Why Automation and Digitization is the One-Stop Solution to Bridge Revenue Losses in the ITC Regime

By: Mr. Rajesh Shukla, Indirect Tax Manager, Tata Motors.

Rolling out the GST is cited as the biggest post-independence tax reform in India. Although the GST has its own advantages, after more than four and a half years, businesses are still struggling with fundamental compliance issues. The process of filing and claiming input tax credits (ITCs) has become one of the main reasons for the loss of revenue for many businesses. Since the rollout of the GST, numerous notifications have been issued and rules amended with the aim of achieving a balance between preventive controls to plug revenue leakages and enabling provisions to facilitate the ease of doing business (EODB) . However, this balance is not yet widespread across different industries. Let’s take a deep dive to understand why.

ITC’s filing process: a sore point in the supply chain

Under the current tax regime, large businesses cannot claim ITCs if a supplier in the supply chain does not file their returns on time. With the Indian government planning to enforce tax compliance more rigorously, companies will likely continue to suffer loss of tax credits for non-compliance at any point in the supply chain.

According to an analysis by a leading online tax service provider, around 7% of a company’s working capital is tied up in ITC for companies with sales over ₹500,000,000. In addition, 6-10% of the total ITCs available are delayed by an average of two months. Therefore, it would not be an exaggeration to say that ITC is currently one of the biggest problems in the entire supply chain industry.

In accordance with a recent amendment, ITC can only be claimed when the credit is reflected in Form GSTR-2B, an automatically generated ITC statement available on the GST portal that takes into account supplier invoices. Also, there should be no difference between the parameters (such as invoice number, place of supply, GSTIN number), etc., in the form. Any delay in filing by any of the suppliers therefore has a credit ripple effect reflected each month and can negatively impact businesses by preventing them from accessing credit due.

Leveraging digitization to relieve pressure

This is where we can exploit the potential offered by automation and digitization to simplify the system. Thanks to digital technologies such as the application planning interface (API) and enterprise resource planning (ERP), all transactions can be accounted for instantly, both at the end of the companies and with their suppliers. This can greatly reduce the risk of human error, facilitating the continuous flow of data from one end of the supply chain to the other. Ultimately, this leaves no room for mismatch in any area, as required by law.

This automated process can also enable the flow of information in a standard format for full data exchange within the GST ecosystem, in turn ensuring correct and timely payment to suppliers, timely consideration in GSTR-2B and reduced reconciliation efforts for ITC. Tata Motors’ unique, locally designed API system for the same, provides a strong example of the benefits of integrating technology to alleviate the pain point of ITC in the industry.

A perspective for the future

With the recent expansion of e-invoice compliance for vendors with turnover above Rs. 20 crores, the prevalence of such an automated platform is slowly becoming imperative for the smooth running of businesses. Simple yet effectively designed technologies can help bridge revenue losses due to ITC non-compliance in a painless way.

Digitization has had its effects in all sectors and systems. We must be proactive in effectively leveraging the plethora of benefits offered by automation and technology to solve problems in all segments of our business.

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