How to easily manage reconciliations under GST with automated e-invoicing solution?

2020 may have been tough on us but it has been a milestone for the Goods and Services tax administration mainly because of the implementation of e-invoicing. This brand-new tax reform mechanism is expected to bring about a paradigm shift in the way India manages its indirect tax administration. It has only been a little under two months to e-invoicing being implemented and while the number of e-invoices generated and validated have been close to 5 crores in the first month alone, businesses have had mixed responses to this new mechanism.

Sure, e-invoicing has increased the compliance load by a little but that is mainly for businesses who are not making the smart choice of employing tax automation solutions and are still opting for manual work. However, tax administration experts are of the opinion that e-invoicing will help businesses comply better with other aspects of GST for a holistic result. This is because e-invoicing will be directly tied to other mechanisms under the Goods and Services Tax viz, the GST portal and the e-way bill portal.

This article will highlight how e-invoicing will impact reconciliation of tax returns and how to easily manage reconciliation using smart automation solutions that will not only make e-invoicing easier but will make the entire tax management process much more efficient.

For starters, let’s briefly understand what is e-invoicing and how it is tied to other GST portals. e-Invoicing is the electronic authentication of a tax invoice which is done by generating a tax invoice as per the prescribed invoice schema. This schema will need to be adapted by the business’s ERP so that it can be correctly read and processed when it is uploaded to the invoice registration portal for electronic authentication.

Once a tax invoice is generated and uploaded to the IRP, the system will authenticate the same by verifying the transaction details (party details, invoice and tax value) and issue an invoice reference number and a QR code unique to that tax invoice. The IRP will digitally sign the e-invoice and return it to the taxpayer. The issue of an invoice reference number determines the validity of the tax invoice and it is only after a tax invoice is deemed valid can it be used to furnish details under other tax portals like GST returns and e-way bills. If a tax invoice doesn’t feature the invoice reference number (and the QR code that is expected to be implemented from December), the tax invoice will be deemed as invalid.

At present, India has only implemented e-invoicing on the following types of transactions:

• B2B Invoices
• B2G Invoices
• RCM invoices
• Export Invoices
• Credit Notes
• Debit Notes

Additionally, e-invoicing is only applicable to companies whose annual turnover exceeds ₹500 crore. However, this purview will be extended in the next six months to accommodate all B2B transactions irrespective of the annual turnover of the business. Also, certain categories of businesses including businesses operating in special economic zones, banking, finance and insurance companies and businesses offering passenger transportation services are currently exempt from adopting e-invoicing, even if they fall under the Centre’s eligibility criteria. But as e-invoicing grows out of its nascent stage and the Centre and taxpayers are more confident of the process, the purview of e-invoicing is likely to expand. This means it will do well for even currently exempt businesses to learn and prepare about e-invoicing and how to manage the mechanism with tax automation technology.

One of the biggest advantages of adopting e-invoicing will be the fact that it will drastically reduce errors while filing returns leading to fewer cases of data reconciliation and fewer tax audits. Why will this happen?

Because the e-invoicing mechanism is directly linked to the GST return filing system and the e-way bill system, when a taxpayer files their monthly returns viz. GSTR-1 or if a recipient of goods and services files GSTR-2A, the forms will be prepopulated with details pulled from the invoice registration portal. This mechanism will also be reflected under the e-way bill system. Let’s understand which mechanisms will be impacted because of e-invoicing.

• GSTR-1 and GSTR-2A return forms
  The GST return forms will pull data from the invoice registration portal and will pre-populate the return forms thereby eliminating the scope of errors due to manual data entry.

• GSTR-1 and GSTR-2A return forms
  The GST return forms will pull data from the invoice registration portal and will pre-populate the return forms thereby eliminating the scope of errors due to manual data entry.

• ITC and Reverse Charge Mechanism
  As the scope of errors while filing returns will be reduced, the process of claiming ITC and ITC under reverse charge mechanism will speed up significantly.

• GST audits
  The chances of audits conducted by GST authorities is likely to reduce as there will be fewer discrepancies in matching of details furnished.

• E-way bill portal
  Similar to the GST returns portal, details of the transaction will be pulled from the IRP and will be used to auto populate data while generating an e-way bill. However, businesses must be aware that an e-way bill must be generated within 24 hours of the invoice reference number being issued. 

Once the IRP issues invoice reference numbers to each e-invoice, the taxpayer will receive the e-invoice on their registered email address, and they will be able to store that data and account the same in their purchase account books. Since the details furnished will now be automatically pulled from the IRP, the returns will be semi auto populated and that means there are unlikely to be errors while claiming ITC or while paying off tax liabilities. This in turn will speed up the ITC claim process which otherwise is an extremely cumbersome and time-consuming process as each and every transaction must be matched with purchase data. Even if taxpayers are willing to spend so many hours on manual invoice matching, any errors could result in a backlog or worse over or under claims of ITC and tax liabilities which are likely to result in legal disputes. Taxpayers must also note that reconciliation is not just limited to one-time consuming return form. Under the GST mechanism, reconciliation must be done to match details furnished under the following forms -

• GSTR-1 and GSTR-3B
• GSTR-2A and GSTR-3B
• GSTR-2A and the business’s books of accounts
• GSTR-1 and the business’s e-way bill log
• Annual reconciliation for filing GSTR-9
• GSTR-9 and the business’s annual accounts books

Manually taking up purchase matching for all of these forms will mean a business’s finance and accounts team will be spending most of their time on manual tasks.

Additionally, the large volume of ITC reconciliation cases means businesses will be unable to receive ITC credit which in turn will impact their business goals and subsequently, the next cycle of taxation. e-Invoicing helps eliminate this vicious cycle by reducing errors in data by automating quite a large portion of manual tasks using tax technology.

That being said, businesses will still be required to take up additional compliance tasks and will need additional help from comprehensive tax compliance automation solution providers like Avalara to manage e-invoicing and enable businesses to reconcile purchase data. E-invoicing is an evolving tax reform and changes can be made based on the response of the taxpayers and how well the system is able to manage the process in its nascent stage.

Even if a business uses their own teams to manage e-invoicing and other tax operations, it will be highly unlikely that they will be able to keep up with changes in tax policies and systems like field updates, schema changes, deadline changes etc as efficiently as cloud-based tax technology providers, especially during a pandemic. Most importantly, in-house IT teams will not be able to integrate multiple tax portals.

In such a case, it is ideally suited to rely on a solution provider who will be able to help businesses automate the following tasks with ease:

• Store e-invoices (at present the IRP only stores e-invoice data for 24 hours)
• Generate, validate and cancel e-invoices in the same dashboard
• Generate e-way bills relevant to a validated tax invoice
• Manage advance reconciliation with data configuration options.
• Integrate with noted ERPs like Tally, SAP, Marg, Oracle, Microsoft, etc.
• Offer in-office as well as cloud-based solutions for efficient business continuity

E-invoicing is expected to have a domino effect of sorts on the entire returns filing mechanism with the invoice reference number being the lynchpin. Once the system has the e-invoice validated, the rest of the chips are expected to fall in place and the use of subscription based or pay-as-you-go tax automation solutions will be able to further streamline this process.