Revolutionizing India's Taxation System: Empowering Small Businesses with e-Invoicing & Role of Private IRPs

Beginning in October 2020, the Indian Government started its transition to the e-Invoicing model, marking another step in the fight against tax evasion and improving the overall efficiency of the reformed taxation system. e-Invoicing has already completed five phases; the focus is gradually shifting towards augmenting the digital infrastructure necessary to handle the significantly higher transaction volumes. Towards this end, the Goods and Services Tax Network (GSTN) launched e-invoice registration services through multiple private e-invoice registration portals (IRPs) in March 2023, paving the way for significant capacity addition for the GST taxpaying community in the country.

However, to cater to the increasing transactional volume, the GST Council recommended the move to approve private IRPs. With it being approved, India’s burgeoning MSME sector and other large businesses now have entities like Cygnet Infotech to cater for their e-Invoicing requirements. With these IRPs facilitating auto-population of invoice details, businesses will benefit from increased accuracy when filling GST returns and can avail of Input Tax Credit (ITC) without hassles. In conjunction with NIC, these private players will undoubtedly ease the GST e-invoice registration process and motivate more Indian businesses to achieve 100 percent compliance with e-invoicing and GST provisions.

Private IRPs’ role will evolve beyond meeting e-Invoicing requirements, as they shall be providing value added services. Via IRP, unaddressed segments such as MSMEs can be directly associated with lenders on a standard platform. By empaneling private IRPs and signaling digitization, the Government has also delivered a fillip to the ability of small businesses to access capital. MSMEs play a crucial role in the Indian economy, contributing significantly to employment generation, industrial output, and overall economic growth. However, a major obstacle they encounter is the insufficient availability of working capital. One of the key factors contributing to the working capital shortage for MSMEs is delayed payments from buyers. Delays in payments can severely affect their ability to meet financial obligations, purchase inventory, pay employees, and invest in business expansion.

Complementing the Credit Guarantee scheme introduced during the peak of the COVID-19 pandemic, businesses shifting to the e-invoicing model will be able to avoid working capital shortages, ostensibly caused by late payment cycles and inherent inefficiencies sapping entrepreneurs of vital benefits like ITC. Moreover, these private IRPs are well on track to amend the existing platforms to introduce invoice financing, enabling business owners to borrow against invoices and fulfill short-term working capital needs. All this while avoiding resorting to loan sharks or even borrowing from financial institutions at a higher interest rate.

In addition to IRPs, the concept of open banking is gaining traction in the country. Open APIs are evolving and moving towards the third layer of India Stack i.e., data layer and Account Aggregator, banks and financial institutions share customer data securely and with consent, enabling third-party providers to develop innovative financial products and services. This development has the potential to significantly impact the MSME sector by expanding access to financial services and facilitating smoother MSME financing. Furthermore, the Goods and Services Tax Network (GSTN) has become a part of the Account Aggregator (AA) ecosystem. With GSTN’s inclusion, MSMEs can leverage their GST data to access a more comprehensive view of their financial position, which can help lenders make more informed lending decisions. Emerging platforms like the Open Credit Enablement Network (OCEN) and the Open Network for Digital Commerce (ONDC) are establishing themselves as embedded financing platforms. These platforms aim to provide seamless integration of financial services into various digital marketplaces, enabling MSMEs to access financing options conveniently. By bridging the gap between financial institutions and MSMEs, Open banking, AA, OCEN and ONDC have the potential to simplify and speed-up securing capital for MSMEs.

Modelled on the lines of GST Sahay, an on-tap invoice-based financing app that specifically caters to MSMEs, the future of seamless credit access is a few steps away for the estimated 6.34 crore MSMEs in India today. By embracing the e-invoicing model and ensuring compliance with GST provisions, business owners will not only be able to realize payments for receivables instantly but also reduce their interest burden substantially. Eventually, these private IRPs will enable online marketplaces where MSMEs can invite interest from multiple parties and take up offers suited to their interests. As MSMEs do not have digital footprints and are new-to-credit, e-Invoice will serve as digital footprint for them enabling a digital collateral for financing. It will allow easy business for SMEs and MSMEs and open the doors to unsecured lending with real-time consent-driven data flow for credit assessment and monitoring. As a result of these transformative changes, micro-enterprises, which account for more than 99 percent of the overall MSME base, will be able to expand their business activity and leap towards high investments and business volumes.

Effecting a paradigm shift by their potential to deliver financial services to small businessmen and entrepreneurs, private IRPs will play a crucial role in enabling the financial inclusion of SMEs & MSMEs. Improved customer experience, faster e-invoice processing times, and better tax compliance are seemingly only the immediate benefits. However, the longer-term positive impact shall be driven all-together with private IRPs, Account aggregator, OCEN and ONDC. It will unleash the true potential of the Indian economy and bring more businesses into the formal sector. It would be only prudent to imagine these private IRPs enabling the development of an online marketplace that will eventually coalesce all business activity and strengthen the entire ecosystem.