Given the current state of the market economy, the GST council seems to be moving towards more and more automation to ensure a reliable and transparent tax administration. The introduction of IMS (Invoice Management System) is one such move to provide businesses with streamlined input tax credit management and GST compliance.
Though implementing IMS is seen as challenging and complex in the short term, it has a wider scope and provides transparency and efficiency in GST compliances, particularly for businesses with numerous services and transactions in the Banking, Finance, Service, and Insurance (BFSI) Industry.
The BFSI industry deals with a large volume of transactions, multiple regulations, and compliances, where a streamlined tax compliance process, audit trails for future investigations, and credit management are crucial.
Implementation of IMS in BFSI would help them streamline the ITC availment and credit management process. Not only this, but the real-time visibility on invoice status due to IMS would also help bring automation, audit trails on invoice activities, insights on GST compliance, etc, making it vital and mandatory for BFSI to integrate IMS.
This blog will delve into the challenges faced by BFSI in GST compliance, how IMS will help streamline their compliance process, facilitate an audit trail, and help streamline BFSI’s tax and credit management.
Challenges in BFSI Tax Compliance
Let’s understand the BFSI industry’s challenges in its tax and GST compliance.
Large volume of transactions:
BFSI deals with a large volume of inward and outward transactions in its daily operations. Keeping streamlined records of all those transactions, real-time tracking, status updates, invoice validation, invoice reconciliation, etc, is complex and challenging yet vital for the industry’s tax compliance and credit management.
Tax and Input Tax Credit management
As stated, BFSI deals with numerous services and transactions; therefore, proper ITC Availment, ensuring the optimum utilization of ITC along with having proper knowledge of GST applicability, rates, is essential.
Missed ITC availments, wrong utilisation, wrong availment of ITC, discrepancies with the invoices reported by the suppliers, etc, would result in an inappropriate tax and credit management and may invite notices, demands, and consequently penalties
With the implementation of IMS in BFSI also, it is vital to track accepted, rejected, pending, or invoices requiring actions by both the supplier and the recipient, and ensure the action taken is not erroneous or wrong to avoid an unnecessary increase in GST liability or loss of Input tax credit.
Legacy systems and workflow
Legacy systems or outdated and manual invoice workflows would only lead to further complications for the BFSI in the current digital economy, particularly with the automation and digitization in tax administration.
Outdated systems and workflow often lack automation, real-time insights on invoices, audit trails, fragmented processes, incomplete records, and invoice storage that do not properly integrate the purchase, sales, accounts, or finance department within the organization.
Lack of audit trails and security
BFSI handles numerous transactions, offers numerous services, and has a larger number of vendors, suppliers, and recipients across all locations. To have a track of each transaction and invoice generated or received across the organization is crucial for financial and tax management.
Logs of actions taken for each transaction, payment received or paid against invoices, tax treatment logs for all invoices, etc., help in future audits and investigations. Invoices not being logged, time-stamped, and encrypted at rest or in transit can create financial loss for the company.
Handling inter-branch operations
BFSI has multiple branches in multiple states, having inter-branch or inter-state transactions and operations. Handling and recording such transactions are prone to errors, anomalies, tampering, and fraud if improperly supervised or handled.
Further dealing within multiple locations can create complexity in GST registration and compliance with e-invoicing regulations, GST law, etc.
Real-time invoice tracking
The IMS system allows real-time tracking of the invoice from the time the supplier saves the invoice data, actions taken in IMS, till the recipient files the GSTR-3B.
Any changes made by a supplier in GSTR-1/1A/IFF shall reset the action taken by the recipient in IMS, and the changes will reflect in the recipient’s module on a real-time basis for fresh action.
Automated reconciliations
Automated reconciliations allow the recipient to reconcile the invoice data reflected in IMS with the purchase register and only allow valid ITC claims. Furthermore, multiple other reconciliations can provide additional compliance related to the filing of GSTR-3B.
Notifications and alerts
IMS provides real-time notifications to the supplier for the action taken on the invoices. It also alerts and notifies of any discrepancy or error in invoices reflected in IMS.
Role of IMS in Creating Reliable Audit Trails
IMS in BFSI may have many challenges, particularly if BFSI is only utilizing government portals for IMS implementation due to the portal’s limitations.
However, partnering with a tech provider and integrating an IMS solution with added features, automation, and other advanced technologies helps the industry to streamline their IMS compliance as well as provide audit trails and security to invoice management.
Let’s understand how automated and advanced IMS solutions play a vital role in creating reliable audit trails:
Centralized audit-ready action Logs
The IMS system logs the action taken (accepted/rejected/pending) by the recipient for the invoices reflected. Further, it can also monitor and log action taken on their outward supply by their recipient.
This provides two-way visibility and an auditable history of the actions taken against the inward and outward supply invoices. It also helps the supplier and recipient to improve communication and reconciliation between both parties and strengthen the audit trails. This also reduces the burden of year-end ITC reconciliations and vendor follow-ups.
Amendment tracking
Amendments of invoices saved in GSTR-1 before filing replace the invoice data in IMS, irrespective of action taken by the recipient, and the later amendment of invoices through GSTR-1A also gets reflected in IMS, which means the original as well as amended invoice data are reflected, providing audit trails of the original and its respective amendment.
Streamlining Input Tax Credit Management
Controlled ITC availment
Invoices accepted or deemed accepted (if no action is taken) in IMS will flow to GSTR-2B, which helps the recipient control the ITC required to be availed, thereby ensuring effective credit management.
Integration with GSTR-2B and GSTR-3B
An invoice accepted in IMS will only flow to GSTR-2B under the ITC available section, which shall get auto-populated in GSTR-3B as eligible ITC.
Rejected invoices shall be recorded as invoices rejected in GSTR-2B and will not flow automatically to GSTR-3 B. Integrating IMS, GSTR-2B, and GSTR-3B ensures automated and efficient credit management.
Re-computation of GSTR-2B
GSTR-2B is generated on the 14th of the succeeding month, which reflects all the invoices accepted or deemed accepted in IMS.
However, when there is any change in action previously taken, GSTR-2B is required to be recomputed to reflect the amended action and ensure only invoices with correct action flows are further processed in GSTR-2B. The invoice data freezes only after filing of GSTR-3B, ensuring ITC compliance.
Actionable invoice workflow
Recipients manage the action taken on IMS, ensuring only correct invoices flow to GSTR-2B for availment. Any incorrect invoice value or invoice not pertaining to them is rejected to avoid erroneous or wrong availment of ITC, facilitating credit management and avoiding penalties, fines, interest, or demands.
Deemed acceptance
The automated flow of deemed accepted invoices, i.e., invoices on which no action is taken in IMS, automatically flows to GSTR-2B, ensuring no genuine ITC remains unclaimed due to delayed action, avoiding compliance burden.
Record retention
The pending invoices stay in IMS till any action is taken or till the law permits the availment of ITC as per section 16(4) of the CGST Act, to ensure no invoices are missed for the availment of ITC.
Case Study: IMS in Action
A large banking institution dealing with thousands of monthly inward transactions must manage vendor invoices properly. Before IMS, the bank had to validate and reconcile the transaction auto-populated in GSTR-2B with their Purchases and returns, and any changes in ITC were made manually in the GSTR-3B.
Manual reconciliation is prone to overlooking discrepancies, a lack of logs on supporting reasons for reconciliation differences, or manual changes in returns can lead to errors, and a lack of logs on changes can lead to inefficient audit-ready data, inviting notices and penalties.
With the implementation of IMS, the bank can actively review and track invoices and accept, reject, or keep them pending, based on its requirements and verification.
Automatically reconcile IMS data with the Purchase register, alert vendors on invoice discrepancies to take corrective actions, and automate the flow of accepted or deemed accepted invoices data to GSTR-2B and GSTR-3B.
IMS not only streamlines invoice workflow for credit management but also provides audit trails on every invoice action, ensuring accuracy, efficiency, time-saving, audit-readiness, security, and GST compliance.
Conclusion
The IMS in BFSI is a vital step towards the digitizing tax compliance, providing proactive invoice management, audit trails, and accuracy in ITC availment. Further, IMS provides time-stamped and reliable audit trails of invoice status and action taken by the recipient.
With IMS, there has been a reduction in the wrong or erroneous availment of ITC, ensuring credit management and avoiding penalties. Integrating IMS in the BFSI industry can contribute to better governance, reduced compliance burden, and ensure transparent, efficient, accurate, and robust tax management.
