How to implement e-invoicing: What the Reduced Threshold of Rs. 5 crores Means for Your Business
May 20, 2023
A government notification from 10th May 2023 is going to impact many small businesses all over the country. The Central Board of Indirect Taxes and Customs (CBIC) has recently announced a significant update to the e-invoicing regulations through Notification No.10/2023 - Central tax. They reduced the threshold to INR 5 crores with effect from 1st August, 2023. Those who understand what e-invoicing is will know that if your business had an aggregate turnover of Rs. 5 crores or more in previous year, you’re now supposed to issue an e-invoice.
Let’s understand these new rules and the implications of e-invoice applicability regulation. We will delve into the changes, examine the reasons behind the government's implementation of e-invoicing, and explore the benefits and challenges you may encounter. Additionally, we will provide a recommended Standard Operating Procedure (SOP) to help you navigate the compliance process effectively.
Now, let's dive into the details of the changes and explore the reasons behind the government's push for e-invoicing.
Overview of the Changes
This table provides an overview of the previous compliance thresholds and their respective effective dates. It helps visualize the progressive reduction in the compliance threshold leading to the upcoming change on 1st August 2023.
|Compliance Threshold||E-invoice Applicability Date|
|INR 500 Crore||1st October 2020 onwards|
|INR 100 Crore||1st January 2021 onwards|
|INR 50 Crore||1st April 2021 onwards|
|INR 20 Crore||1st April 2022 onwards|
|INR 10 Crore||1st October 2022 onwards|
|INR 5 Crore||1st August 2023 onwards|
The progressive reduction in the compliance threshold highlights the government's commitment to expanding the adoption of e-invoicing across businesses of varying sizes.
Consider a manufacturing company with an aggregate turnover of INR 6 crores in the preceding financial year. Under the previous threshold of INR 10 crores, this company would not have been mandatorily required to generate e-invoices. However, with the new threshold of INR 5 crores coming into effect from 1st August 2023, this company will now fall within the ambit of e-invoicing compliance.
Who is affected by the change?
The reduced compliance threshold for e-invoicing will impact many businesses in India. To understand if it impacts you, it's important to understand the term "aggregate turnover." Aggregate turnover refers to the total value of all taxable supplies (including exports) and exempt supplies made by a taxpayer. It includes both goods and services provided by the business.
For example, consider a SaaS company that has 30% global clients. If its total sales in the last financial year are above 5 scores (including zero-rated and exempt supplies), it will be subject to the e-invoicing requirement from 1st August 2023.
The reduction in the compliance threshold will result in a broader scope of businesses being impacted by e-invoicing. It will encompass many businesses with aggregate turnovers exceeding INR 5 crores, including many mid-sized enterprises and expanding small businesses. Understanding the e-invoice applicability is crucial for these businesses.
However, it's important to note that there are certain specified exemptions from the e-invoicing requirement. These exemptions are designed to provide relief to specific categories of businesses. It's recommended to consult with a tax professional or refer to the relevant government notifications for specific details on exemptions and e-invoice applicability.
Benefits of e-invoicing for your businesses
- Seamless accounting: E-invoicing streamlines the invoicing and accounting processes by automating invoice generation, validation, and transmission. Implementing an e-invoice system can streamline your invoicing process and bring numerous benefits to your business. It reduces manual data entry, minimizes errors, and improves the overall accuracy of financial records.
- Faster filing of GST returns: Integration with the Goods and Services Tax Network (GSTN) simplifies and accelerates GST returns filing. The automation and accuracy provided by e-invoicing enable businesses to reconcile their invoices more efficiently and submit GST returns without delays.
- Enhanced cash flow management: E-invoicing enables faster invoice processing, delivery, and payment, leading to improved cash flow management. You can receive payments more promptly, reducing the time it takes to convert invoices into cash.
- Reduced errors and disputes: Minimizing manual data entry and the risk of human errors/ discrepancies in invoices. The automated validation and matching processes help identify and rectify errors upfront, reducing the likelihood of invoice disputes with customers or suppliers. This leads to smoother and improved relationships with trading partners.
- Improved productivity and efficiency: You can now automate repetitive tasks associated with manual invoice processing, such as data entry and document management. This frees up resources, allowing employees to focus on other operations.
By leveraging the advantages of e-invoicing, you can streamline your invoicing processes, enhance financial management, and unlock potential benefits that contribute to your overall success and competitiveness.
Challenges and potential pitfalls of adopting e-invoicing:
- Initial implementation and training costs: Implementing e-invoicing may require businesses to invest in the initial setup, including software installation, customization, and employee training.
- Hiring new personnel: Some businesses might need to hire additional manpower or retrain existing resources. In many cases, consulting CAs also extend help for handling the operations of e-invoicing compliance. This could result in additional costs.
- Live invoicing: E-invoicing often requires invoices to be generated and reported in real-time or near real-time, with dates that match the actual supply of goods or services. Hence businesses relying on part-time accountants who come in once a week will be unable to keep up.
- Integration challenges: Integrating GST e-invoicing systems with existing business processes, accounting software like Zoho Books and ClearTax, and other systems can be daunting for businesses new to the digital world. They will require technical expertise or third-party assistance to ensure smooth integration.
Why is the government implementing this?
Despite these challenges, the government has concrete reasons to implement a lower threshold for e-invoicing to contribute to a stronger administration:
- Real-time buyer-seller matching: GST e-invoicing enables real-time validation and matching of invoices between buyers and sellers, reducing the chances of errors, duplication, and tax evasion. It helps ensure that both parties accurately report the details mentioned in the invoice.
- Reduction in tax evasion: It enhances transparency in business transactions, making it easier for tax authorities to identify discrepancies and potential tax evasion cases. This minimizes tax leakage and increases both compliance and revenue.
- Streamlined tax administration: E-invoicing system for more businesses will further simplify tax compliance and administration processes by automating invoice generation, reporting, and verification. This will reduce the burden of manual data entry, improve accuracy, and facilitate seamless integration with the Goods and Services Tax Network (GSTN).
- Elimination of mismatched records: The significant reduction between the supplier's and recipient's books facilitates smoother reconciliation of invoices, ensuring that the financial data reported by businesses aligns with their trading partners.
“With an intent to curb tax evasion and circulation of fake invoices to claim an input tax credit, the e-invoice system was introduced. With each passing year, the government is reducing the turnover limit for mandatory requirements. Though intent (of reducing the threshold to 5 crores) is good, this would hinder the ease of doing business for small registered dealers,” says Mumbai-based CA Harshil Shah.
Overall, the government's implementation of e-invoicing aims to enhance transparency, improve tax compliance, and streamline tax administration processes, resulting in a more efficient and effective tax system.
Recommended Standard Operating Procedure (SOP) for e-invoicing Compliance
Adopting a standardized approach is crucial for businesses to ensure smooth compliance with the new e-invoicing regulations. Here is a step-by-step guide for complying with the new e-invoicing regulations:
1. Assessing eligibility for e-invoicing:
- Determine if your aggregate turnover in the preceding financial year exceeds INR 5 crores.
- Evaluate if your business falls within any specified exemptions.
2. Selecting appropriate e-invoicing software:
- Research and evaluate different GST e-invoicing software options available in the market.
- Consider factors such as compatibility with your existing systems, features, user-friendliness, and affordability.
- Consult with software vendors, seek recommendations from trusted sources, and consider reviews and testimonials.
3. Implementation and integration of e-invoicing systems:
- Set up the chosen e-invoicing software and configure it to align with your business processes.
- Ensure seamless integration with your accounting and ERP systems, if applicable.
- Test the system thoroughly to identify and address any technical issues or glitches before going live.
4. Training employees and stakeholders:
- Conduct comprehensive training sessions to familiarize employees with the e-invoicing software and processes.
- Highlight the benefits and emphasize the importance of compliance.
- Provide hands-on training and support to ensure a smooth transition.
5. Monitoring and ensuring ongoing compliance:
- Establish regular monitoring and audit mechanisms to ensure compliance with e-invoicing regulations.
- Conduct periodic internal reviews to identify and address any deviations or non-compliance.
- Stay updated with any changes or updates to the e-invoicing regulations and adjust your processes accordingly.
By following the recommended Standard Operating Procedure (SOP) for e-invoicing compliance, businesses can effectively ensure smooth adoption and navigate the e-invoice applicability. It's crucial to tailor the approach to your business needs and seek professional guidance when necessary.
“I was initially hesitant about implementing e-invoicing for my business, but its positive impact is undeniable. It has streamlined our invoicing processes but also put pressure on real-time accounting, which is tough. With time, we’ll see the actual results of this new GST system.”
Remember, early adoption and proactive compliance can provide a competitive advantage, streamline operations, and enhance financial management in the long run.
Q. Is this applicable to B2C businesses?
No, e-invoicing regulations only apply to B2B (business-to-business) transactions. This means businesses selling goods or services to other businesses must comply with the e-invoicing requirements. B2C (business-to-consumer) businesses, which directly sell products or services to individual consumers, are not mandated to follow the GST e-invoicing regulations.
Q. How is "aggregate turnover" calculated?
Aggregate turnover refers to the total value of a business’s taxable supplies (goods and services) within a financial year. It includes the value of supplies made within the state, supplies made outside the state, exports, and exempt supplies. Aggregate turnover does not include the value of inward supplies on which the business is liable to pay tax on a reverse charge basis.
Q. Which businesses are exempt from the e-invoicing requirement?
In our conversation with CA Ravi Mamodiya, he mentioned, “Businesses that engage only in exempted goods and services like grains, flour and others are exempt from the e-invoicing requirement, irrespective of their turnover. However, even if they sell a single product that attracts GST and their aggregate turnover (total of exempt as well as taxable products) is over 5 crores, they are mandated to comply with the e-invoicing system.”
Q. What are the penalties for non-compliance?
The penalties for not generating an e-invoice is 100% of the tax due or Rs.10,000, whichever is higher, for every invoice.
Q. What are other consequences of non compliance of e invoicing?
- Goods in transit can be detained
- Holding up invoice payments/ITC claims may be denied to GST registered buyers.
- Affects e-way bill generation and causes delays
Q. How can my business transition to e-invoicing?
You need to follow the following steps:
- Select suitable e-invoicing software or service providers to generate and manage your e-invoices.
- Implement the chosen solution, train your employees, and establish a monitoring system to ensure ongoing compliance.
Q. What tools can I use for generating GST e-invoices?
Several tools are available for generating e-invoices, including free and paid options. Some commonly used tools for generating e-invoices are
- Online accounting software: Many platforms like Zoho Books offer built-in e-invoicing features that allow you to generate and send e-invoices directly from the software.
- E-invoicing service providers: Specialised service providers like Cleartax offer e-invoicing solutions, allowing you to create and manage e-invoices through their platforms.
- Government portal: The GST portal also provides an e-invoicing tool to generate and submit e-invoices according to regulatory requirements.
The implementation of e-invoicing regulations, as announced in Notification No.10/2023 - Central tax dated 10 May 2023, marks a significant milestone in the digital transformation of the invoicing process. Reducing the compliance threshold to INR 5 crores from 1st August 2023 expands the scope of businesses required to adopt e-invoicing. This change aims to enhance transparency, improve tax compliance, and streamline business administration processes.
E-invoicing brings numerous benefits to businesses, including seamless accounting, faster filing of GST returns, enhanced cash flow management, and reduced errors and disputes. While challenges are associated with adopting e-invoicing, such as initial implementation costs and integration complexities, proper planning and consultation with experts can help mitigate these challenges.
To comply with the new GST e-invoicing regulations, businesses should assess their eligibility, select appropriate e-invoicing software or service providers, integrate e-invoicing systems into their existing processes, train employees and stakeholders, and ensure ongoing compliance. Real-life case studies of businesses that have successfully adopted e-invoicing can serve as valuable examples and guidance for others.
It is important for businesses to stay updated with the latest e-invoicing regulations, seek professional advice when needed, and embrace digital transformation to unlock the potential benefits of e-invoicing. Businesses can streamline invoicing processes, improve financial management, and contribute to a more efficient and effective tax system.
Disclaimer: The information provided in this blog is for educational purposes only and should not be considered as professional or legal advice. It is recommended to consult with relevant experts and authorities for specific guidance tailored to your business requirements and compliance obligations.