What do we mean by Problem of Invoicing or GST here?
Well, IT Companies specially those involved in development or designs specially faces an Invoicing problem. Let us explain the same here:
How generally the IT Companies function in terms of sales:
All this sounds so Simple and Perfect!! But the reality is
So, a person didn’t hold their part of the bargain, they didn’t pay, so-what? Is that big an Issue.
So, fellow Business-men, the Issue is Simple:
You made an Invoice and never received money against it. So, your Sales are on a higher side and Money never flew in. Your receivables get higher too. It’s a guaranteed 99% chance that you might never receive this money. But because this was recorded in your sales you might have to pay taxes on this amount which will include (Income Tax @30% (approx.) and GST @18% (Approx.)), Now think about you’re the total amount you didn’t receive. And the Tax you have to pay on the same in a Year and do remember these taxes are not just entries real cash outflow of Company is Involved.
In Accounting once an Invoice Is made it cannot just be Cancelled or thrown away. Now, what to do, just reverse these Sales Invoices. Sounds Simple but here are Some Issues in this too….
- One method to go for is Writing off the Receivables. I.e. to Claim the money not received as Bad-Debts- Expense in your P&L account and reduce your profits for Income Tax Liability. Now, its not that simple, and not just a Book Entry and if you have been doing it like this then you are probably 90% wrong, due to following reasons:
- As per Limitation Law of India a debt is still considered good if has not been due past 3 years. So if you write these amounts off as Bad Debts in the same year you made them the Invoice you are probably looking for an Addition by the Income Tax Officer for the same. Also as per new guidelines of Income Tax you will have to quote PAN No’s of those parties you have written off in your books accounts in your ITR Form. So from the persons to whom you could not sell your product, do you really think that you will be able to get their PAN no’s and that too to report to Income Tax Department?
- Also remember if your Invoice has GST Applicability on it, that GST wont be reversed with write offs and you will have to pay the same from out of your pockets.
- Second is a little easier than first: Issue Credit Notes: What are Credit Notes? Credit Notes are basically negative sales, for every Invoice you want to cancel you can create a credit note which will reverse the said sale and reverse the GST on it too.
Hence, your sales will be reduced so no extra Income Tax and Your GST will reduce too. (Remember you can always make an Invoice and Create Its credit note in just a click with our GST Automated INVI Invoicing Software: Signup for higher profits and your virtual accountant at WEB: https://inviindia.com/. or Download it at: Apple App Store (IOS): https://apps.apple.com/in/app/invi-invoicing/id1570035950 Google Play Store (Android): https://play.google.com/store/apps/details?id=app.inviindia.invi).
So what is the Issue with Credit Notes?
- Credit notes are generally fine if your sales maximum sales are converted, therefore the number of Credit Notes will be smaller. But if 20% or more of your sales are not Converted and Credit notes are created for the same this might cause an eye of the GST Department rolling towards you.
- Secondly if A sale Invoice attracting GST is made in a month and is cancelled via credit note the other month then you will have to pay GST from out of pocket in the previous month itself hence creating a cash flow trouble.
- But with credit notes the major issue comes if you are an Exporter. Well we don’t want to scare you with RBI or ED, but as per RBI Notification No. FEMA 23(R)/2015-RB, Foreign Exchange Management (Export of Goods & Services) Regulations, 2015, if you are making an export of Software or Its related services then the payment against the same must be received within 9 months from the date of Export. And If you make an Invoice to these people then the same will be considered as Export Made. So making them believe that it was not will be a difficult task for you.
- And also essentially the payments are received in these cases as advance, so making Invoices for the same is not suitable.
So, What to do?- How not to pay high amount of Taxes which should not be due to you and also not get into any troubles with revenue authorities.
Well, there can be a way till the time the Revenue understands your problems and create a solution for this-
This way is elegant and simple:
Don’t create an Invoice, instead make an Estimate/Proposal/Quotation for your client, and if against the Estimate, Proposal, Quotations etc. payment is received from your client then only duly make a Tax-Invoice for them and send it to them.
Don’t worry its not a scheme or against the law all those people who have good accounting knowledge will tell you this that this is the best way to keep your Books of Accounts neat and clean and to make them reflect the real situation of business which wont have any dubious and false sales or receivables entries.
This is also very easily understood by the revenue authorities, as the same stands only logical and legal solution for this problem right now.
How Can INVI Invoicing Help you In this: