By Anand Ramachandran, CFO, TechProcess Payment Services, Ingenico Group
Exactly a year ago, post-independence India’s most ambitious and disruptive economic measure, demonetisation, was switched on. It’s also four months into the launch of the country’s most ambitious tax reform: the goods and services tax (GST).
Around 10 million businesses have registered on the GST Network (GSTN), of which 7.2 million are existing taxpayers and another 2.8 million new registrants. More than the tax compliance part, the way GST is being implemented is already changing the practices of most Indian businesses, especially those of small and medium enterprises (SMEs). Yes, there are teething troubles, both anticipated and unanticipated. However, it provides a huge opportunity for business to accelerate digitisation.
Till now, one of the most common excuses of Indian businesses to not adopt digitisation has been the ‘ecosystem’, which was largely manual. The earlier system of ‘black’ and ‘white’ books also compounded the problem. So, there was excessive reliance on manual processes and ‘bill books’.
Only paper invoices were acceptable, they had to physically delivered, would travel all the way up and down the financial supply chain through layers of approval, and then finally get released for payment. Add to this cash-flow issues, on-average days salesoutstanding (DSO) ranging from 45 to 90 days. With margins already squeezed, this delay can choke the working capital of many SMEs, many of which tolerated the system as it provided the flexibility to make book ‘adjustments’ to conceal taxable income.
With GST, you have a system where there is no information asymmetry between buyer, seller and the tax authorities. The seller’s entire sales register, by invoice, must be uploaded on the GSTN. Then, the buyer’s entirepurchase register, by invoice, must be uploaded. Next, an invoice-level matching is enforced by making the availing of input credit conditional upon invoice matching.
This is like GoI getting an insideout view of your purchase and sales at a detailed level. And given that each GST number is linked to an income-tax Permanent Account Number, there is no escaping tax. So, one break in the GST chain can result in breakages and tax losses down the line. If SMEs continue with the old manual system, there is no way they will have a real-time view of the status of these invoices. They will then be exposed to the risk of waiting for invoicesto match. If they don’t match, then someone stands to lose the input credit.
And it’s not just invoice matching. The Harmonised System of Nomenclature (HSN) of the seller’s invoice has to match with the HSN of the buyer’s purchase register.
A second problem is matching payments with invoices. Since the seller has to pay GST on his entire sales output even before recovering from the buyer, his cash flow is stuck till he collects his dues. Also, if buyer makes payments, he has to match it against specific invoices.
e-Invoicing — involving seller and buyer exchanging invoice detail data, like itemised breakup, HSN or Services Accounting Code (SAC) codes, base rates, tax applied and shipping details — is one solution that SMEs can adopt to avoid this situation. This is, of course, easier said than done, as buyers and sellers may have different accounting or billing software systems, and different data points may not necessarily talk to each other. The GST system has made this easier by using HSN codes and SAC.
In fact, large corporates that are typically customers of smaller SMEs also stand to benefit from having their suppliers present them an e-invoice, an actionable document with an embedded payment link. The buyer can be presented with a host of electronic payment options making the entire process of ship-to-cash digital. Which is why more than demonetisation, it is GST that will push India towards a less-cash economy.
This article was previously published on Economic Times.