Purchase Invoice Digitization- A Root Cause fix for ITC Maximization

In today's digital age, businesses are increasingly relying on technology to streamline their operations and remain competitive. However, many still face challenges when it comes to managing their finances efficiently. One particular pain point is the process of claiming Input Tax Credits (ITC), which can be a complex and time-consuming task. Without proper documentation, businesses may miss out on significant tax savings and find themselves in non-compliance with regulations. Fortunately, one solution that has gained traction in recent years is the digitization of purchase invoices. In this blog post, we will explore the challenges businesses face, the costs of failing to invest in technology solutions, the available options for digitizing purchase invoices, and the benefits that can be achieved by implementing such a solution.

Challenges businesses face in claiming ITC:

The claim of Input Tax Credits is subject to stringent provisions that require the recipient to receive the details of the invoice or debit note, tax payment by the supplier, and unrestricted ITC on the document. To maximize ITC claims, documents should be reconciled on a monthly basis, and missing documents should be tracked for later reconciliation. However, businesses encounter various obstacles when attempting to claim Input Tax Credit, including vendor invoice reporting delays. Depending on the industry, payment terms may necessitate remitting funds to vendors before their tax return is filed, rendering it difficult to confirm the ITC's availability. Furthermore, the process of recording and reconciling invoices can be complex due to diverse accounting and billing software that generate and store invoices in differing formats, potentially resulting in inaccuracies in ITC claims.  

Cost of failing to invest in technology solutions:

Failing to invest in technology solutions for purchase invoice digitization can have a significant cost on a company. This can include delayed reporting of invoices by vendors, manual recording errors, and non-compliance which can ultimately lead to blocked funds and negatively impact a company's cash flow. Additionally, the reconciliation of invoices and communication with vendors require coordination between the tax and procurement teams, adding to the company's overhead costs. Non-compliant vendors can also cause taxpayers to claim less eligible ITC, further impacting the company's bottom line. If ITC is availed in excess or incorrectly, this can also result in interest costs. Thus, it's critical for companies to invest in technology solutions to avoid these costly pitfalls. 

“The root cause fix to all ITC challenges is Purchase Invoice Digitization. An average of 2-4% of invoices are recorded incorrectly, leading to unreconciled invoices which can block ITC claims, negatively impact working capital, and result in additional efforts needed for vendor communication to reconcile invoices. We participated in 4 such Taxation and CFO Finance events in the last quarter where we found that more than 60% of the corporates are facing such challenges. I’d say though we won ‘The Best TaxTechnology company of the year’ award in one such forum, it will only be meaningful for us when we can help and enable tax transformation with the right technology for not hundreds but thousands of such organizations.” Founder & MD – Niraj Hutheesing

Solutions for digitizing purchase invoices:

The process of digitizing purchase invoices is essential for the efficient operation of businesses. Fortunately, there are technologically advanced solutions available that can assist organizations in converting their invoices into digital form and optimizing their accounts payable procedures. Among the solutions available, two worth mentioning are invoice digitization and accounts payable automation.

Invoice digitization is an effective solution for businesses that aim to maximize their Input Tax Credit utilization. With this solution, purchase entry processes can be streamlined, reducing the likelihood of errors associated with manual data entry. This solution also leverages e-invoices and other digitalization tools, enabling machine-readability and uniform interpretation of invoices, facilitating enhanced interoperability and consistency in invoice handling. Overall, invoice digitization offers a reliable means of correctly recording the purchase invoices and enhancing overall business processes.

On the other hand, accounts payable automation is a useful solution for businesses looking to manage cash flows effectively and minimise the cost of blocked funds. The automation program performs real-time reconciliation, checks for the documents during recording and withholds payments to non-compliant vendors or raises debit notes where payment has been made, but invoices are not reported by the vendor. By leveraging accounts payable automation, businesses can better manage their payments to vendors and safeguard company’s ITC.

These solutions can effectively streamline the invoicing process and improve operational efficiency, allowing businesses to make the most of their ITC and reduce the likelihood of errors associated with manual data entry.

Benefits that can be achieved by implementing such a solution:

Implementing a purchase invoice digitization solution in combination with other tax-tech solutions can lead to significant benefits for businesses, specifically in maximizing Input Tax Credit and improving cashflows. By reducing manual intervention in the procurement to payment cycle, this solution can also ensure that businesses can claim ITC while safeguarding their rights.

Decision makers can benefit from reduced blockage of funds, which translates to savings in the cost of finance and ultimately increases the bottom line. The solution provides an ROI of 100 percent in less than a year due to the savings in the cost of financing of the blocked ITC.

For tax teams, the integration of the reconciliation status with the purchase register on a real-time basis can insulate businesses from the interest cost related to the availment of blocked ITC. Moreover, tax and procurement teams can benefit from increased efficiency and productivity.

Other benefits include minimizing exposure to interest due to wrongful availment of ITC and further reduction of blockage of funds, which translates to savings in the cost of finance and increases the bottom line. Overall, implementing a purchase invoice digitization solution can lead to significant benefits for businesses looking to maximize their ITC and improve their cashflows.