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How MSMEs can maximize input tax credit and better manage cash flow

Ease of doing business for MSMEs: manual reconciliations are cumbersome. Offline tracking and coordination between teams such as the tax team, accounts payable team, etc., will only create additional delays and end up wasting even more ITC for the business. Therefore, the first step should be to automate all GST reconciliations.

By Archit Gupta

Ease of doing business for MSMEs: The introduction of the GST promised taxpayers the free flow of input tax credits (ITCs) throughout the supply chain. However, a few years later, input tax credit claims became a point of contention, with the government capping the provisional ITC at 20%, then further reducing it to 10% and 5%. At the 45th Board meeting, the GST Board made the decision to discontinue all interim input tax credit (ITC) claims in the near future. This means that taxpayers will no longer be able to claim additional ITCs beyond what is reported on their GSTR-2B return. This is a blow for taxpayers, especially MSMEs, who have to deal with small sellers who sometimes delay in uploading their sales invoices.

What is the impact of the removal of provisional ITC claims on cash flow?

With taxpayers allowed to claim provisional ITCs, this gave them the ability to claim an input tax credit on invoices that had yet to be uploaded by their vendors. Delays are usually caused by supplier defaults or because the supplier has elected to file their GST returns quarterly.

Now the government will soon apply an absolute restriction on provisional ITCs and there will be no wiggle room for taxpayers whose suppliers have not uploaded their invoices. Since he cannot claim ITCs on these pending invoices, the taxpayer’s GST liability will have to be paid in cash to that extent. This not only increases cash outflow but also affects the working capital of the business. And in cases where suppliers do not upload invoices at all, it even affects the profitability of the recipient taxpayer.

Why is this problem even more critical for MSMEs?

Unlike large companies, MSMEs generally deal with small suppliers. Now, with increasingly strict ITC restrictions, any delay or default by the supplier prevents the MSME from claiming the optimal ITC. This could end up affecting their cash flow and working capital by up to 7%, which is quite substantial.

In addition, most MSMEs perform their input tax credit reconciliations manually or using tools like Excel. Manual reconciliations are time-consuming and error-prone, further affecting ITC claims and cash flow. Not to mention that incorrect claims for ITCs also lead to the collection of interest and penalties and the risk of cancellation of GST registrations in extreme cases.

How can MSMEs maximize their input tax credit and better manage cash flow?

The answer is simple. MSMEs just need to bring the right digital tools and automate their GST compliance. In fact, simply by digitizing these three core processes, which are part of GST compliance, MSMEs can also increase their input tax credit claims and reduce their cash outflow.

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AI-powered invoice reconciliations

Manual reconciliations are laborious. Offline tracking and coordination between teams such as the tax team, accounts payable team, etc., will only create additional delays and end up wasting even more ITC for the business. Therefore, the first step should be to automate all GST reconciliations.

The advanced GST reconciliation tools available today guarantee 100% accuracy without any manual intervention. Using AI-powered tools, businesses can ensure their input tax credit is claimed accurately and no invoices are missed. In fact, modern FinTech companies offer fully automated solutions where data is exported from the accounting system and uploaded from the GST portal and reconciled continuously. The taxpayer just sees the results and takes action. AI-powered invoice reconciliations also help detect missing invoices or mismatched data so that the company can get in touch with the supplier at the earliest and have the invoice uploaded or rectify the inconsistencies.

One-click supplier communication

The second process that smart companies are automating today is communication with suppliers. With increasingly stringent ITC claims and ever-increasing reliance on vendors, the need for automated vendor communication is all the more necessary. No business wants to spend precious man hours reminding their suppliers to upload invoices and constantly follow up with them. MSMEs should consider digitizing this process and benefit from one-click communication with suppliers via email, WhatsApp, etc., which will contribute to faster invoice uploads and higher ITC claims.

Automated supplier payment management

Automating vendor payments is extremely essential for a business to truly maximize its ITC and reduce its GST cash outflow. Unless suppliers are aware that their payments may be withheld for non-compliance, they may not take uploading invoices seriously.

However, the withholding of payment cannot be done manually and must not violate the terms of payment for MSMEs in India. This process should be automated using the right digital tools and strategies, like vendor gamification. For example, an MSME can set supplier payment terms to automatically withhold the GST amount if the supplier has not filed their GST returns. This decision can be synchronized with the accounting system and used for all future payments. Over time, failing suppliers decrease and CII claims increase.

Digitization is key to maximizing input tax credit claims

Regardless of business size and scale, it is imperative that businesses consider digitizing their GST compliance today. Technology helps in more ways than one. In addition to maximizing input tax credit and reducing GST cash outflows, it contributes to faster and more efficient GST returns and also reduces the risk of interest and penalties.

Archit Gupta is the founder and CEO of Clear. The opinions expressed are those of the author.

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