Why SMEs should start work on E-Invoices?
Vinod Subramanian delves into the framework of e-Invoices and sheds light over adoption of similar reforms globally. Here are his few observations:
There is so much noise about e-Invoice. What is e-Invoice?
By definition, an Electronic Invoice is an invoice that is issued and received in electronic format. Proof of integrity and authenticity of an invoice must be available, from the issuance of the invoice until the end of the archiving period. Invoice must remain legible during that time. Non-repudiation is critical - an assurance that someone cannot deny something. (If an e-Invoice is created against Bharat Motors by Dharma Spare Parts, Bharat Motors cannot deny it).
What is the main purpose behind e-Invoicing?
Plugging tax evasion is the fundamental driver. It also brings in transparency and efficiency at scale. It provides the government with a rich data pool enabling policy makers and regulatory bodies with an unmatched level of accuracy of all economic activities.
What are the models in which e-Invoicing are usually deployed by governments?
Various governments adopt diverse models to encourage early adoption. Blanket deployment across all businesses is the ideal situation, but the practical difficulties persist. In most countries 15-20 per cent of transactions happen with government entities, the B2G segment gives critical mass, and this is usually the first sweet spot, all invoices to Government entities get mandated. Industry segment, revenue of the company and value of transactions are the other criteria used to gradually deploy and done in a top-down approach. Additional opt-ins encourages all forward looking entities to leverage it. If you look at the Europe example, EC Expert Group makes recommendations on initiatives. In parallel, most countries mandated it for all B2G transactions, and PEPPOL (Pan European Public Procurement Online) defined the standard electronic document formats.
What are the benefits to companies and why should they deploy e-Invoicing?
Currently, most business transactions happen on paper. In any transaction, there are structured documents, unstructured documents and regulatorily compliant documents that get transferred between parties. Invoices fall in the third category. Typically, invoices are created in a billing or accounting or ERP system, and then transmitted through paper or email to the counter party. The counter party needs to capture the details in the Invoice and need to match that with the details in its own accounting or ERP system. All these are manual processes, some are being automated through RPAs. Companies spend between Rs 10 and 5000 per invoice on such overheads and deploy lot of labor to manage them. Moreover, these are error-prone. These overheads can be substantially reduced by e-Invoicing. One European study estimated, the cost saving per invoice at 6.4 Euros. Larger the number of Invoices processed, larger the savings.
How does e-Invoices bring in tax avoidance?
In order to be accepted as an e-Invoice, the message or packet (which carries the information about an Invoice) being transmitted (a) needs to be complete with all the data elements of the Invoice (b) The data should be validated for compliance to GST rules - mainly
tax slab or rates against the material or service (c) the transmission should be secure, and both the integrity and authenticity needs
to be tamper-proof. Integrity validates data is correct, and authenticity validates that it is coming from the right person, and is going to the
What are the key considerations for a regulator while looking at technology requirements for e-Invoicing?
There are three key considerations for the regulator.
Interoperability, or any-to-any formatting. Hundreds of softwares are used by companies large and small. It should be possible for everyone to participate and transact with each other. There should be easily available export and import tools to facilitate easy data movements.
Cost: The cost of converting data from their existing systems to the formats desired by the regulator should be minimum or nil. If there is a large one-time cost to upgrade systems to be ready for e-Invoices, it is a strong deterrent, especially for SMEs
Tamper Proof: The invoices should be completely tamper proof, both authenticity and integrity should be maintained for a reasonable amount of time which supports audit. Equal Treatment or Catch All method made it clear that paper and electronic were treated equally.
What is the evolution of technology standards in e-Invoicing?
The original technology framework used by large enterprises or government bodies was EDI (Electronic Data Interchange). With public networks coming alive, the standards moved to EDIFACT. In the last decade, XML has taken over. PDF is a very well accepted technology standard for Invoices by SMEs. While large enterprises have lot of structured data, SMEs do not.
What is the role of service providers or consolidators?
Since the market is huge, covering enterprises using sophisticated technology at one end and SMEs who still are using khata for transactions, enablers are critical. It is not unusual for government to appoint or certify a few service providers who can support business organisations in creating, transmitting, reconciling and storing e-Invoices. The presence of service providers also bring in a level of respectable competition, helping players innovate and be customer centric.
How have the service providers evolved?
e-Invoice players flourished in the Scandinavian countries and later across all Europe. In the early 2000s, there were about 500 service providers. Over the years, many have disappeared, a few have merged and some leaders have emerged. The landscape of these providers changed dramatically after 2011, when a new set of operators came in, leveraging cloud and scale and disrupting all traditional cost economics. As per analyst reports, there are only four players who manage transaction volumes of >100mn e-Invoices annually. There is a wide gap to the remaining players, with the smaller ones handling less than 10mn
How has adoption of e-Invoices progressed across global markets?
Adoption is mainly compliance driven. North American market is heavy, volume of invoicing is covered by large enterprises. The US has heavily-evident paper and bill culture. Companies prefer a direct contractor to manage it for them. Europe and Latin America are heavier on SMEs and use service providers or operators. While LATAM, US and Asia are stronger on Digital Signatures, Europe is not so demanding on Digital Signatures. LATAM is known to be the strictest.
Is e-Invoicing Real-Time or Post Facto? How will it impact GSTR filings?
e-Invoicing is absolutely real-time. It provides the regulator a real-time visibility into all commercial activities in the market. In an ideal scenario, an e-Invoice should capture all line item level details of an invoice, and all critical elements of the invoice which determines the tax applicable- HSN Codes, Material or Service descriptions, quantity and unit of measure, rate and price, tax slab, counter party details and both the time of supply and place of supply. If all your invoices are e-Invoices, both on sell and buy side of your business, the need for separate GSTR filings do not arise.
What is the situation in India and what are the possible models?
India defined its GST framework where every line item level detail of transactions are captured in the GSTR reports. So, there already exists a rich level of detail which can be easily leveraged. India also has already deployed eWay bills, so there is an additional level of data capture of movement of goods. While these are embraced by large entities already, as you move down to SMEs, they are still filing at summary. It is important to note that India has a multi-slab GST, so it becomes more significant to capture what product or service is sold to determine the accuracy of tax applied. e-Invoicing, if it needs to achieve its stated objective, needs data at line item level, otherwise the stated purpose of controlling tax evasion becomes impossible. An aggressive view would be to look at leapfrogging ahead by making it mandatory across the board. A conservative view would be tolook at deploying it in phases. Since most of the tax evasion is known to happen at the last mile, a sector specific approach may be more impactful than one based on revenue or value bands.
Vinod Subramanian is a graduate from IIT Kharagpur who is a widely-travelled business leader with 23 years of experience. He is known to deliver consistent results to the organisation and clients. He heads as a CEO of Logo Infosoft, a leader in GST and e-Invoices in Eastern Europe, and its SME offering Vyapari was recently selected by GSTN in its initiative to automate SMEs. He has worked at organisations like HCL, Oracle and EY, Vinod brings in strong leadership experience in building high performance teams. In his previous roles, he has led IT advisory teams at EY, and enterprise application business at Oracle Asia Pacific, and carries a track record of building genuine and honest relationships.