The Small And The Vulnerable
Beginning on 1 August even micro, small and medium enterprises (MSMEs) need to begin the process of e-invoicing for paying Goods and Services Tax (GST). The lowering of the compliance threshold will bring many more firms within the e-invoicing regime for the first time. It is estimated that almost 30 per cent of MSMEs fall within the Rs 5 - Rs 10 crore annual turnover bracket.
For these companies, details of every invoice must be submitted to the GST portal so that information may be shared in real-time with the GST system. "Larger SMEs with established technological capabilities might adapt more smoothly, whereas smaller ones could face initial challenges in adopting the necessary e-invoicing systems. The degree of impact will depend on how prepared SMEs are for this transition," points out Sanjay Kaushik, Managing Director (MD), Netrika Consulting.
The turnover threshold for mandatory e-invoicing has been progressively brought down from an annual turnover of above Rs 500 crore to Rs 10 crore and effective 1 August this year, Rs 5 crore, thus bringing MSMEs within its ambit. The measure aims to simultaneously boost GST collections and improve tax compliance. The phased implementation of the process was intended to allow industry and businesses and particularly SMEs (small and medium enterprises), time to prepare for the process.
A report by Global Alliance for Mass Entrepreneurship (GAME) with Dun & Bradstreet and Omidyar Network India revealed that an estimated 5.9 per cent of the gross value added (GVA) in the Indian economy i.e. Rs 10.7 lakh crore is locked up in delayed payments from buyers to MSME suppliers. So, mandatory e-invoicing may solve the perennial problem of funds stuck in the pipeline for small and medium businesses.
At the same time, it will also necessitate that MSMEs have the technology and the wherewithal to implement the process. Several small businesses in India are concerned that initial set-up costs may act as a hurdle for them as implementing e-invoicing systems and processes require an investment in technology, software and training. The industry response to this progressive digitisation of tax paying facilities was, therefore, somewhat mixed as we took stock of the situation on the ground.
Experts told BW Businessworld that the reduction in the compliance threshold will encompass more businesses within the ambit of mandatory e-invoicing, which is the desired goal. However, it will also increase costs for many businesses with aggregate turnovers exceeding Rs 5 crore, including many mid-sized enterprises and expanding small businesses.
"While e-invoicing offers numerous benefits, there are also challenges associated with its implementation. It can require a significant initial investment in software and training. For smaller businesses, these costs may be a barrier to adoption. E-invoicing systems are susceptible to cybersecurity threats, such as data breaches. Businesses must therefore implement robust security measures to protect sensitive financial information," says Srivatsan Sridhar, Founder and Chief Executive Officer (CEO), Skydo, a cross-border payments platform.
Cyber Security
Implementing e-invoicing, moreover, involves the transmission and storage of sensitive financial data, which can be susceptible to cyber threats and hacking attempts. According to NordLocker, a cybersecurity firm, India is among the top nations hit by ransomware attacks with more than half those targeted being small businesses. Small and medium enterprises with an employee base of 500 are at the highest risk of ransomware attacks and were the target of 54 per cent of all the attacks in India between January 2020 and July 2022."
“The MSMEs are very weak in accounting and technology. So understanding and complying with e-invoicing is going to be a major challenge for them. All MSMEs will be expected to have access to a computer or have access to an accountant to do this compliance. These are additional costs on an already stressed MSME sector," says Raja Debnath, Managing Director, Veefin Solutions, a digital supply chain finance company.
Industry leaders expect e-invoicing to streamline invoicing procedures, improve accuracy and reduce manual errors. However, not adapting well to it could lead to disruptions in operations and potential penalties, but now SMEs (cash-strapped or not) do not have much choice and need to comply.
Crying for Help
Cumulatively, micro, small and medium businesses now account for 27 per cent of India’s gross domestic product (GDP), which has earned them the epithet of the “backbone of the Indian economy”. They, therefore, look to the government now to come to their aid. Industry veterans say businesses, government bodies and technology providers should collaborate to tackle the challenges MSMEs face in e-invoicing.
"Addressing the challenges arising from the mandatory GST e-invoicing for Indian SMEs requires a multifaceted approach by the government. Streamlining the e-invoice infrastructure to ensure scalability, robustness and compatibility with diverse business systems is pivotal. Regular audits and updates to address potential glitches and security concerns are crucial for sustained effectiveness," explains Kaushik.
Industry leaders also suggest regular assessments, quick issue resolution and flexible adjustments to refine the e-invoice infrastructure and make the most of its potential to simplify tax compliance in India's diverse business environment.
Says Sridhar, "Businesses can consult with their tax advisors or engage with e-invoicing solution providers to assist with implementation and compliance. With proper transition planning, robust security measures, and effective communication, e-invoicing will bring efficiency and accuracy in tax reporting besides helping reduce disputes and seamless flow of input tax credit to the recipient business."
Debnath says that the government should prioritise incentives including referral schemes for MSMEs to bring awareness of e-invoicing within their community and bring them on board. He also suggests widespread awareness campaigns in vernacular languages to demystify the e-invoicing process and benefits. Who is listening?
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