GST Service Provider

How bilateral validation of invoices works under GST

Goods and Service Tax or GST is all set to roll out from July 1st, 2017. The biggest tax reform since independence. GST tax India will make the indirect tax regime easier and more transparent and make tax compliance hassle free. One major change that GST for business will bring about is the seamless flow of credit in the entire value chain.

By introducing bilateral validation of credit, or invoice matching, GST also promises to eliminate duplicate claim for input credit through fake invoices on paper. This is an important feature that will also make tax administration easier. Here is how it will work.

What is a bilateral validation of credit and why is it important?

Bilateral validation of credit or invoice matching is a mechanism in which all supplies that that taxable under GST needs to be matched against all taxable supplies received by the buyer. This means that input credit tax for the purchase of goods and services can be claimed only details of inward supply (purchase invoice) under GSTR 2 return of the buyer matches with the outward supply (sales invoice) filed under GSTR 1 by the supplier.

Unless this matching is validated, the buyer will be unable to claim input credit on taxes he has paid on the purchase of goods or services as input. Further a “compliance rating” has been introduced to urge business to file timely returns in the correct format. It is thus critical for all businesses to be GST compliant to improve future business possibilities.

Impact and critique of bilateral validation of credit

While the Government claims that this mechanism will improve tax administration and result in better tax compliance, SMEs are unhappy about the fact that input credit to the tax payer is denied if the supplier has not met his tax liabilities. SMEs are complaining that they are being burdened with the responsibility of knowing whether their suppliers are meeting tax liabilities which is an unfair and onerous burden.

This also means that if the supplier is not tax complaint, it will result in dent in the cash outflow for the SME. What is worse is, if the supplier fails to furnish valid returns the input credit tax claimed by the buyers will be reversed to them and the onus will be on them to pay the tax along with an interest component. This is therefore a twin blow to the taxpaying organisation which must pay the supplier as well as pay taxes along with interest if input tax claim is reversed.

What SMEs should do

GST will overhaul the entire way in which businesses are conducted in India. A change of this nature is not going to be easy. Businesses of all sizes, especially SMEs must realise the importance of timely compliance. Apart from updating their current accounting and ERP systems and mapping businesses against it, it is also critical to emphasise on vendor management at this stage.

It is evident that vendor management will be one of the most crucial factors facilitating timely claim of input credit tax. It is therefore important for SMEs to identify suppliers who have credibility and are capable of on-time GST compliance. The GST compliance rating is also been designed to help businesses choose credible suppliers who will be partners in their success and will not stand in the way of GST compliance.

The onus is on SMEs to understand that GST for business will bring about long term benefits only if there are complete co-operation and readiness by tax payers to comply with the new set of rules. Teething problems notwithstanding, GST tax India will prove to be gainful for businesses and enhance transparency and ease of doing business in the long run.


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