compliance for taxpayers. But a closer look shows is a step in easing compliance for businesses. Compliance becomes part of the business process and supply chain system. GST reporting will be easier with real-time auto-population of invoice details into return (for supplier and respective buyers) and simultaneous generation of e-way bill, where required.
The standard invoice format (INV-01) has got all the elements of a typical commercial invoice. It paves way for interoperability amongst businesses, by allowing direct transmission of invoices in a structured format from one finance system to another. This leads to elimination of data-entry errors, reduction of reconciliation issues, reduction of disputes among transacting parties, fast payment cycles, reduction of paper, reduced processing costs, better internal controls and thus enhancing efficiency of businesses. At a global level, the EU countries lead this approach.
Global trends: Many Latin American countries are leaders in ‘clearance’ model of e-invoicing. Brazil, Chile and Mexico could plug revenue leakages and tax evasion in a significant way. In ‘clearance’ model, before issuing to buyer, an invoice has to be reported and ‘cleared’ from a government-designated portal. India’s design also broadly falls under this category.
This model has advantages: fiscal documents becoming tax-compliant on real-time basis, reduced risk of fines, single source of truth for fiscal purposes, possible elimination of requirement to file periodic returns, low frequency of audits, automatic refunds, reduction of frauds, etc.
Even in the EU where ‘e-invoicing’ hitherto meant electronic exchange of documents among businesses, they are actively looking towards the ‘clearance’ model.
Towards Continuous Transaction Controls (CTCs): Invoice is the key document evidencing business transaction as well as tax compliance. The ‘clearance’ model signals a departure from the traditional, retro-active system of ‘post-audit’. In the ‘post-audit’ approach (in India also), long after completion of transaction, the invoice details are reported periodically by taxpayers to government. Drawbacks of this model are that tax authorities can obtain visibility of a transaction long after its conclusion and auditors have to exclusively rely on historical and often aggregated data maintained by businesses.
The global trend is towards CTCs, i.e. the digital mechanisms used by tax authorities to collect transactional invoice data in real-, or near-real time, so that tax receipts can be matched to business activity. Clearance model of e-invoicing is the prime example of this approach.
In recognition of popularity of CTCs in many countries, in June 2020 the International Chamber of Commerce had come out with practice principles for CTCs. The report notes: “There is an emerging view among both public administrations and businesses that technology-driven modernisation of public revenue collection such as CTCs have the potential to reduce the administrative burden on companies while increasing the effectiveness of tax and other public administration controls.”
Against this backdrop, it is only expected that e-invoicing in India is going to be a win-win for both businesses and the government, in the time to come.
The author is an IRS officer and vice-president, GST Network, New Delhi. Views are personal