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How to automate vendor payments to reflect vendor compliance status

How to automate vendor payments to reflect vendor compliance status

The role of vendors in business compliance has become significant with the government introducing new restrictions in Goods and Services Tax (GST) laws. Previously, when a purchase was done and paid for, a business’ taxes and credit claims were not impacted by their vendors’ compliance. Now, the dependency on vendors to comply with invoice uploading is more than ever before.Changes in the GST lawLet’s take a look at what brought about this radical change. In 2019, the government introduced Rule 36(4) in the GST law. Under this rule, businesses were not allowed to claim more than 20% of provisional input tax credit (ITC) on invoices not uploaded by their vendors. Vendor compliance became critical to your own compliance.In 2020, this percentage was reduced to 10% and thereafter 5%. Very recently, the government took its final stance on restricting ITC claims. Now, businesses cannot claim input tax credit on an invoice at all if the invoice has not been uploaded by the vendor.Impact of vendor non-complianceIf a vendor does not upload invoices in time, then the business’ tax liability needs to be paid in cash to the extent of the invoices not uploaded. This, in turn, negatively affects working capital. Further, in the case of certain vendors who do not upload invoices at all, the recipient business’ profitability ends up taking a hit.As per Clear’s research, businesses lose up to 8% of their profits due to improper ITC claims. About 7% of their working capital gets impacted due to the same reason. For large enterprises, this figure could work out to tens or hundreds of crores of rupees.Besides ITC claims, large businesses also spend huge amounts of time and money each year on manual data reconciliations and following up with these non-compliant vendors. With the complexity of business compliance constantly increasing and multiple teams handling multiple vendors, it becomes impossible to keep track of individual vendors and their invoices. Some enterprises devote resources to train and educate their vendors about how to go about filing GST returns and being compliant. These vendors need simple solutions to easily resolve their GST related challenges and continue to supply to their customers and be able to offer ITC to them.What are the challenges involved in getting vendors to comply?One of the key challenges that enterprises face is in terms of reaching out to their small vendors. These vendors have intermittent access to emails, and they typically file quarterly returns. Despite repeated follow-up efforts, the status of the invoices uploaded by these vendors rarely change.The government has given quarterly vendors the option to use the Invoice Furnishing Facility (IFF) each month to upload their sales invoices. This would help their customers claim input tax credit on time. However, most small vendors do not make use of this facility. Clear’s research further showed that one of the biggest reasons for the low adoption of the IFF facility is lack of awareness. Large enterprises need to look at educating their small vendor base to ensure a higher adoption of the IFF facility by all QRMP scheme (quarterly filing) vendors.What is the solution?About 35% of businesses are fed up with non-compliant vendors. And wish to block their payments but are unable to do so due to this exercise being manually driven. Vendor payment blocking, if not done right, can lead to serious implications. Vendor’s need to be assigned a rating which defines the risk from their non-compliance. Yet this is a thin rope walk as businesses who do not want to withhold payments for these vendors may not be able to survive lack of funds, ultimately impacting the supply chain. Not only should vendor’s risk categorisation be taken into account, but withholding payments for critical vendors could be catastrophic. This is why businesses need the right tools and processes in place to be able to ethically block vendor payments, and this can be done only by automating the vendor management function.Technology plays a very important role in vendor management, right from vendor onboarding. In fact, just by digitising the vendor onboarding function, a business can ensure that it only deals with vendor partners who are 100% compliant in filing their GST returns. This means that the vendor onboarded is not likely to default in the future and will upload their invoices on time.Next comes automating the vendor communication process. With one-click communication and bulk emailing/messaging, there is less need for manual intervention with more likelihood of getting the vendor to actually comply.Last comes vendor payment automation. Automating the vendor payment process using technology like vendor gamification will ensure that an enterprise only pays compliant vendors and withholds the payments of defaulting vendors. Most businesses wish to do this, but due to manual processes, they cannot execute it. But, with automated vendor payments that are synced to a business’ ERP, the payments of frequently defaulting vendors get withheld until the vendor complies.How does Clear help automate vendor communication and payment blocking?Clear recently launched a new solution called Clear Max ITC. This solution automates a business’ vendor management function by leveraging advanced technology. Vendors are categorised based on an intelligent risk assessment into low, medium and high risk. The enterprise then decides the payment terms for each vendor category. For example, for a medium-risk vendor, the payment terms can be set to hold the GST amount if the vendor does not file their returns.Clear Max ITC gives enterprises the flexibility to alter the payment terms to suit business needs. By tying up vendor payments to the category of the vendor, businesses will not just have zero ITC that has not been filed but also a significant reduction in ITC that has been delayed.Vendor communication is also a very critical part of the ITC maximisation journey. Clear Max ITC relies on not just one communication channel, i.e. email, but multiple channels like SMS and Whatsapp to fast track vendor communication. With the entire vendor communication flow automated, businesses only need to select the vendor type, and the communication will be carried out accordingly.Clear Max ITC also comes with vendor enablement. There are so many small vendors who are quarterly filers and do not even know how to use the IFF. Clear goes a step ahead by facilitating training courses for using the IFF. Clear further helps in digitising small vendors by providing them with simple software and tools to run their business more effectively and remain compliant. A compliant vendor translates to more ITC for the recipient enterprise.Hence, just by maximising the amount of ITC claimed each month, a business can increase its profits by up to 8%.Download.

brand-post 2021-10-21 Livemint