How can MSMEs maximise input tax credit and better manage cash flows

Ease of Doing Business for MSMEs: Manual reconciliations are laborious. Offline tracking and coordination across teams such as the tax team, accounts payable team, etc., will only create further delays and end up with the enterprise losing even more ITC. Hence, the first step should be to automate all GST reconciliations.

Irrespective of the size and scale of business, it is imperative that enterprises look at digitising their GST compliance today. (Image: stockvault)

By Archit Gupta

Ease of Doing Business for MSMEs: The introduction of GST promised taxpayers a free flow of input tax credit (ITC) across the supply chain. However, a couple of years down the line, input tax credit claims became a point of contention with the government capping provisional ITC at 20 per cent and then reducing it further to 10 per cent and 5 per cent. In the 45th Council meeting, the GST Council took a decision to soon remove all provisional input tax credit (ITC) claims. This means that taxpayers will no longer be able to claim any additional ITC over and above what is reflected in their GSTR-2B statement. This comes as a blow for taxpayers, especially MSMEs, who have to deal with small vendors who sometimes delay in uploading their sales invoices.

How does the removal of provisional ITC claims impact cash flows?

With taxpayers being allowed provisional ITC claims, it provided them with the opportunity of claiming input tax credit on invoices that were still not uploaded by their suppliers. Delays are usually caused by defaults on the supplier’s end or because the supplier has opted for quarterly filing of their GST returns.

Now the government will soon enforce an absolute restriction on provisional ITC and there will be no leeway for taxpayers whose suppliers have not uploaded their invoices. By not being able to claim ITC on these pending invoices, the taxpayer’s GST liability will need to be paid in cash to that extent. This not just increases cash outflows but hits the enterprise’s working capital. And in cases where suppliers do not upload invoices at all, it even hits the profitability of the recipient taxpayer.

Why is this problem even more critical for MSMEs?

Unlike large enterprises, MSMEs typically deal with small vendors. Now, with the ITC restrictions becoming tighter, any vendor delays or defaults result in the MSME being unable to claim optimal ITC. This could end up hitting their cash flows and working capital by up to 7 per cent, which is quite substantial.

Further, most MSMEs undertake their input tax credit reconciliations manually or by using tools like Excel. Manual reconciliations are time-consuming and prone to errors, and this further affects ITC claims and cash flows. Not to mention, incorrect ITC claims also result in interest and penalties being levied and the risk of GST registrations being cancelled in extreme cases.

How can MSMEs maximise their input tax credit and manage cash flows better?

The answer is simple. MSMEs just need to bring in the right digital tools and automate their GST compliance. In fact, just by digitising these three main processes, which are a part of GST compliance, MSMEs can increase their input tax credit claims as well and reduce their cash outflows.

Subscribe to Financial Express SME newsletter now: Your weekly dose of news, views, and updates from the world of micro, small, and medium enterprises 

AI-based invoice reconciliations

Manual reconciliations are laborious. Offline tracking and coordination across teams such as the tax team, accounts payable team, etc., will only create further delays and end up with the enterprise losing even more ITC. Hence, the first step should be to automate all GST reconciliations. 

The advanced GST reconciliation tools available today assure 100 per cent accuracy with zero manual intervention. Using AI-based tools, businesses can ensure that their input tax credit is claimed accurately and not a single invoice is missed out on. In fact, modern FinTech companies offer fully automated solutions where the data is exported from the accounting system and downloaded from the GST portal and reconciled on a continuous basis. The taxpayer just views the results and takes action. AI-based invoice reconciliations also help detect missing invoices or mismatched data so that the enterprise can get in touch with the vendor at the earliest and have the invoice uploaded or mismatch rectified.

One-click vendor communication

The second process that smart businesses are automating today is vendor communication. With ITC claims getting stricter and the dependency on vendors only increasing, the need for automated vendor communication is all the more. No business wants to spend precious man hours on reminding their vendors to upload invoices and constantly following up with them. MSMEs should look at digitising this process and benefit from one-click vendor communication via email, WhatsApp, etc., which will contribute to the faster uploading of invoices and higher ITC claims.

Automated vendor payment management

Automating vendor payments is extremely critical for a business to truly maximise their ITC and reduce their GST cash outflows. Unless vendors are aware that their payments can be withheld for non-compliance, they may not take invoice uploading seriously. 

However, payment withholding cannot be done manually and should not violate the MSME payment terms in India. This process should be automated using the right digital tools and strategies like vendor gamification. For example, an MSME can set the vendor payment terms to automatically withhold the GST amount if the vendor has not filed their GST returns. This decision can be synced to the accounting system and used for all future payments. Over time, the defaulting vendors reduce, and ITC claims increase.

Digitisation is key for maximising input tax credit claims

Irrespective of the size and scale of business, it is imperative that enterprises look at digitising their GST compliance today. Technology helps in more ways than one. Besides maximising input tax credit and reducing GST cash outflows, it helps in faster, more efficient GST filings and also reduces the risk of interest and penalties.

Archit Gupta is the Founder and CEO at Clear. Views expressed are the author’s own.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.