goods and service tax

The Impact of Invoice Management System on GST Compliance for Businesses

The Role of Invoice Management System (IMS) in Business under GST

Importance of Invoices in Business

Invoices serve as the pulse of a business, essential for maintaining financial health. Commonly recognized as the lifeblood of financial transactions, they facilitate crucial business operations. With the implementation of Goods and Services Tax (GST), the GST department aims to monitor all B2B invoices for both incoming and outgoing supplies, including debit and credit notes.

To streamline this process, the GST department has introduced an invoice reference number (E-Invoice) and an e-way bill. The goal is to address and resolve queries related to input tax credits, credit notes, debit notes, and outward supplies at the supplier and recipient levels, ultimately reducing input tax credit litigation in the future.

However, these measures may lead to an increase in the number of litigation notices, adding to the workload and automation costs. Businesses will need time and manpower to regularly verify amendments and rejections on the portal while following up with respective suppliers and recipients.

Introduction of the Invoice Management System (IMS)

To tackle these challenges, the GST department has launched the Invoice Management System (IMS) effective from October 1, 2024. This new feature within the GST portal aims to enhance invoice management between suppliers and recipients. Key functionalities of IMS include the ability for recipients to accept, reject, or keep invoices pending.

Key Features of IMS:

  • Real-time Invoice Visibility: Once a supplier saves an invoice in GSTR-1, it appears in the recipient’s IMS dashboard.
  • Recipient Actions: The recipient can:
    • Accept:
      • GSTR 2B Treatment: Automatically flows to the 'ITC Available' section.
      • GSTR 3B Treatment: Auto-populates as eligible input tax credit.
    • Reject:
      • GSTR 2B Treatment: Flows to 'ITC Rejected' in GSTR 2B.
      • GSTR 3B Treatment: Will not auto-populate.
    • Keep Pending:
      • GSTR 2B Treatment: Remains in IMS and is not included in GSTR 2B preparation.
      • Must be addressed (accepted or rejected) within the timeframe outlined in Section 16(4) of the Central GST Act.
    • No Action Taken: Considered as automatically accepted.
      • GSTR 2B: Deemed as accepted.
      • GSTR 3B: Auto-populates as eligible input tax credit.
  • Record Management: Accepted, deemed accepted, or rejected records will be removed from the IMS dashboard after GSTR 3B filing. Pending records will remain and can be actioned in future months.

Specific Transaction Treatments

The GST Network (GSTN) has delineated the treatment of certain specific transactions within IMS, including:

  1. Invoice Amendments: If a supplier alters an invoice before GSTR 1 filing, the modified invoice will replace the original in IMS, regardless of the recipient’s actions on the original invoice.

  2. GSTR 1A Amendments: An amended invoice reported in GSTR 1A will flow to IMS; the corresponding input tax credit will reflect in the recipient’s next month’s GSTR 2B.

  3. Exclusions from IMS: Certain transactions will not be included in IMS, such as:

    • Inward reverse charge supplies reported in Table 4B of IFF.
    • Supplies where the recipient is ineligible to claim input tax credit due to restrictions specified in Section 16(4) or Place of Supply rules.

  4. Action Requirements:

    • If original and amended transactions span different GSTR 2B periods, action must be taken on the original record prior to amending the record.
    • If both records are within the same GSTR 2B period, only the amended record will be considered for input tax credit.

Challenges in GST Compliance

Working Capital Blockages

Businesses may encounter several challenges under the new system, affecting working capital:

  • Credit Note Rejections: If a recipient rejects a credit note after filing GSTR 3B, the corresponding liability will be added to the supplier’s GSTR 3B for the subsequent period, accumulating interest.
  • Tax Invoices and Stock Issues: If a tax invoice is rejected post-GSTR 3B filing, supplier liabilities remain unchanged.
  • Incomplete Actions on Invoices: Suppliers may inadvertently raise tax invoices for items not delivered, leading to increased liability upon rejection of credit notes.
  • Automation Costs: New regulations require businesses to continuously invest in automation, leading to increased operational costs.
  • Employee Costs: Increased manpower is necessary to regularly check rejections and make the necessary follow-ups.

Stock Reconciliation Difficulties

Reconciliation poses another challenge. Rejected credit notes imply that the stock was fully received, while credit notes indicate short stock. Without careful tracking and follow-up, discrepancies may arise, complicating stock reconciliation processes.

Frequent Litigation and Notices

Inconsistencies between GSTR 1 and GSTR 3B due to rejections necessitate detailed reconciliation and the maintenance of supporting documentation. Regular audits, integration of finance and accounting systems with IMS, e-invoices, e-way bills, and GST filings will be essential to minimize tax disputes and litigation.

Conclusion

The introduction of the Invoice Management System stands to revolutionize the GST compliance landscape by providing an organized approach to invoice handling. However, businesses must navigate the challenges presented, including litigation, reconciliation, and maintaining working capital. The need for thorough monitoring and effective communication with vendors remains paramount to successfully adapt to this evolving GST environment.