In line with the digitization of tax compliance, countries like India and Russia have already mandated e-invoicing for most of the transactions which would come under the purview of their GST/ VAT regimes. E-invoice is typically a structured invoice that is generated and exchanged between a supplier and recipient in an electronic format like XML as opposed to the conventional approach of sharing the invoice details with the tax authorities after sending the invoice to the customers.
From a business perspective, e-invoicing simplifies compliance requirements, since most of the returns related data gets auto-populated from these invoices, thereby obviating the necessity to upload most of the returns data as annexures. Transactions are processed swiftly, the per-transaction cost and human error risks also get reduced, while encrypted files, digital signatures, and secure computer servers improve upon the security and confidentiality factor.
From the government perspective, unlike the traditional method of periodic reporting of aggregate data, this system seals revenue leakages, since all the relevant transactions would need to be invoiced through this system which results in real time transaction reporting.
The European Commission has started a public consultation with the endeavor to standardized electronic VAT invoicing for Intra-EU transactions, which, over a period of time, would result in a complete harmonization of VAT reporting obligations. However, confirmation of the member countries of the EU is necessary from the alignment and interoperability perspective. As of now, 13 EU countries seem to be aligning with the e-invoicing requirements.
Few countries have already mandated e-invoicing for business to government (B2G) transactions while Italy alone mandates e-invoicing for both government and private sectors. Italy follows the Latin American model, under which, each electronic invoice is sent to the tax authority who validates it using a digital signature and either returns it back to the entity who raised the invoice or delivers it to the client directly.
A legislative proposal is expected to be submitted by the EC during 2022 as ‘VAT in the Digital Age’, like the ‘Making Tax Digital – MTD’ initiative of the United Kingdom. The key topics to form a part of this proposal would be.
- Electronic Invoicing
- VAT Reporting
- Unified VAT Registration for the Entire EU
- Avoidance of Revenue Leakages (EU has estimated the revenue leakage in 2019 as a whopping 134 billion Euros)
The Organization for Economic Cooperation and Development (OECD) is also analyzing the e-invoicing concept and a report from them is expected during the second half of 2022.
At present, different countries in the EU have different strategies and approaches with respect to e-invoicing. For example, the Federal Republic like Germany has 16 partly autonomous federal states resulting in the e-invoicing competencies being divided between the federal states and the central ministry. Italy has e-Invoicing for all types of transactions, while various other EU countries have implemented the same only for B2G transactions. Standardizing the formats and mode of e-Invoicing within the EU countries would result in a substantial reduction in compliance cost and efforts, while ensuring that the governments effectively plugs the revenue leaks.