Vendor Payments: Not so simple under GST

Vendor Payments: Not so simple under GST


The heading of this blog – ‘Vendor Payments’ might intrigue the readers as to what is not so simple about vendor payments. Once you receive the supplies and invoices, you can verify the quality and quantity and make payments to vendors. So, what exactly is so difficult about making vendor payments?

In the pre-GST era, vendor payments were indeed simple; however, when GST was rolled out, vendor payments have not remained a cakewalk. This is primarily because, the Government has linked the input tax credit availability to the tax payments by vendors; As per Section 16 of the CGST Act, 2017, a recipient of goods and/or services is not eligible to avail Input Tax Credit (ITC) if the vendor does not deposit tax with the Government. Therefore, in a way, a recipient’s eligibility to avail credit gets linked with vendor’s payment of tax.

Issue in vendor payments

With this backdrop, organizations started amending their vendor contracts, running a vendor compliance test, and modified their purchase order terms. The corporates started linking their vendor payment terms with their compliance score and the visibility of credit in GSTR 2A. Three mechanics are commonly being used by corporates in this regard:

  • 100% payment to be made to vendors once the tax payment has been made by the vendor and the credit gets reflected in the GSTR 2A of the recipient or;
  • 50% payment can be made as per the regular payment terms and the remaining payment can be released once the credit gets reflected in the GSTR 2A of the recipient or;
  • The entire amount can be released as per the payment terms barring the tax component. The tax component is only paid once the credit gets reflected in the GSTR 2A of the recipient.

There could be other arrangements also between a supplier and recipient whereby the recipient is assured of the fact that the vendor shall deposit taxes on a timely basis. This could include indemnity clauses in the contract, recovery clauses, etc.

Also, the invoice is available in GSTR 2A. However, in GSTR 2B, the taxpayers get to know whether they can avail ITC or not. Vendor invoices in 2A will flag filing or non-filing. If data is pushed but not filed –only base amount and not the GST amount is released. In such case, the taxpayer has to wait till the filing period is over. In addition, it is important to locate its availability in GSTR 2B to avail the ITC on time. If not filed, the entire invoice amount is blocked and will not also be available in GSTR 2B. Further, if filed and matched, also available in GSTR 2B, full payment will be released.

The above mechanics or options may put the long-standing vendor relations in jeopardy and may impact the trust between two parties negatively. Nonetheless, not taking proactive steps to safeguard the input tax credit may have financial costs involved with higher risks.

Vendor relation has a human element involved in it; it can entirely not be based upon the compliance score of a vendor. There are softer aspects which needs to be considered. Therefore, each vendor may have to be handled differently. In multinational companies, having differing policies for different vendors may be a humongous task for the procurement team or accounts payables team. The issue that arises is how can this be addressed?

Solutions offered by technology

There are multiple ways in which technology can assist businesses in streamlining their vendor payments. Vendor payment solutions can be integrated with the ERP system of an organization. This solution can be tweaked for each vendor to change the rules of payment and customize the vendor payment rules. With the help of this feature, the businesses can incorporate different payment rules for different vendors at ERP level which shall reduce human efforts and make vendor payment processing simpler.

This feature also lets the businesses have control over their payment cycles for different vendors. Moreover, the reconciliations between payments made and payments due become a thing of past as this feature reconciles bank statements and payments on a real time basis and creates a report when called for. Another benefit is the reduction in risk which arises due to manual errors and time saving for payables team.

The segregation of vendors can be done basis their GST Compliance rating or basis the size of invoices or frequency of procurements. There can be multiple factors that decide the payment terms and can be different for different businesses. This feature allows the businesses to define their own payment terms and integrate the same in the ERP system.

Future of vendor payments

With e-Invoicing in place, vendor payments are set to be automated. e-Invoices are machine readable, can be recorded with minimum human intervention and now can be paid automatically. Moreover, not only from GST perspective, automated payment solutions also help to deduct TDS at prevalent rates and deposit the same with the Government treasury.

Efficient vendor payments elevate the goodwill of corporates amongst their business partners. Moreover, it alleviates the chances of interest implications which might arise on late payments to vendors. On the flip side, for timely payments, a lot of vendors give incentives such as discounts, schemes, etc. Businesses can realize these gains if payments are made in time without taking the risk of losing their input tax credit.

Thus, vendor payments are not as simple as it sounds; there is a wide spectrum of innovations and use of technology which can help businesses in not only automating the process but reducing their risk of losing input tax credit on account of non-compliant vendors.

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