E-Invoicing and GST: A Winning Combination for SMEs

Feb 6, 2023

India has had GST for five years, and the e-invoicing system has been operational for around two years. Many things have changed since then. While the GST unified all indirect taxes and paved the groundwork for other digital changes, electronic invoicing has completely transformed how businesses conduct themselves. Both improvements have been very advantageous and have prompted a change in corporate behaviour in India.

If your company is GST-registered, you will have to send electronic invoices for business-to-business transactions. The government of India declared the fifth phase of mandatory implementation of E-invoicing for businesses with an annual turnover exceeding Rs. 10 Crore from 1st October 2022. The sixth phase for businesses with an annual turnover exceeding Rs. 5 Crore which was set to be implemented from 1st January 2023 to be is yet to be notified.

What is E-invoicing in GST?

The system through which B2B invoices are electronically authenticated by the Goods and Services Tax Network (GSTN) for use on the common GST portal is referred to as electronic invoicing, or E-invoicing in GST.

The GST Council implemented an E-invoicing system to cover specific categories, including both small and large businesses at its 35th meeting. The objective was to standardize invoices so that they could be recognized by machines and operated in a variety of business and compliance situations. As a result, data reconciliations, e-way bill generation, invoice reporting, accounts receivables management, and GST return filing have all improved in efficiency.

Additionally, this assures that digital invoices issued by one software may be read by any other software, removing the need for manual data entry. This applies to the entire GST ecosystem.

Electronic invoicing is anticipated to ease the burden of compliance on taxpayers in addition to improving corporate procedures. Since e-way bills and GST returns have different formats, taxpayers are currently required to input invoice data individually for each. There are numerous problems with this, including mistakes made during manual processing, unnecessary paper use, and the creation of fraudulent invoices by scammers. Therefore, an e-invoicing standard was required at the time to minimise human data entry and guarantee synchronisation between the billing/accounting systems of customers and suppliers.

How does E-invoicing work?

The e-invoice system's workflow can be divided into two categories. The first is the relationship that exists between the company (supply in an invoice example) and the Invoice Registration Portal (IRP). The second component consists of the interactions between the IRP, GST/E-Way Bill Systems, and the Buyer.

  • The vendor or seller generates an invoice in the structured sequence using their accounting or billing software (e-invoice schema). It must offer the relevant details.

  • The supplier's accounting software generates a JSON file for each B2B invoice. The JSON file is added to the IRP.
  • The GSTIN of the supplier, the invoice number, and the financial year are used to create a hash (an alpha-numeric number) once the invoice has been posted to the IRP. The hash is subsequently converted to the IRN, a number that is unique to each invoice for the full financial year. The GST laws only recognise e-invoices that are signed by the IRP as being valid.

  • The IRP also creates a QR code with important information including the GSTINs of the buyer and seller, the invoice number, the date of the invoice, and the line number of the items. Finally, if the customer and supplier specified an email address on the invoice, the IRP will send the e-invoice data along with a digital signature and QR code to them. Additionally, the IRP will share the e-way bill system and common GST gateway with the supplied invoice data.

Advantages of the e-invoicing system

  • Real-time tracking of invoices 

Digital invoicing facilitates real-time monitoring of invoices issued by a supplier. This enables input tax credits to become available more quickly (ITC).

  • One-time reporting of B2B invoices 

With e-invoicing, a taxpayer only has to submit the invoices once and have them authenticated by the Invoice Registration Portal (IRP), which analyzes the invoice and issues the Invoice Reference Number (IRN). The information automatically populates the GSTR-1 return following login. Thus automating the previously used manual reporting process.

  • Easy creation of e-way bill

Digital invoicing simplifies the generation of the e-way bill because the taxpayer only needs to update vehicle information. When an e-invoice is authorised using the GST site, the information in Part-A of the e-way bill is automatically filled in.

  • Aids consumers

Once the e-invoice has been posted to the GST site for verification, it is also sent to the buyer at the email address he has provided on the e-invoice. This enables the customer to instantly approve or reject the invoice and reconcile his purchase order with the electronic invoice.

  • Reduced data entry errors 

The e-invoicing system sends the invoice to the shared portal, allowing for multipurpose reporting. All invoices are instantly transferred after authentication to the e-way bill and GST portals. When filing GST returns, this auto-population minimizes the need for manual data entry and cut down on data entry errors.

  • Enables interoperability 

Because e-invoices are produced in a standard format, invoices produced by one software can also be read by other software. Hence, Interoperability is made possible.

  • Stop tax evasion 

Since invoices are generated before a transaction is completed, real-time data access reduces the possibility of invoice manipulation. This further limits the use of fraudulent GST invoices, and only legitimate ITC can be claimed. The details of the output tax and input tax credit are widely available, making it simpler for tax agents to identify false input credits.

Disadvantages of the e-invoicing system

The reduction of tax evasion is the primary goal of the deployment of electronic invoicing. However, the new system only supports B2B invoices, not B2C invoices. Because there is no ITC involved, B2C invoices have the highest frequency of scams. Therefore, a mechanism that enables customers to submit non-compliant invoicing should be put into place in order to stop tax fraud at its source.

What is GST & how it applies to SMEs?

GST is an abbreviation for the Goods and Services Tax. In India, it is an indirect tax that has mostly superseded other indirect taxes including excise duty, VAT, and services tax. The Goods and Service Tax Act was approved by Parliament on March 29, 2017, and it became operative on July 1 of that same year.

In other words, the provision of goods and services is subject to the Goods and Services Tax (GST). Every value addition in India is subject to the comprehensive, multi-stage Goods and Services Tax Law, which is dependent on the destination. For the entire nation, GST is a single domestic indirect tax law.

Under GST, businesses are required to register for GST if their annual turnover exceeds a certain threshold. For most states in India, the threshold is currently INR 40 Lakhs (INR 20 Lakhs for special category states such as North Eastern states, Himachal Pradesh, and Uttarakhand).

Once registered, businesses must charge GST on the goods and services they provide, and they must pay GST to the government on a regular basis. GST is charged at different rates for different goods and services. There are currently five GST rates: 0%, 5%, 12%, 18% and 28%.

SMEs have the option to opt for the Composition Scheme under GST, which allows them to pay a lower rate of GST and have a simpler compliance process. Under this scheme, businesses with an annual turnover of up to INR 1.5 Crore can pay GST at a fixed rate, which is currently 1% for manufacturers, and 2.5% for traders and service providers.

However, there are some restrictions for businesses opting for composition schemes such as they can't issue tax invoices and can't claim an input tax credit.

SMEs must also file GST returns on a regular basis. The frequency of return filing depends on the turnover of the business, with businesses having higher turnover required to file returns more frequently.

In summary, GST applies to SMEs in the same way as it does to larger businesses, but SMEs have the option to opt for the Composition Scheme, which allows them to pay a lower rate of GST and have a simpler compliance process.

The benefits of e-invoicing for GST compliance include

Streamlined compliance

Digital invoicing automates the invoicing process and makes it more efficient and accurate, reducing the chances of errors and mistakes. This makes it easier for businesses to comply with GST regulations.

  • Improved data accuracy 

Electronic invoicing ensures that all invoices are generated and transmitted electronically, reducing the chances of manual errors and ensuring that data is accurate and consistent.

Reduced compliance costs: Electronic invoicing reduces the need for manual data entry and reduces the cost of compliance.

  • Real-time tracking 

E-invoicing provides real-time tracking of invoices, allowing businesses to easily monitor and manage their GST compliance.

  • Reduced fraud 

E-invoicing improves security and reduces the risk of fraud by providing a tamper-proof record of transactions.

  • Better reconciliation of Input Tax Credit 

It enables real-time validation of invoices which will help to claim input tax credit on time and also reduces disputes.

Overall, digital invoicing is a cost-effective and efficient way for businesses to comply with GST regulations and improve their GST compliance process.

Here are some tips for implementing e-invoicing for GST compliance:

  • It is important to understand the process and the requirements for GST compliance. Understand how to generate and transmit invoices electronically, how to authenticate and validate invoices, and how to file GST returns.

  • Look for reliable e-invoicing or accounting software that is compliant with GST regulations and can handle the generation and transmission of invoices. It should also integrate well with your existing accounting software. Test your system to ensure that it is working properly and that all invoices are being generated and transmitted correctly.

  •  Keep records of all invoices generated and transmitted electronically, and ensure that they are easily accessible for GST compliance purposes.

  • Regularly monitor your e-invoicing system to ensure that it is functioning properly and that all invoice management is done effortlessly.

By following these tips, businesses can ensure that their e-invoicing system is set up correctly and that they are able to comply with GST regulations effectively.

End Note

The digitalization of processes is a common thread between the implementation of GST and e-invoicing. Unprecedented transparency and accountability have been made possible by the establishment of the GST and e-invoicing. Small businesses have quicker access to finance, lending institutions find the verification process to be more palatable, and large enterprises are more likely to deposit their funds in the treasury.

Sooner or later, the government will digitise the supply chain. With e-invoicing, e-way bills, and the linking of direct and indirect taxes, it has already started to ensure that all company transactions are trackable and traceable.

Because of this, every business, regardless of size, should think about automating processes. With GenieBooks' GST-compliant and 100% Cloud accounting and inventory management software, you can automate all your business processes seamlessly.