Businesses purchase and sell all manner of goods and services to support their operations. For each transaction, an invoice is generated, which could follow any suitable format for the seller. These invoices are further used for taxation and financial management purposes, but their non-standard formats often reduce interoperability and machine readability across management and regulatory systems.
As businesses digitise, this particular challenge is also being addressed with the adoption of e-invoicing. In this article, we will discuss e-invoicing, its constituents, its benefits, and the process for getting e-invoices for your MSME business.
What is E-Invoicing?
E-Invoicing is the process of generating, issuing, receiving, processing and authenticating B2B invoices electronically. E-invoices can be generated by manufacturers or traders and issued by suppliers to their B2B customers for bill settlement. E-invoices are prepared in a standardised format and authenticated by the Goods and Service Tax Network (GSTN).
As of April 2022, e-invoicing is mandatory for all businesses with an aggregated turnover of more than Rs. 20 Crore. The aggregate turnover includes the turnover of every GSTIN registered under a single PAN. However, certain business types are exempted from this mandate, such as an NBFC, insurance or banking company, a Goods Transport Agency, an SEZ unit, and a government department or local authority.
Difference Between Old Invoicing Process and E-Invoicing
The older, non-electronic invoicing process required the manual creation of invoices for sale and purchase transactions. Individual transactions had to be carefully recorded to maintain day-to-day activities. There was no standardised format or software for generating invoices, and entire records had to be manually reviewed to file GST returns for the business. Based on the type and size of the business, this activity could occur at the end of every month, quarter, or year.
With e-invoicing, this is no longer needed. E-Invoices are created in a GST compliant schema and pushed to the Invoice Registration Portal (IRP). The invoice details are automatically stored in the IRP and are pushed to the GSTN at 24 hour intervals. For MSME businesses, this means auto-population of ANX-1 (Annexure 1) of the GST return form for the outward supply of goods and services. This leads to substantial savings in terms of time, cost, and effort.
Essential Components of an E-Invoice
The automated generation of e-invoices and data transfer to GSTN is possible because of a standardised schema and format followed for e-invoicing. Therefore, each e-invoice must comprise certain essential components for interoperability and authorization. These components are:
- IRN: The IRN is an Invoice Reference number, which is unique for each invoice and generated by the IRP.
- QR Code: The QR code is also generated by the IRP and is another unique identifier that assists in invoice viewing and verification through scanning.
- Digital Signature: The digital signature is generated for each business entity through encrypted JSON data returning from the IRP. It is a mandatory component of each e-invoice and should not be confused with the tax payer’s signature.
All the other details (such as your GSTIN, invoice date, tax schema, etc.) can be set as per the specific needs of your business. GSPs typically provide multiple options to choose from and include all the necessary information in each format. But any invoice can only truly become an e-invoice when it has the above three mandatory components, i.e., the IRN, QR code, and digital signature.
E-Invoice and GST Filing
Your selected GSP can automate the GST filing process with e-invoicing through the following steps:
- Firstly, compile the invoice data maintained in MS Excel or JSON format from your business unit. If you manage multiple businesses, a separate e-invoicing process will have to be set up for each business unit.
- Once the data is compiled, the sales register and supply are automatically uploaded in GSTR1. This activity is completed within 10 days at the end of the month, to avoid data errors or delays.
- Next, the inward purchase receipts are downloaded as DRAFT GSTR2. The system generates these based on the GSTR1 filled by the suppliers.
- Then, the DRAFT GSTR2 is cross-referenced with purchase records maintained in the business accounts to generate the final GSTR2.
- GSTR2 is then uploaded to the GSTN, and together with GSTR1, it generates GSTR3.
Benefits of E-Invoicing
While automated GST filing is an unparalleled benefit of E-invoicing, the practice offers several other benefits for businesses adopting e-invoicing. These are:
- Better data reconciliation and reduction of data entry and mismatch errors under GST.
- Improved interoperability and machine readability of e-invoices generated on one software by another.
- Real time tracking of supplier invoices and improved accounts management.
- Ready availability of authentic input tax credit at a faster pace.
- Reduced probability and incidence of tax audits and surveys, since the transactional data is available in a genuine and transparent format.
- Reduced compliance burden through automation of the tax return filing process, and generation of the Part A of e-way bills.
- Better access to quality credit for MSMEs, as banking and financial institutions rate the businesses applying for loans on the basis of e-invoices.
- Easy tracking of invoices and reduction in fake or duplicate invoices.
In conclusion, e-invoicing makes tax filing and working capital management efficient, accurate and faster. Furthermore, for MSME business owners, e-invoices improve the accessibility to quality credit. Financial service providers like Kinara Capital offer specialised working capital loans and asset purchase loans to MSME businesses. The loan application process is expedited by Kinara capital if the applicants can submit e-invoices to validate business activity.
Thus, adopting e-invoicing for your business shouldn’t be an option, but a wise decision to support growth and profitability.
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