Guide to vendor payment automation for businesses
What used to be the job of liquid cash and safety lockers is replaced by banks and payment solutions now.
Businesses are on the cusp of throwing away their checkbooks and shifting to online payments to make vendor payments. Especially in the metro and suburban parts of India, merchants use real-time payment methods like credit cards, wallets, and mobile apps.
But using digital solutions alone cannot be termed automation. This guide talks in detail about how businesses can achieve vendor payment automation.
What are vendor payments?
Vendor payments are the payouts that a vendor sends to their stakeholders and suppliers in exchange for goods, stocks, or services. The accounts payable department of a company handles vendor payment management and vendor payment processing.
The vendor payment process starts when the supplier company raises an invoice and sends it to the buyer through email or post. The buyer company verifies the invoice and its entries and approves it for processing on mentioned due date.
On or before the time and date mentioned, the payment is made by cash, cards, online banking, or wallets like Google Pay.
Also, you can check out our article on what is an invoice in accounting to understand the essential role invoices play in financial transactions.
Applicability of GST on vendor payments in India
In the pre-GST world, vendor payments were much simpler. Since the introduction of GST in 2015, vendor payment deposits have become complicated.
The taxpayer is eligible to avail of input tax credit for a goods purchase, only if the vendor has registered with GST and paid taxes for selling the goods/services.
In order to save money on taxes and comply with the established norms, companies revised their vendor payment terms and altered their vendor compliance list.
Here is how GST is applicable to vendor payment management in India.
• If the vendor is a registered GST taxpayer from India, then the buyer should pay the GST applicable for the purchase of goods/services to the vendor along with the invoice payments.
The invoice carries the GST entry and amount along with the price to be paid. The supplier here makes the payment while filing the GST.
For purchases within the same state, CGST and SGST are levied by central and state governments. For inter-state purchases, IGST is included too. The buyer can file ITC for selected purchases.
• There are many unregistered GST businesses operating unofficially in India. When a buyer makes a purchase from them which is entitled to levying GST, then the buyer themselves should file and pay the GST under the reverse charging mechanism.
Here, the buyer will create and send a self-invoice recording the purchase, price amount, and GST components for records purposes.
Using this, they will file a GST and pay the taxes. ITC claim is possible for the purchases and expenses spent on promoting/expanding the business.
• The vendor and recipient can have contracts and clauses that underline the timely payment of taxes.
• There are two major forms concerning tax filing for invoices and ITC credits avail. They are GSTR 2A and GSTR 2B.
If a supplier doesn’t file invoices on time, that respective invoice won’t be available for the buyer company while filing ITC in GSTR 2B. For the entire input credit to be available and released, the invoice should be filed first and matched properly while filing ITC.
• So, the GST has the potential to make or break vendor relationships and create disputes over vendor payments.
Vendor payment procedure in India
Vendor payments processing involves receiving paper or electronic invoices and making payments on time.
Generally, it’s the accounts payable department that handles outgoing expenses and vendor payment management.
For small businesses, it’s a small team or a single bookkeeper who takes care of vendor payments. Vendor payment management is given great importance as it can impact the relationship with stakeholders and affect business productivity.
1. Collect the invoice from the vendor
The vendor sends an invoice after making any purchase or availing of a service from them. It’s the responsibility of the accounts payable team to collect the invoices in whatever mode they send them in.
They can communicate or follow up with the vendor to find out missing or delayed invoices.
2. Make an entry in ERP & accounting system
After receiving the invoices, the accounting team will organize them depending on their due date, payment category, urgency, and many more.
A fair share of the companies in India relies on digital accounting systems for expense reporting if not for making payments.
So, the data from the invoice will be uploaded manually into the ERP system. Modern ERPs come with the ability to be connected to OCRs that can capture the details of an invoice automatically and upload them into the system.
3. Calculate for tax TDS ITC, Under GST
TDS is tax deducted at the source. When a buyer pays money to the seller, they deduct an amount from the total money they owe to the seller and deposit that in the government account.
TDS is applicable only if the value of goods exceeds Rs.50 lakhs. The value of TDS is deducted from the total amount the supply is worth and it doesn’t include CGST and SGST. And the TDS percentage is 0.1%.
4. Any tax payable is paid
If TDS is applicable to the purchase for which the vendor payments processing is pending, then it should be deposited on time. It can be reported during the monthly or quarterly ITC filing using the GSTR 3B form.
5. Get authorized signatory
Once the tax items are detected and the invoice details are verified, it gets moved to the next stage. Be it manual or automatic vendor payment processing, the accounts team sends out the payment only after they receive the approved signal.
They have different approvers for each payment category. They request approval over mail, physically bring it to their table, or use invoice processing apps. The approver can either approve or reject the invoice.
6. Make the vendor payment
Once the approval is obtained, the invoice is ready for payment. Some vendors mention a due date and some don’t. In either case, an earlier payment is the most recommended.
They can process the payment and settle it by paying through online payment applications, wallets, UPI, bank transfers, or cash along with the determined GST.
If you have established vendor payment automation, the payment will stay in the queue and go out on time.
7. Send the receipt to the vendor
Once the accounts payable team receives the confirmation from the bank, a receipt stating the same is sent to the vendor as a confirmation
This message is to let the vendor know the processed payment so that they can expect your payment and plan their cash flow accordingly.
Suggested read: Guide to bulk payment system in India
Rules and regulations by the government on payments related to MSME vendors
In order to help the vendors stay compliant with GST taxation and file taxes on time accurately, Government has set up the following rules.
These sections and acts enforce MSME (micro, small and medium enterprises) to not delay the GST filing and explain the legal implications that delayed payments can lead to.
1. Companies Act, 2013
According to the MCA (Ministry of Corporate Affairs), any company that makes purchases from a company that falls under the MSME category should file a half-yearly return using the form MSME 1.
This is applicable if that company has pending or uncleared vendor payments for more than forty-five days for the goods or services buys they have made from other MSME suppliers.
So, when the MSME vendor payments are pending for more than 45 days, they are liable to file the MSME 1 form mentioning the reason for the payment delay.
This act ensures that MSME companies receive their payments on time and that the payment outstanding duration does not exceed a month.
If a company misses filing the consecutive MSME 1, then they are charged a penalty of Rs. 20000 and for each missing day after that, they are levied Rs.1000 which can increase up to Rs. 3 lakh.
2. MSME Act, 2013
In order to strengthen the vendor payment terms and protect MSME, the following sections are established.
Section 15
Section 15 enforces companies that make goods or services purchases from micro, small, and medium-sized enterprises should make their payment promptly within 45 days from the date of purchase or the date when the invoice is raised.
Section 16
Section 16 underlines what the buyer company is liable for when they miss making the payment within 45 days of purchase and encroach on section 15.
Despite the presence of any live agreement or vendor payment terms that the buyer and seller have signed and are currently active, the buyer should pay the invoice amount with interest.
This interest rate is three times higher than the actual interest rate determined by the RBI. And the interest is calculated for the period from the payment missed to the final payment date.
Section 22
If the buyer company is in a state to conduct any audit, the company must produce the following information and supporting documents.
• If there are any unpaid vendor payments and accrued interest pertinent to that at the end of the accounting period.
• If any supplier payments have been made on delay along with interest as per section 16, the total amount and interest paid to the vendor during the concerned accounting period must be mentioned.
• The total interest amount that’s left unpaid at the end of the accounting period where the actual amount has been already paid but beyond the 45-day time period limit.
• The total interest amount that can be accrued for unpaid vendor payments even after the end of the accounting period till the payment and interest get fully paid to gain the eligibility for
disallowance.
Impact on business for not complying with companies act, MSME Act 2013
The buyer company is supposed to make vendor payments on time. Not clearing the invoices before their due date in India can bring the following consequences and here is what the buyer company is liable to do.
1. Non-compliance with the Companies Act 2013
If the buyer company repays the vendor payments to an MSME vendor company after 45 days, here is what they are liable to do according to the companies act 2013.
Half-yearly GSTR filing and reporting
They have to file MSME 1 form twice a year for all pending payments of the half-yearly period. This filing happens online and every detail regarding the delayed payment should be reported through this to the Ministry of Corporate Affairs.
Financial Report and auditing
In the financial statement of the respective year, the buyer company should report the data below regarding the delayed vendor payments.
The total amount that the buyer company owes to the seller and the accrued interest for the delayed period, the interest that has already been paid and is pending, and the interest that will be accrued and paid in the succeeding year.
2. Non-compliance with MSME Act 2013
Here is how the MSME act 2013 affects the late payers who delay vendor payments to MSME businesses in India for more than 45 days.
Liable to pay interest
When the buyer doesn’t pay within 45 days from the date of purchase is liable to pay interest on the principal amount as per section 16. This interest is paid to the MSME vendor and is growing in nature.
Reporting
Similar to the company’s act, of 2013, the buyers are entitled to report the interest and payment details in their financial statements and audit papers.
Liable for court charges and petitions by vendors
Many vendors have filed cases on buyers when they don’t pay for ages nor provide a fitting response. As expected, the court has ordered given its verdict favorable to the vendors and raised orders to the buyer to make payment and interest on time.
How you can automate your vendor payments with Volopay
Vendor payment automation is crucial in these times when you can never predict when your company is going to scale.
Any disturbances in your outgoing payments will make you liable to pay an incessantly growing interest or face lawsuits and court orders that can impact your brand name.
So, the need for perfect vendor payment software is higher than ever as companies in India don’t want to afford the repercussions of delayed vendor payments.
Volopay is the perfect answer to your vendor payment management requirements. It helps in end-to-end vendor payment automation and ensures that no payment is left unpaid.
Your accountants would breathe a sigh of relief as they don’t have to manually enter or transfer the invoice and payment details from one software to another.
In a few clicks, they can create bills, divert them to pre-destined approvers, and schedule them till their due date. Here are some of the hard-to-resist features of Volopay that can transform the way you do vendor payment processing.
1. Easy cross-border transactions with card payments
Got a vendor from overseas whose payouts are unmanageable? You can use our corporate cards for making cross-border transactions. They work just like normal cards and can be connected with its relevant departments and budgets too.
2. One time burner cards for each vendor
Volopay has both one-time and recurring cards that you can create in as many counts as your business requires.
Cards are the perfect way to pay monthly subscription costs that occur every month. Similarly, they can be also used just one time and discarded after use by freezing them.
These are one-time cards that are safe to distribute even for employees to fulfill their business obligations.
3. Lowest FX fees
Worried about spending more than the actual bill amount to make a foreign transaction happen? Volopay got you covered.
Now you can make quick foreign transactions at low fx costs better than what traditional banks and western union can offer. Our prices are better and competitively lower than other global payment solutions in India.
4. OCR for capturing supplier invoices
OCR is for capturing data automatically and loading that into the vendor payment software. It’s the peak of vendor payment automation that simplifies uploading invoices into the system.
You can receive invoices in any form; this system will scan and update the content in minutes and pull up the vendor records from the vendor payment management application.
5. Real-time visibility to track payments
You might have tons of vendors you pay regularly using Volopay and also make other business payments
If you cannot see it, you won’t be able to realize how much spend. Volopay gives a real-time peek into your payment history and shows you where your money is spent, category-wise and department-wise
Tracking payments is the pivotal part of vendor payment software as you can track your vendor payments separately and know if the payment is made or not.
6. Reconcile tx with your accounting books
Accounting integration makes your job easy as you don’t have to update every transaction manually into your other bookkeeping software like QuickBooks or zero.
Instead, you can connect them with each other and let Volopay integrate seamlessly and sync the payments. You can enable manual synchronization too.
Vendor payment management in India is a burdensome task with all the GST estimations and penal charges for late payments. You need efficient means like vendor payment automation to handle them and stay aligned with your vendor payment terms.
By paying on time, you are strengthening your relationship with vendors and keeping them a part of your thriving business network.