Digitization could ease MSMEs’ access to supply-chain finance

Introduction

Access to formal credit continues to be a challenge for micro, small and medium enterprises (MSMEs). Lack of reliable financial information is one of the main reasons. This can be solved by linking India’s GST system with the TReDS (Trade Receivables Discounting System) platform.

Why India should link the GST system and TReDS platform?

The Parliamentary Standing Committee on Finance, while reviewing The Factoring Regulation (Amendment) Bill, 2020, recommended that the GST e-invoices above a certain threshold should flow directly to the TReDS platform.

How to link GST System and TReDS platform?

The creditworthiness of MSMEs can be judged from three data points on the GST system: 1) Input tax credit (ITC) being claimed by the MSME; 2) Trade volume as per the e-way bills (EWBs) created by it, and 3) Trade volume as per the electronic invoices raised by MSMEs.

But the ITC and EWBs may not be useful to link with the TReDS platform due to shortcomings like

-ITC does not provide the break-up of ITC seller-wise or invoice-wise.

-EWBs only applies to manufacturers/traders that supply physical goods and one EWB may correspond to multiple buyers.

In the e-invoicing system, a supplier generates a unique 64-character alphanumeric code called the IRN (invoice reference number) with details of its GSTIN, invoice date, internal invoice number. These invoices can be identified with their IRN and can be sent to the TReDS platform to be made available for factoring.

But, to link GST data with the TReDS requires GST Council approval.

What are the benefits of linking the GST system and TReDS Platform?

An EWBs that is coupled with an e-invoice can act as a supporting document for a factoring unit, enhancing MSMEs authenticity.

Help digitize the supply chain of MSMEs, making their access to finance much easier.

Can provide for buyers’ acceptance, which would serve as valid proof, like a goods receipt note.

The GST system can develop a rating system for all taxpayers based on their tax compliance. This may prove valuable for factoring agencies on the TReDS.

Source: This post is based on the article “Digitization could ease MSMEs’ access to supply-chain finance” published in Livemint on 2nd November 2021.