JULY 13, 2020

Dr. Shrikant Kamat, Advocate & Counsel - Taxation & Commercial Laws, Founder & Proprietor - Shrikant Kamat & Associates

(This is the 3rd and final instalment of the 3 part discussion paper wherein the author brings out the importance of fintech in the modern world and how India's GST law tries to enable this digital revolution)

Fintechs will be key players in India's GST ecosystem

As lenders and bankers find innovative ways of financing businesses, Reserve Bank of India (RBI), the regulator, also plays catch up by introducing regulations to govern these innovative processes so that unfair practices and data misuse can be prevented alongwith balancing customer demand for better data management. The ever increasing number of banking frauds clearly point to a gap between business innovations in financing and meticulous conformance to regulations consistently.

Digital solutions are rapidly capturing the large empty space that is created by paper based compliances in the BFS sector. These solutions adequately address the rising compliance management mandates. These are commonly known as Regulatory technology software, or RegTech, in Fintech parlance. These regtechs help companies in the BFS sector in managing and complying with regulatory protocols more efficiently. The technology helps complete legally mandated tasks faster at lower costs and with lesser errors. It also enables the compliance ecosystem to catch up in real-time as regulations multiply faster.

Role of Regtechs in the GST ecosystem

Until the introduction of GST in India, a large section of businesses was using pre-printed stationery and pen to raise invoices. Besides, small entrepreneurs generally rely on their accountants to understand the status of key variables such as profits, receivables, stock adjustments, etc. They also find the use of accounting software complex as it requires extensive training. Introduction of GST marked the onset of the era of automated and online compliance in the field of indirect taxation in India. The government's digital initiatives such as setting up the GSTN portal are the key steps towards enabling greater accountability and transparency in business transactions, while initiating consumer friendly technology solutions to the masses. With the advent of GST, the demand for accounting software surged and also a new category emerged: GST accounting applications to tap into the millions of micro and small entrepreneurs who fall under GST ambit and would require a proper digital GST invoicing and accounting solution. GST, t he tax reform, has certainly brought about a sea change in how the micro, small and medium business enterprises ( MSMEs) now undertake tax compliance.

GST has paved the way for online generation of financial data of all enterprises over the GSTN portal. Regtechs integrate with the GST compliance applications to access this data and to assess the creditworthiness of the loan applicant and make data-driven decisions in credit lending to MSMEs. Along with the data on e-way bills, data of purchase and sales uploaded on GSTN ensures precision and transparency of the business. In a nutshell, the data generated from GSTN helps Regtechs in assessing the financial health of the business in terms of its cash flow, supply chain and sales.

Given the enhanced transparency in the entire supply chain, as there is a record for every transaction including sales and purchases, such record-keeping is useful for authentication when lending agencies undertake credit assessment with the help of fintechs. Instead of relying solely on traditional lending parameters including credit scores, previous credit history or financial data that applicants provide, relying on the GSTN data enables lenders to provide the working capital in right measures to MSMEs with minimal documentation and maximum speed. In fact, GSTN data has also helped fintechs in creating customised lending products tailored to the specific credit requirements of each borrower. 

Banks and non-banking companies have automated the goods and services tax (GST) functionality with the revenue management solutions developed by many regtechs. Banks use these solutions for tax segregation, tax accounting, generating tax invoice and all process for data filing. The GST module sits on top of the bank's core processing software, integrating into the existing enterprise solution.

How does GSTN data help fintechs?

The data on the GSTN portal typically includes:

- Purchase Data - Inward supply information about goods and services;

- Sales data - Outward supply of goods and services, aggregate turnover, HSN- wise classification;

- Purchase data - inward supply of goods and services, input tax credit available

- Customer Database - Profile and details of customers across products and services

- Vendor Database - Complete vendor list and purchase trends across products and their detail breakdown

- Demographic data - State-wise bifurcated information and breakup of data

- Public Data - Compliance status and GST registration details

Gaining insights from the GSTN helps the fintechs create an accurate and personalised profile of the loan applicants, which in turn helps banks in delivering personalised loan offerings with competitive interest rates that cater to the need of the end user.

Fintechs verify whether loan applicant is providing the right financial information by comparing real-time information from the GSTN. This helps banks in understanding the financial health of the business accurately assessing whether the applicant/ borrower will be able to repay the loan through. Thus, by analysing GSTN data, fintechs can help lenders in considerably reducing, if not eliminating, prospective defaulters.

By building a relevant statistical model from data accessed from GSTN, fintech platforms can access instant insight into the overall credit behaviour of the applicant. The high-end analytics of the Fintech's solution could provide a detailed analysis that takes into consideration several data points including the GSTN, multi-credit bureau analysis, bank statement analysis and more.

GST E-invoicing and the Fintech angle

If Covid-19 doesn't create more troubles for India's beleaguered economy, then, on 1 st October January 2019, e-invoicing will be mandatory for many businesses undertaking B2B and B2C transactions. ¹ This is by far the brightest spot in the star that India's GST is made out to be. Taxpayers will issue invoices and send them to Invoice Registration Portals (IRPs). The IRPs will generate a unique Invoice Reference Number (IRN) for each invoice, sign them digitally, and produce a QR code. The IRPs will email e-invoices to the Goods and Services Tax Network (GSTN) along with the invoice recipients. Companies must generate invoices in JSON format.

An open-API MSME solution based on TReDS data, that is validated by GSTN with authentication from the trusted e-invoice infrastructure designed around TREDS-GSTN integration is also likely to be rolled out by many fintechs soon to supplant a cash-flow based financing for MSMEs by lending institutions. ²

The road ahead for Fintechs

GST has brought in a data boom in the country. This big data needs to be harnessed effectively with the help of analytical tools and algorithms to achieve the desired purpose for banking and financial companies, in addition to institutions engaged in financial research. This is what Fintechs can achieve by using new age technology encompassing block chain, artificial intelligence and internet of things (IoT), among others. However, what Fintechs need to also set out to do is to eliminate duplication of data entry and integration of data uploaded by the taxpayer across the monthly return, the annual return, the E-way bill and the e-invoice when lending institutions need to verify the authenticity of inward and outward supply transactions.

If Fintechs can pull the taxpayer's data related to import and export directly from the ICEGATE portal and validate it with the inward and outward remittances, even validation of transactions for the purpose of export trade finance or working capital loan disbursal will become hassle free, especially for MSMEs.

It is beyond any doubt that Fintechs will be all pervading in our daily lives hereonwards, but whether they can create a simple and user friendly ecosystem for the banks as well as for the tax payer is something that we have to watch out for in the next few months. The Covid-19 pandemic has only hastened this process and the future is definitely promising for fintechs as much as it is exciting for the consumer.

(concluded)

[The views expressed are strictly personal.]

¹ The implementation process is planned to be gradual, starting with companies invoicing over INR 100 crore per year, followed by others on a piecemeal basis. At B2C level, the e-invoicing requirement is for businesses with turnover in excess of INR 500 crore to issue invoices to individuals including a QR code containing payment details for traceability.

² Source: The Financial Express accssed at https://www.financialexpress.com/industry/sme/fintech-to-the-aid-of-msmes-cash-based-financing-e-invoicing-for-gst-could-soon-be-reality/1693924

See Part I & Part II