Everything You Need to Know About the E-Invoicing System

Everything You Need to Know About the E-Invoicing System

Making India Digital, a young yet dominant campaign of the Government is focusing on empowering the country digitally and improving its online infrastructure. ‘Power to Empower’ as we motto for a Digital India, is being further pushed forth by the Indian Tax Authorities. 

With the roll-out of GST in mid-2017, Indian Indirect Taxes has undergone a complete revamp. Still in the process of constant development and updates, digitization will change the way transactions are being reported under GST. Looking into the near future, two initiatives through New Returns and E-invoicing are ready to be launched. Both the initiatives are set to be implemented on 1st April 2020, as re-assured in the Union Budget. 

Invoice is the primary document that evidences the existence and validity of a transaction. Assessments and scrutiny revolve around the documentary force. The credibility of a document that is approved by the Government is unmatched to any other manual system.

What is E-invoicing?

In April 2019, a committee was set up to evaluate the e-invoicing system for India, similar to what was prevalent in other global countries. After various discussions and proposals the 35th Council Meeting in June 2019, adopted the concept of e-invoicing. Between Sep and Dec 2019, e-invoicing formats and explanation documents had been issued into the public domain

Electronic invoicing or E-invoicing is a process wherein the invoice data is registered or submitted to the GSTN through a centralized government portal. The information submitted to this portal goes through validation checks by the Government and receives a unique number of serving authenticity.  This process is completely automated.

E-invoicing does not mean generating an invoice from GST or an external portal. Invoices will continue to be generated using the existing Accounting or ERP systems, in the same process which is being followed currently, to avoid any unnecessary restriction on the way business is being conducted. To convert a regular tax invoice to an e-invoice, only one additional step has been introduced by the Government wherein some specified information is uploaded, which is validated and returned with a digital signature.

In simple terms, E-invoicing refers to the capturing of invoice data through electronic means in a standardized manner by a central portal and issuing a validation signature to it. From the date of implementation, only an e-invoice will be considered as a valid invoice. Currently, only B2B transactions have been brought into the ambit for e-invoicing and that too in a phased manner. The table below indicates the timeline for taxpayers for whom e-invoicing is made applicable.

TURNOVER VOLUNTARY / TRIAL BASIS MANDATORY

More than INR 500 crores
(Will also have to include dynamic QR code for payments for B2C transactions)

01 Jan 2020

01 Apr 2020

More than INR 100 crores
(Less than INR 500 crores)

01 Feb 2020

01 Apr 2020

Less than INR 100 crores

01 Apr 2020

To be notified

At the outset, there are too many misconceptions floating in the market which has created unrest among taxpayers. The below facts about e-invoicing will debunk the ongoing myths and ease the understanding.

    • E-invoice will not be generated through the GST portal. The tax invoice will continue to be generated from the existing ERP system
    • E-invoicing is not applicable to all. E-invoicing is being implemented in a phased manner for specified turnover taxpayers and B2B transactions currently
    • The E-way bill will not be eliminated gradually. E-way bills will continue to be generated. Part A of an e-way bill to be auto-populated in draft format (not generated) through e-invoice data
    • A new software / ERP system will not be required for e-invoicing. No new software will be required. Existing software will have to be geared up to implement additional e-invoicing features.

* Will also have to include dynamic QR code for payments for B2C transactions

Rationale behind E-invoicing

Since the advent of GST, fake invoicing and tax evasion has been a critical cause of concern for the Government. E-invoicing aims to provide better taxpayer services by curtailing multiple reporting and smooth filing of new returns. Further, it will help in establishing an audit trail of B2B invoices which will allow system-level matching of credit. Lastly, e-invoicing will also allow interoperability of systems, standardization of data and reporting into a central system thereby clearing jurisdictional challenges.

Knowing the Terms

A new concept brings in new terminology and new features. To be able to understand or interact in an e-invoicing environment, it becomes fundamental to accustom ourselves to these terms. These terms are simply the features of an e-invoice. E-invoice Standard is the schema prescribed and notified by the GST Council. Today, each organization or business follows its own practice of invoicing. Since e-invoicing is complete automation driven compliance, it needs to be uniformly machine-readable. For instance, an invoice generated by the SAP system cannot be read by the Tally system and vice-versa. When millions of systems come to one platform to transmit data, the need for standardization becomes a necessity. This schema provides standardization of contents in a specified format. It contains mandatory and optional parameters of an e-invoice which sum up to over 120 fields. The wide range of fields caters to the peculiarity of different industries. This standard ensures the complete interoperability of systems and eliminates the need for manual data entry and transcription errors. 

  • Invoice Registration Portal (IRP) is the central portal that will be the liasoning point between a supplier and GSTN. From the supplier’s outlook, IRP will be responsible for receiving invoice data from the supplier, performing the validation checks (through GSTN) and sending the information back to the supplier with the digital signature. From the GSTN outlook, IRP will undertake a validation and deduplication check from the information stored in the Central Registry of the GSTN – for the purpose of authenticating invoice data. Subsequent to the validated e-invoice, such details are pushed onto the GST portal and e-way bill portal thereby prefilling the new return annexures and e-way bill (where applicable), respectively. To ensure the smooth running of the IRP, the government has notified ten IRPs that will balance the load and generate an IRN within a fraction of second, even for bulk transactions.
  • Invoice Reference Number (IRN) is a unique number that is generated by the IRP upon completing the validation. The parameters for generating an IRN are GSTIN of the supplier, Financial year, Document Type and Document number. Without an IRN, the e-invoice will be considered as invalid. Relevant to note that obtaining an IRN does not eliminate the requirement of an invoice number. IRN only indicates the validation by IRP.
  •  QR Code is a regular quick response code that stores specific invoice data. The IRP will generate a QR code in addition to the IRN. QR code contains seven other parameters of information. Said parameters are Supplier GSTIN, Recipient’s GSTIN, Supplier’s invoice number, Date of invoice, Invoice value (taxable and gross), Number of line items, HSN code of the main item (line item having highest taxable value), Unique IRN. QR code is an encrypted image carrying information that is machine-readable. The underlying information can be accessed only when a machine converts such language. This is done to ensure the security of sensitive data of an invoice. The QR code will be available in printable format, so that suppliers may print the same on their hard copy invoice. The advantage of having a QR code on an invoice is the possibility to verify and read underlying information through an offline app (not IRP) as well. This mainly helps tax officers checking invoices roadside where the internet may not be available all the time. 
  • The other key considerations of an e-invoice are its flexibility. It allows currency options, with the default being INR. It appears that there is no limit to the number of line items in an invoice. The e-invoice would carry the IRP’s digital signature. There is no restriction on printing an e-invoice, the same can be continued as a usual business process. However, a QR code ought to be present on the printed invoice.

Creating an E-invoice

  • Since it is clear that an invoice is to be generated from the existing accounting system. The first step is towards conforming to the e-invoice schema using the GSTN’s offline utility or third party application. The software should be capable of reading the prescribed language (JSON).
  • Uploading the invoice information onto the IRP with the required parameters. This may be done directly by accessing the IRP or by using GSPs or third party applications
  • The IRP performs de-duplication check through the central registry of the GSTN. Upon validation of the data received, IRP digitally signs and QR code to the invoice. In case of an invalid result, an error code is generated.
  • Basis the above, IRP returns the digitally signed invoice containing QR code which is capable of being printed on the invoice. In case of an error, the error code is sent back to the generator. Such erred invoice data does not get stored in the central registry.
  • At the same time of communicating with the generator, the signed e-invoice is sent to the GST portal and e-way bill portal. This signed e-invoice received by the GST portal gets stored in the central registry (forming a database for subsequent deduplication checks). The GST portal starts updating ANX-1 of the supplier and ANX-2 of the buyer basis the e-invoice data collected. Similarly, where applicable, the e-way bill form also gets populated basis such data.

What needs to be done by an e-invoice generator?

  • Reconfigure the ERP system as per the e-invoicing standard issued through the software provider or using the other forms of creating an e-invoice (for small business)
  • Ensure security and sensitivity of data flowing
  • The correctness of information flowing into the GSTN and appropriate recording of the received information into the accounting system

Modes of creating an e-invoice

The Government enlists five modes of creation of an e-invoice. These include web-based, API based, mobile app-based, an offline tool based and GSP based. The multiple modes of creation of an e-invoice are based on the scale of operations of a business and the adaptability of the ERP system.

New compliance will raise transition challenges at the beginning. These challenges are mainly on account of operations and lack of clarity of new compliance. The only solution to resolving such challenges is being prepared with system changes. We have listed the challenges that a business may face:

  • Bulk Reporting: IRN can be generated only one at a time. The IRP is designed in such a way that only one invoice will be processed at a time regardless of the quantum of upload. Given that the applicability is for large taxpayer groups that issue bulk invoices daily may face a challenge in generating IRN through the portal. Measures to mitigate the downtime of IRP to avoid business impact is crucial.
  • Multiple reconciliations: given the quantum of compliance prevalent today, multiple reconciliations need to be made – Reconciling books of accounts with e-invoice generated, Reconciliation with auto-populated annexures under new returns, reconciling during an audit, etc.
  • Multiple systems: taxpayers are already accessing their accounting system, GSTN, government tools, e-way bill portal with an additional IRP now. It is recommended to align all the systems into one integrated system to ease data access and retrieval. 

While e-invoicing has some teething challenges, it comes with a wide range of opportunities. The benefits are for the taxpayers and their business. These include:

  • One time reporting: the event of generating an e-invoice is the time of reporting data to the GSTN. This information plugged into the system gets transferred to the GSTN to form returns and E-way Bill portal to prefill e-way bills. Currently, taxpayers are to report invoice level information at the time of GSTR-1 and again, at the time of the creation of the e-way bill. The format of each form and the required information varies only slightly but involves repetition of effort. Especially, for a business that involves frequent movement of goods; manual effort and attention need to be allocated specifically to each compliance and each transaction. All of this will be require one third the effort.
  • Input Tax Credit: Claiming valid input tax credit in their returns, is an all-time concern for the taxpayers. The concern arises right from collating invoices from a supplier, reviewing the eligibility of invoice in claiming credit and then actually claiming the credit. 
  • ITC Reconciliation: Since GSTR-2 has been suspended, the reconciliation with Form GSTR-2A becomes crucial to claim any ITC. The possibility of overlooking available ITC or remaining unclaimed by the taxpayers is substantially high. The e-invoices uploaded will automatically be reconciled allowing the input tax credit to such extent. Further, reconciliation will require intervention only where a user modifies or rejects the credit suo-moto. Thus, e-invoicing will resolve and plug a major gap in the data reconciliation under GST to reduce mismatch errors.
  • Assessments: being a major source of evidence. Any form of the assessment conducted by the authorities requires major documentation review, whether on the input or output side of the business. Since the invoices are already available with the Tax Department for their verification. The scope of the review to that extent will be trimmed and will allow quicker disposal of assessments. 
  • Accuracy and efficiency: e-invoicing curtails the scope of transcription errors due to the elimination of manual entry. Since all processes are online, real-time tracking of invoices is possible. E-invoices created on one software can be read by another, allowing interoperability makes data access rather easy. Larger companies having a business that are multinational or pan India are capable of viewing invoices that are more standardized. 
  • Storage benefit: e-invoicing is an attempt to make the invoicing process paperless. Printing invoices is an option available to the taxpayers. However, avoiding this step is possible as the suppliers, buyers and the tax authorities will have this information readily available. Eliminating the circulation of manual invoices will make the transactions more eco-friendly and reduce the burden of storage. Today, huge costs and resources are allocated to storage spaces. 

What changes from the existing methods to e-invoicing from a business perspective is described as below.

Existing Scenario 

In the existing GST compliance world, the process was accounting driven and scattered. Mainly referring to the R2R function of recording information and reporting it onto the GSTN – the compliance process would mean to convert accounting data into the reportable data using the GSTN website, utility tools, GSPs or APIs depending on upon the scale of operations. 

In this process, the flow of information is unilateral – from the ERP system to the GSTN. The aim is to put the invoice level information onto the GSTN and be compliant. Subsequent validations will be through assessment procedures. 

Transitional Scenario 

The requirement to adopt new form compliance from the existing requires transition and adaptation. Since the change is electronic, the stakeholder for change is the ERP system. Adaptation of the ERP system does not mean change in the manner of usage or change in the interface of the ERP system or changing the ERP system itself. The only amendment to be made is towards enabling the software to communicate with the IRP, i.e. send and receive information. 

Further, the modification in the system will be done by the ERP service provider (whether commercial or customized). The responsibility of a taxpayer will be to ensure the modified system works effectively and is compliant with the Government requirements. At the same time for taxpayers using GSPs or APIs shall integrate these applications with the new requirement.

Proposed Scenario 

Unlike the current process, the interaction between the ERP and GSTN is two way. While the invoicing data is being uploaded onto the IRP, a digitally signed e-invoice is also being received from the IRP which will be recorded in the ERP system. Since e-invoicing is applicable to large taxpayers, the flow of data is through the ERP system, GSPs via APIs, IRP and to the GSTN and back to IRP to GSPs via APIs and to the ERP. This flow of information opens up six spots for data leaks or the requirement of data security. 

What can be examined here is that multiple systems or portals will make compliance challenging. Integrating all portals through one system is the key. Integrating all systems together eliminates scope for error and reduces the effort in data entry and data tracking. In our understanding, the only options available to the taxpayers are through SFTP and Enriched APIs that will not only keep the data encrypted but allow transport of data to and fro all the systems in the fastest way. 

Keeping in mind the SMEs’s the government has launched eight free accounting software that will allow the taxpayers to use this software and generate the e-invoice (when made applicable) and be compliant without the need of going through robust system integration processes.

An Application Programming Interface (API) is a software intermediary that allows two applications to communicate with each other. For the purpose of e-invoicing, APIs will be able to communicate between the ERP system and IRP. For the same, the Government has released API specifications with sandbox testing and made a separate portal for such developers to ensure that our APIs are in line with the GSTN’s requirement. Six APIs will be involved in the e-invoicing system – Authentication (POST), GENERATE IRN (POST), Cancel IRN (POST), Get e-invoice by IRN (GET), Get GSTIN details (GET), Health Check API (GET). 

The API approach towards e-invoicing is given below

API approach towards e-invoicing

An Application Programming Interface (API) is a software intermediary that allows two applications to communicate with each other. For the purpose of e-invoicing, APIs will be able to communicate between the ERP system and IRP. For the same, the Government has released API specifications with sandbox testing and made a separate portal for such developers to ensure that our APIs are in line with the GSTN’s requirement. Six APIs will be involved in the e-invoicing system – Authentication (POST), GENERATE IRN (POST), Cancel IRN (POST), Get e-invoice by IRN (GET), Get GSTIN details (GET), Health Check API (GET). 

The API approach towards e-invoicing is given below. approach is towards the SFTP

Taxpayers having huge transactional data can upload the Data and schema related fields into e-Invoicing Application. The extractors available will be able to fetch the necessary field level details from the existing heterogeneous data sources. This data is then pushed to the Data Sync/transfer utility. Here the data gets validated. In case there are any errors, these errors are thrown back to the Users which need to be rectified in their ERP Systems. 

The validated data is pushed on to the ASP Portal post which the same gets uploaded on to the IRP. Similar to the above, JSON gets uploaded to the IRP Portal, IRN is generated, validation checks, pre-filling returns, and e-way bills, etc. are undertaken by the IRP. This signed QR code is sent back to the GSP. These SFTP based and API based integrations are possible by Z-programs as well as Testing whiz connector for multiple ERPs and Databases like SAP, MS SQL, MY SQL, Oracle.

Just when India witnessed uploading 8 billion invoices under GST, the global market forecast is to encompass 550 billion invoices annually with only 55 billion invoices being paperless. Thus, the scope of a further increase in e-invoicing is large. Over 60 countries have already incorporated e-invoicing in their regulations. Of the globe, Latin America, South Korea, and a few European countries have successfully implemented e-invoicing with Asia being the younger member of the group.  

Worthy to notice that the leading nations have also implemented B2C transactions owing to the experience and sophistication of the system. Italy has proven itself in the e-invoicing world. This European nation has been in the process of implementing e-invoicing since 2014 in a staggered manner and has successfully launched in early 2019 for all transactions. It is India’s turn to gear up for a smooth implementation. 

New compliance will raise transition challenges at the beginning. These challenges are mainly on account of operations and lack of clarity of new compliance. The only solution to resolving such challenges is being prepared with system changes. We have listed the challenges that a business may face:

  • Bulk Reporting: IRN can be generated only one at a time. The IRP is designed in such a way that only one invoice will be processed at a time regardless of the quantum of upload. Given that the applicability is for large taxpayer groups that issue bulk invoices daily may face a challenge in generating IRN through the portal. Measures to mitigate the downtime of IRP to avoid business impact is crucial.
  • Multiple reconciliations: given the quantum of compliance prevalent today, multiple reconciliations need to be made - Reconciling books of accounts with e-invoice generated, Reconciliation with auto-populated annexures under new returns, reconciling during an audit, etc.
  • Multiple systems: taxpayers are already accessing their accounting system, GSTN, government tools, e-way bill portal with an additional IRP now. It is recommended to align all the systems into one integrated system to ease data access and retrieval. 

While e-invoicing has some teething challenges, it comes with a wide range of opportunities. The benefits are for the taxpayers and their business. These include:

  • One time reporting: the event of generating an e-invoice is the time of reporting data to the GSTN. This information plugged into the system gets transferred to the GSTN to form returns and E-way Bill portal to prefill e-way bills. Currently, taxpayers are to report invoice level information at the time of GSTR-1 and again, at the time of the creation of the e-way bill. The format of each form and the required information varies only slightly but involves repetition of effort. Especially, for a business that involves frequent movement of goods; manual effort and attention need to be allocated specifically to each compliance and each transaction. All of this will be require one third the effort.
  • Input Tax Credit: Claiming valid input tax credit in their returns, is an all-time concern for the taxpayers. The concern arises right from collating invoices from a supplier, reviewing the eligibility of invoice in claiming credit and then actually claiming the credit. 
  • ITC Reconciliation: Since GSTR-2 has been suspended, the reconciliation with Form GSTR-2A becomes crucial to claim any ITC. The possibility of overlooking available ITC or remaining unclaimed by the taxpayers is substantially high. The e-invoices uploaded will automatically be reconciled allowing the input tax credit to such extent. Further, reconciliation will require intervention only where a user modifies or rejects the credit suo-moto. Thus, e-invoicing will resolve and plug a major gap in the data reconciliation under GST to reduce mismatch errors.
  • Assessments: being a major source of evidence. Any form of the assessment conducted by the authorities requires major documentation review, whether on the input or output side of the business. Since the invoices are already available with the Tax Department for their verification. The scope of the review to that extent will be trimmed and will allow quicker disposal of assessments. 
  • Accuracy and efficiency: e-invoicing curtails the scope of transcription errors due to the elimination of manual entry. Since all processes are online, real-time tracking of invoices is possible. E-invoices created on one software can be read by another, allowing interoperability makes data access rather easy. Larger companies having a business that are multinational or pan India are capable of viewing invoices that are more standardized. 
  • Storage benefit: e-invoicing is an attempt to make the invoicing process paperless. Printing invoices is an option available to the taxpayers. However, avoiding this step is possible as the suppliers, buyers and the tax authorities will have this information readily available. Eliminating the circulation of manual invoices will make the transactions more eco-friendly and reduce the burden of storage. Today, huge costs and resources are allocated to storage spaces. 

What changes from the existing methods to e-invoicing from a business perspective is described as below.

Existing Scenario 

In the existing GST compliance world, the process was accounting driven and scattered. Mainly referring to the R2R function of recording information and reporting it onto the GSTN – the compliance process would mean to convert accounting data into the reportable data using the GSTN website, utility tools, GSPs or APIs depending on upon the scale of operations. 

In this process, the flow of information is unilateral – from the ERP system to the GSTN. The aim is to put the invoice level information onto the GSTN and be compliant. Subsequent validations will be through assessment procedures. 

Transitional Scenario 

The requirement to adopt new form compliance from the existing requires transition and adaptation. Since the change is electronic, the stakeholder for change is the ERP system. Adaptation of the ERP system does not mean change in the manner of usage or change in the interface of the ERP system or changing the ERP system itself. The only amendment to be made is towards enabling the software to communicate with the IRP, i.e. send and receive information. 

Further, the modification in the system will be done by the ERP service provider (whether commercial or customized). The responsibility of a taxpayer will be to ensure the modified system works effectively and is compliant with the Government requirements. At the same time for taxpayers using GSPs or APIs shall integrate these applications with the new requirement.

Proposed Scenario 

Unlike the current process, the interaction between the ERP and GSTN is two way. While the invoicing data is being uploaded onto the IRP, a digitally signed e-invoice is also being received from the IRP which will be recorded in the ERP system. Since e-invoicing is applicable to large taxpayers, the flow of data is through the ERP system, GSPs via APIs, IRP and to the GSTN and back to IRP to GSPs via APIs and to the ERP. This flow of information opens up six spots for data leaks or the requirement of data security. 

What can be examined here is that multiple systems or portals will make compliance challenging. Integrating all portals through one system is the key. Integrating all systems together eliminates scope for error and reduces the effort in data entry and data tracking. In our understanding, the only options available to the taxpayers are through SFTP and Enriched APIs that will not only keep the data encrypted but allow transport of data to and fro all the systems in the fastest way. 

Keeping in mind the SMEs’s the government has launched eight free accounting software that will allow the taxpayers to use this software and generate the e-invoice (when made applicable) and be compliant without the need of going through robust system integration processes.

An Application Programming Interface (API) is a software intermediary that allows two applications to communicate with each other. For the purpose of e-invoicing, APIs will be able to communicate between the ERP system and IRP. For the same, the Government has released API specifications with sandbox testing and made a separate portal for such developers to ensure that our APIs are in line with the GSTN’s requirement. Six APIs will be involved in the e-invoicing system - Authentication (POST), GENERATE IRN (POST), Cancel IRN (POST), Get e-invoice by IRN (GET), Get GSTIN details (GET), Health Check API (GET). 

The API approach towards e-invoicing is given below

API approach towards e-invoicing

An Application Programming Interface (API) is a software intermediary that allows two applications to communicate with each other. For the purpose of e-invoicing, APIs will be able to communicate between the ERP system and IRP. For the same, the Government has released API specifications with sandbox testing and made a separate portal for such developers to ensure that our APIs are in line with the GSTN’s requirement. Six APIs will be involved in the e-invoicing system - Authentication (POST), GENERATE IRN (POST), Cancel IRN (POST), Get e-invoice by IRN (GET), Get GSTIN details (GET), Health Check API (GET). 

The API approach towards e-invoicing is given below. approach is towards the SFTP

Taxpayers having huge transactional data can upload the Data and schema related fields into e-Invoicing Application. The extractors available will be able to fetch the necessary field level details from the existing heterogeneous data sources. This data is then pushed to the Data Sync/transfer utility. Here the data gets validated. In case there are any errors, these errors are thrown back to the Users which need to be rectified in their ERP Systems. 

The validated data is pushed on to the ASP Portal post which the same gets uploaded on to the IRP. Similar to the above, JSON gets uploaded to the IRP Portal, IRN is generated, validation checks, pre-filling returns, and e-way bills, etc. are undertaken by the IRP. This signed QR code is sent back to the GSP. These SFTP based and API based integrations are possible by Z-programs as well as Testing whiz connector for multiple ERPs and Databases like SAP, MS SQL, MY SQL, Oracle.

Just when India witnessed uploading 8 billion invoices under GST, the global market forecast is to encompass 550 billion invoices annually with only 55 billion invoices being paperless. Thus, the scope of a further increase in e-invoicing is large. Over 60 countries have already incorporated e-invoicing in their regulations. Of the globe, Latin America, South Korea, and a few European countries have successfully implemented e-invoicing with Asia being the younger member of the group.  

Worthy to notice that the leading nations have also implemented B2C transactions owing to the experience and sophistication of the system. Italy has proven itself in the e-invoicing world. This European nation has been in the process of implementing e-invoicing since 2014 in a staggered manner and has successfully launched in early 2019 for all transactions. It is India’s turn to gear up for a smooth implementation. 

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