How e-invoicing will change operations, GST compliance of small businesses

Recently, the government announced implementing the fifth phase of e-invoicing to taxpayers with annual turnover of more than Rs 10 crore to Rs 20 crore. This phase shall begin on October 1, 2022, and is expected to drastically affect the small businesses falling in this turnover range, including their business operations and compliance. 

The overview

Under e-invoicing, applicable businesses must report to the government to verify certain documents. The portal where validations happen is called the Invoice Registration Portal (IRP), such as the NIC and Clear. As a result, the government responds with a signed QR code and a unique Invoice Reference Number (IRN). The e-invoices get auto-filled in GSTR-1 of such businesses towards the end of the tax period.

Any failure to generate IRN attracts a penalty of up to Rs 25,000 per invoice for issuing an invoice incorrectly. If the business does not raise the required invoices, it shall have to pay a fine of Rs 10,000 per invoice not raised.

The IRP verifies documents such as tax invoices, credit notes, and debit notes raised towards transactions such as taxable Business-to-Business (B2B) and Business-to-Government (B2G) sales of goods or services, exports, and supplies made under the reverse charge mechanism. 

The system does not apply to exempted supplies for which bill of supply is raised, job works, imports, delivery challans, and entities operating as banks and NBFCs, government departments, exhibiting films on multiplex screens, goods and passenger transportation agencies, and the Special Economic Zones (SEZ) units.

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Changes in business operations & compliance

The applicable businesses must set up and test the new system before October 1, 2022. Testing of e-invoicing setup is currently available in a sandbox environment on the API portal of the GST Network. First-time compliance demands all the applicable businesses to register on the e-invoice portal such as NIC (https://einvoice1.gst.gov.in/) or notified IRPs like Clear.

e-Invoicing needs system and process changes and affects how compliance is done. Changes can be seen in their business process and preparation of GSTR-1, including alterations in the invoicing software or Enterprise Resource Planning (ERP) systems. 

GSTR-1 filing becomes easier with auto-population, but gives rise to some reconciliation complications between GSTR-1 and sales books every tax period. Such businesses must cross-check e-invoice entries in GSTR-1 before it is filed. Tech-based reconciliation can help them save time and effort.

e-Invoicing does not mean generating invoices on the government portal, but it refers to reporting already generated invoices to the government for validation. So, such reporting requires every invoice, debit, or credit note to be in a particular format as notified, called the e-invoice schema. 

Also, recognise transactions and documents where e-invoicing applies and segregate them at source from the rest for easier reporting onto the IRP and processing for GSTR-1. Similar action is needed for e-way bills, which can be optionally auto-generated based on e-invoice details entered. 

Printing options must be modified to capture IRN and QR code in the e-invoice. All the above are system changes and require the present billing or ERP or accounting systems or software to be reconfigured.

Businesses must select and implement the best-suited mode for e-invoice generation, such as online and real-time SMS and offline and batch processing. They can opt for the SFTP or API integration using fully functional, end-to-end cloud-based solutions for large invoice scale, and timely customer service. 

Alternatively, they can access IRPs via existing e-way bill APIs or web-based direct integration with IRPs such as NIC and Clear. Businesses can ensure integration with IRP via GST Suvidha Provider (GSP), also served by Clear. Enterprises operating at a low scale may choose to depend on low-cost SMS-based or mobile app-based generation and traditional offline spreadsheet-based utilities such as the GePP, but these may not be very effective.

Small businesses operating from semi-urban and rural areas are at risk of intermittent internet connection. They may hesitate to switch to innovative tech-based systems. Also, untrained staff and a lack of connected setup along the invoice-to-pay process can delay invoice operations and payment delays and may ultimately hurt customer relations. 

Automating invoicing operations becomes essential to ensure the accuracy of invoices generated under e-invoicing. It would also allow sharing documents between businesses with a click of a button and tracking payments. 

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The purpose and effect

The primary motive for reducing the e-invoice turnover limit is to detect and prevent tax fraud through compliance improvement. It allows businesses along the supply chain to claim only validated Input Tax Credit (ITC), thereby plugging GST revenue leakages for the government. e-Invoicing further strives to widen the net of GST digitisation. It captures details of business transactions at a nascent or billing stage.

More taxpayers fall in the Rs 10-20 crore yearly turnover range compared to any previous e-invoicing phases. Further, these small businesses tend to have a higher transaction volume posing fresh compliance challenges.

Due to government validation, the system allows small businesses to approach formal credit routes through invoice financing easily. However, large enterprises sourcing their raw materials from these businesses must secure vendor compliance to avoid delays in ITC claims. 

Eventually, e-invoicing across India allows businesses' billing or ERP systems to interact with each other. It will reduce manual errors and improve transparency.