Digitization in accounts payable process: How it will help in ITC claim

Digitization in accounts payable process How it will help in ITC claim

Considering how businesses today deal in a dynamic and competitive market, it becomes essential for businesses to integrate technology into their organizational functions to keep up with the changing times. Business processes have taken a virtual turnaround from traditional paper methods to digital payment solutions. Especially since the pandemic has made going digital vital for every business in the current market scenario.

In this blog, we aim to cover the digitization of one of the key functions of organizations, i.e., Accounts Payable.

How does a Digitized Accounts Payable Process Work?

In an automated accounts payable process, the invoice is first submitted to an invoicing software or platform which allows the buyer to capture the platform data. This invoice is then processed and approved by the software and payment is processed and completed to the supplier within a fixed number of days. Such an automation process reduces cost, saves time and improves overall business efficiency. It also helps pick the least cost alternative, considering various payment schemes and discounts applicable in each scenario.

In case of advanced automation with Artificial Intelligence (AI) assisted systems, invoices can be reviewed and processed on the back end to identify and flag any suspicious patterns with the help of data checks and controls. These could indicate fraud, errors, policy violations, or misutilization of funds. Such tools and controls relieve the burden of routine check compliance and enable the resources to focus on the judgement-based core business areas.

A fully digital accounts payable process is not limited to certain tasks like billing or invoicing. It also covers the digitization of communication among various departments of the organization, with suppliers, vendors, customers and other team members. Thus, the need for any printed receipts, invoices, bills etc. is fully eliminated due to creation of a virtual database. This is in line with the number of remote working policies adopted in various organizations after the start of the pandemic as well as mandatory e-Invoicing under GST.

Benefits of Digitization in Accounts Payable Process

  • Resource optimization
  • Enables businesses to capture early payment discount incentives
  • Improved insights can be gained through automated processes
  • Accuracy of data
  • Systematic and streamlined workflows
  • Reduces regulatory risks

Digitized Accounts Payable and GST

Enterprise Resource Planning (ERP) systems closely tie with Accounts Payable processes. Such a system manages routine and day-to-day business activities such as procurement, accounting, supply chain operations and other compliance related matters. Records of all of the above need to be maintained under the GST regime.

Integration of Accounts Payable technology with ERP Systems is vital for developing digital businesses. With the help of such automation, the process of managing, capturing and organizing invoice data can be fully automated and completed in a time-saving and cost-effective manner. Along with it, the streamlined processes automate payment and procurement processes as well. Thus, the business operations become more transparent and data validation is also ensured. Reporting the same under GST becomes a simple compliance as the automated accounts payable processes have already been integrated into the ERP systems.

Need for Digitized Accounts Payable Processes for ITC Reconciliation

Input Tax Reconciliation under GST involves matching the accounting Purchase Register and the GSTR-2B, which is auto-populated on the basis of GSTR 1 filing by the respective vendors of the business. ITC Reconciliation has become crucial to ensure timely and accurate claim of the input tax credit as well as for the accuracy of various GST returns and related compliance. With the recent amendments in place in Rule 36(4) and the introduction of Section 16(2)(aa), the importance of ITC reconciliations has increased significantly. Starting 1 January 2022, businesses can claim ITC only to the extent visible in GSTR-2B. Therefore, organizations need to prudently handle their vendor payments in order to claim maximum ITC permissible by law.

ITC reconciliation manually is a complex and time-consuming task which does not guarantee full accuracy. This establishes the need for a proper process and system for executing the reconciliation effectively and efficiently.

How Digitized Accounts Payable Processes impact ITC Claim & Vendor Payments

Various technology solutions and software are now available which integrate the accounting system to schedule auto-reconciliation of ITC data and sync vendor payment decisions accordingly. Auto-reconciliations of ITC data run in the background and in case of any missing data or invoices, an automated communication is sent to the vendor. Additionally, vendor payments are put on hold.

The automated solutions integrated with ERP majorly gives the following flags in cases where ITC is not reflected in GSTR-2B, for vendor payment:

  • Full Payment – An option to pay the vendor in full (base amount plus tax amount not reflected as ITC)
  • Part Payment – Any amount to be paid in part, either as previously agreed or on the basis of vendor communication.
  • Payment of base amount & retaining the tax amount till the ITC gets reflected in GSTR-2B.

However, such decisions need to be taken on basis of vendor relations and dominance of the party. This means that in case the vendor relations are old and trusted, or the vendor is a monopolist in the market, the companies may go ahead and make full payment. These customisations are also available in the solutions.
Nonetheless, an automated accounts payable process may still depend on human input to make judgement-based decisions. Another point to consider is that since the payment is automatically processed and completed within a set number of days from the date of entry of the invoice, the Accounts Payable teams may book invoices late intentionally so as to delay vendor payments. This overrides the system controls.

Digital transformation has already impacted many areas of business and development such as asset management, finance, HR, marketing, compliance work, etc. Digitization of Accounts Payable Processes will not only make businesses more efficient but will also help streamline the transaction process. Along with cost efficiency and elimination of human errors, digitization of account payable also helps in making the compliance simpler.

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