Widening the net: How e-invoicing is boosting GST compliance

The government’s move to introduce e-invoicing as a mandatory part of the GST landscape has improved compliance and boosted GST collections while also transforming the transactional landscape of India’s commercial economy into a digital and transparent system.

This was not the case when with the introduction of GST in July 2017, the government’s hopes of a uniform nationwide law to boost compliance and enhance tax collections, were repeatedly belied. Revenue collections in the first 3 years of GST were nowhere near expected lines with widespread non-compliance and non-filing of GST returns by a significant number of taxpayers. GST non-compliance was on the rise and increasing cases of fraudulent invoices to avail input tax credit (), were coming to light.

There was the dire need to course correct the GST law and the government seized this opportunity to introduce e-invoicing in a phased manner. Simply put, e-invoicing ensures that a trade invoice is identified by a unique identification number (termed as invoice reference number) which is generated by the Invoice Registration portal of the GSTN. This invoice registration number is required to be encrypted in a Quick Response code (QR) on the invoice. The QR code contains, apart from the IRN, the GST registration numbers of the supplier and recipient, date of invoice generation, the invoice number and the invoice value. This unique matrix bar code is machine readable and can easily verify the invoice by even a cellphone. It permits interoperability as e-invoices are generated in a standardised format and thus can be read by different software.

How does e-invoicing ensure compliance? Having an e-invoice which is validated by the GSTN ensures that the GSTN system captures at the incipient invoice generation stage, all supply transactions on which input credit can be availed of by a buyer of goods and services. In fact, the GSTN goes further and auto populates the sale and purchase returns of the GST registered seller and buyer. Thus, on a real time basis the GSTN system captures all the B2B transactions on which GST is applicable – any B2B invoice which does not have an IRN cannot be used for availing ITC and thus drastically truncates fraudulent practices for wrongful availment of ITC by businesses.

It is no surprise that since November 2020, GST collections have been on the rise and crossed the Rs 1 lakh crore benchmark – e-invoicing was introduced in Oct 2020 for businesses with turnover over Rs 500 crore and extended to those with turnover over Rs 100 crore from Jan 2021; and e-invoicing is now mandatory for businesses with turnover above Rs 50 crore, from 1 April 2021.

This staggered approach has ensured that both GSTN and businesses are prepared for this major transformation in the GST compliance construct. E-invoicing is already running successfully in many countries across the globe, and with this measure, India will also be following the contemporary global standard of invoice format used in business transactions. Further, it is expected that by end of this year, e-invoicing will be extended and made mandatory for all GST registered businesses, except for B2C and GST exempted transactions. Financial institutions, goods and passenger transport and SEZ units also are outside the ambit of e-invoicing.

This transmission, reception, and processing of digital transactional documents by way of an e-invoice between suppliers and buyers, proffers several advantages over the traditional system of physical invoicing. Electronic invoice generation reduces data input errors, improves account reconciliation, provides for accurate ITC claims and shortened payment cycles, and results in enhanced customer relationships. E-invoicing takes away the advantage of spontaneous physical invoicing particularly for small business and also requires additional spend on automation.

For the government, e-invoicing enables real time tracking of invoices and an automated e-trail, reducing mismatches of input tax credit, leading to a unified and automated system of GST filing. Backed by increased coverage and success of e-invoicing, the Finance Minister has been on record to have agreed to eliminate the requirement of e-way bills (road permit or transportation document) in the near future. Most importantly, e-invoicing has, to a great extent, killed two birds with one stone – while reducing the burden of business of matching invoices and thus availing correct ITC in a timely manner, it has simultaneously ensured that government does not suffer losses on account of unscrupulous practices of fake and fraudulent tax invoices (it is no secret that the European Union loses about 30 billion Euro per annum due to incorrect ITC availment). Additionally, the automated population of e-invoices in the GST returns of sellers and buyers has vastly reduced the burden of GST compliance for trade. Its true success would, however, lie in the government ensuring that there are no technology glitches in the e-invoicing regime and that it continues to expend on upping its technology advancement to transform GST compliance into an auto regulated system.

Underscoring government’s efforts to promote a digital economy, e-invoicing provides for retention of records in a cloud environment and thus supports a clean environment as printed invoices can literally be done away. Legal changes can be expected on that front soon.

(The writer is Senior Director with Deloitte India)