Tuesday, July 4, 2017

GST – Tax Invoice Financing - An Introduction

This one feature of GST - "The new tax will require firms to upload their invoices every month to a portal that will match them with those of their suppliers or vendors" -, is enough to trigger a tectonic shift in :

·       Receivable Financing
·       Bills Discounting (Key word Search BILL)
·       Inventory Financing . Commonly known as Dealer Financing in India
·       Working capital financing

All the above have a common aim, to provide access to Sellers or Buyers access to funds at a reasonable rate of interest.  A large number of participants operate in the market to enable Sellers/Buyers to get the best deals. The discovery mechanism for capital safety is a mix of market intelligence and Statement of Accounts.

     In spite of best efforts financing institutions had to face:

§  Defaults
§  Multiple financing of same inventory
§  Fraudulent invoices

In the last couple of years, Online Lending companies too entered the fray. A large group was chasing the same set of clients.

All this is set to change with GST introducing the concept of ‘Invoice Matching’.
The invoice matching mechanism in the goods and services tax (GST) to be rolled out from July 1 will help curb fake bill frauds, Finance Minister Arun Jaitley has said, in a letter to a Congress1 leader.
Jaitley said the model of invoice matching for eligibility of input tax credit of the recipient has been adopted in the GST design after much deliberations in the GST Council.
"One of the most important advantages of adopting this model is for curbing the possible tax evasion on account of fake invoice frauds," the finance minister said in response to the concerns raised by Congress Rajya Sabha MP Digvijaya Singh.
Singh, in his letter to Jaitley, had said multiple tax returns would have to be filed by businesses leading to compliance burden.
This 9 page article explains in details the process of Invoice Matching under GST.
With Invoice Matching being completely online without any physical paper, the incidence of fraudulent invoices falls down drastically.
The broad contours of Invoice Financing under GST is as under::
A new Section 25 entity ‘GST Invoice Financing Corporation of India’, to enable a large number of willing finance companies to service the needs of Sellers/Buyers.
GSTN registered entities if they are willing to avail finance, register on GIFCI
All types of Financial Institutions i.e Scheduled Banks, NBFCs, All India Financial Institutions, Online Lending Companies, High Net worth Individuals register on GIFCI as finance providers.
The tax invoice uploaded in GSTN flows to GIFCI (GST Invoice Financing Corporation of India) Portal  
The finance providers bid the best price. EG :
Ø  Seller – ABC Inc
Ø  Buyer – XYZ Inc
Ø  Tax Invoice Value – INR3,25,000/-
Ø  Payment Terms – 45 days from Invoice Date
Ø  Invoice Date – 15/07/2017
Ø  Invoice Number – 12345
Ø  Finance Provider 1 – FGH Corporation
Ø  Finance Provider 2 – A1D  Corporation
Ø  Finance Provider 3 –  2EB  Corporation
Ø  Finance Provider 4 –   Q54 Corporation

a)     ABC Inc uploads the Invoice No 12345 on GSTN and authorises GSTN to share the Invoice No 12345 details with GIFCI
b)    The finance providers evaluate the sellers background and offer the best quote
Finance Provider 1 – FGH Corporation Quote – Rs3,10,000
Finance Provider 2 – A1D  Corporation Quote – Rs3,18,000
Finance Provider 3 –  2EB  Corporation Quote – Rs3,18,500
Finance Provider 4 –   Q54 Corporation Quote – Rs3,20,000
c)     The buyer XYZ Inc chooses the best offer (Q54 Corporation Quote – Rs3,20,000) and accepts it on GIFCI portal digitally, without any further paperwork.

d)    Q54 Corporation credits Rs3,20,000 to Sellers ABC Inc Bank account.

e)    On the Invoice due date, Buyer XYZ Inc remits Rs3,25,000 to the bank account of Q54 Corporation.

f)     Once the Invoice is financed, the information flows to GSTN and no further financing will be possible by another financier on GIFCI portal
As the market matures, varied products can be offered on GIFCI portal. Rules to handle defaults will be in place.
The invoice can be for supply of physical goods or services.   
Possible timelines for rollout of GIFCI:--
01)  Discussion in GST Council by October 2017
02)  Finalisation of the composition of GIFCI by December 2017
03)  Release of Business Rules of GIFCI by March 2018
04)  GIFCI Go-Live on July 1st 2018
The GST Model law has defined the time limit for issue of GST tax invoices, revised bills, debit notes and credit note.
Following are the due dates for issuing an invoice to customers:
ü  Supply of Goods (Normal case)- On or before date of removal/ delivery
ü  Supply of Goods (Continuous Supply)- On or before date of issue of account statement/ payment
ü  Supply of Services (General case)- within 30 days of supply of services
ü  Supply of Services (Banks & NBFCs)- within 45 days of supply of services
Under the present financing mechanisms, minimal financing is available for ‘receivables’, by Service Providers. In the last few years, there has a massive jump under Service Sector. The outsourcing industry is the best example of Service Sector.
The farming community through can avail financing services through the GIFCI portal. The only condition is that the farmers have to be registered in GSTN.

Yes, Voluntary registration under GST in GSTN is possible.

A business entity may opt itself to get registered voluntarily under GST even if he is not liable to be registered.

All the provisions of GST applicable to a registered taxable person will similarly apply to such a voluntarily registered person also, i.e., he will be treated as a normal taxable person.

The drawbacks under composition levy can be overcome through registration under GST.

Other Advantages of Registration under GST are as under:

v  Legally recognized as supplier of goods or services– This increases the confidence levels of potential customers.
v  Provide input tax credit to customers– As they can issue taxable invoices, they can collect GST. Their customers can take input credit on their purchases.
v  Become more competitive– They will be more competitive than other small business as buying from them will ensure input credit.
v  Take input credit– Voluntarily registered persons can take input credit on their own purchases and input services like legal fees, consultation fees etc.
v  Make inter-state sales without many restrictions– They can make inter-state sales without many restrictions (they will be treated as casual taxable persons).

Thus, nothing stops farmers from being registered under GST. In fact once they are registered under GST, larger opportunities open up for them.

This article is a work-in-progress and as and when the procedures are finalised, updates will be published

I acknowledge the articles of Cleartax @ https://cleartax.in/gst to widen my GST knowledge base.

GSTN – Goods and Services Tax Network
GIFCI - GST Invoice Financing Corporation of India