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The Goods and Services Tax (GST) regime in India has undergone significant transformation, with the latest being introduction of 'Invoice Management System' (IMS) on GST portal. IMS may play an important role to simplify transmission of invoices and availment of Input Tax Credit (ITC). It will provide a real-time dashboard to reconcile supplier invoices and addressing discrepancies in a timely manner.
IMS has been introduced by the government as a technological advancement with an intent to facilitate direct collaboration between recipients and suppliers to resolve invoice level issues swiftly, fostering stronger relationships within the GST ecosystem. This improved coordination is expected to enhance compliance and optimise processes, as taxpayers will be able to take action on invoices starting 14th October 2024.
By enhancing validation before ITC claims, the system promotes transparency and minimises errors, which can help to bring efficiency in compliances. This may also result in minimization of regular notices issued on account of mismatch in relation to ITC.
Key features and functionality of IMS
IMS has two different sections:
IMS allows businesses to manage inward invoices before they become part of GSTR-2B by enabling the recipient to 'accept', 'reject', or mark invoices as 'pending', which helps verify the authenticity of inward invoices and ensures ITC claims are based on legitimate transactions and documents.
As mentioned above, recipients can take three actions on original invoices or records filed/ saved by suppliers in GSTR-1/1A/IFF:
If no action would be taken, documents would be deemed to be accepted and it would be automatically included in GSTR-2B. Filed and accepted records (including records with 'no action') or rejected records will be used for GSTR-2B generation based on the cut-off date.
It is worth noting that few changes around regular compliances were implemented in July 2022 wherein Circular No. 170/02/2022-GST introduced few additional requirements with respect to the filing of GSTR-3B. IMS is expected to streamline these requirements to some extent as it will eliminate reporting of 'reversals' in GSTR-3B for those inward supplies that would be marked as 'rejected' or 'pending'. This may bring operational efficiencies in preparation of regular compliance workings for filing of GSTR-3B.
IMS can offer significant benefits in the form of improved decision making, robust processes, efficient compliances, etc. but it is evident from the past that in the initial phase, taxpayers at times face challenges in embracing new functionalities. Some of the challenges can be with respect to internal systems wherein integration of IMS would require some time.
Few operational challenges could also be on account of 'pending' option which provides flexibility for deferring decisions only for certain records. Taxpayers cannot mark credit notes, upward amendments to credit notes, downward amendments to credit notes (if the original credit note was rejected), or downward amendments to invoices or debit notes (if the original document was accepted and GSTR-3B has been filed) as 'pending'.
Key consideration in this regard is that the liability of supplier will be increased in GSTR-3B for the subsequent tax period in relation to those invoices/records which have been rejected by the recipient in the IMS for above four cases.
Moreover, the mechanism of deemed acceptance carries certain risks. One potential unintended consequence is the possibility of the department accusing involvement of a recipient in relation to fraudulent invoices raised by any supplier. This risk becomes particularly pronounced if a taxpayer fails to take action on the IMS dashboard, allowing the invoices to be deemed accepted or leaving them as ‘pending’. Such inaction may be viewed unfavourably by the department, potentially prompting investigations into why the taxpayer did not actively reject the ITC when it did not pertain to him.
Specifically, credit notes can prove to be a double-edged sword for businesses. If a supplier issues a valid credit note, the recipient may reject it if it has not been recorded in his books of accounts. This rejection will increase the supplier’s liability in GSTR-3B, potentially leading to working capital challenges. Conversely, in order to avoid disputes or meet business commitments, the recipient may also face working capital issues in case he opts not to reject the credit note, which would require him to reverse the ITC associated with it. On the other hand, if the recipient accepts the credit note but later decides not to reverse the corresponding ITC in GSTR-3B, it may attract questions from the authorities. Consequently, we may anticipate an increase in mismatch notices following the implementation of the IMS.
The IMS will streamline tax compliance by enabling efficient invoice level reconciliation, however, the taxpayers would be required to adapt to this newly introduced facility by carefully reviewing invoices, managing credit notes and adhering to regulations to avoid disputes and departmental scrutiny. As the businesses would be investing time and resources towards this system, it will help them to position themselves to sustain in this dynamic regulatory environment. IMS seems to have the potential to transform compliance processes, but its overall impact will unfold over time.
Contributed by: Shubham Mishra (Manager) and Nancy Gupta (Consultant) at Grant Thornton Bharat LLP
This article first appeared in the Taxmann on 10 October 2024.