The real cost of non-compliance on your business

The cost of compliance refers to the expenses involved in keeping a business compliant with the relevant laws and regulations. From recordkeeping to tax filings and audits, one of the main reasons that companies adhere to compliance requirements is to avoid the hefty interest fees, fines and penalties that come with it.

However, in doing business today, this is only the tip of the iceberg, as the impact that non-compliance has extends far beyond just the bottom line. The financial impact is significant, but the insidious risks to business are even more severe. So, why has compliance become such a challenge today, and how can enterprises mitigate the cost of non-compliance?

Evolving laws and the shift towards a real-time approach makes compliance a challenging affair

Every organisation in the country wants to be compliant with government regulations and tax laws. However, the constantly evolving laws and the government’s shift to a real-time approach to compliance make the mission to maintain 100% compliance quite challenging.

The Indian tax system has evolved to become an interconnected network encompassing direct and indirect tax laws, e-invoicing, e-way bills, and company and labour laws, with several payments, filings, audits, and rules to adhere to. A single source of data input now flows across various government tax and compliance ecosystems..

For instance, data inputted into an e-invoice flows into e-way bills and multiple GST returns. The same is then used as proof of tax credit for the customer. This data is then reported on the income tax portal as well. Infact, a recent advisory by the government has now stated that all e-invoices must be generated within seven days from the date of the original invoice. While this rule is proposed to be implemented for large enterprises from May 2023, there is a possibility that it could get extended to all other enterprises in the future.

This goes to show that the government is pushing for real-time compliance. Even the slightest error or oversight in data input could result in a domino effect across the network. This magnifies the need for accurate data entry and frequent data reconciliations on a weekly basis, albeit even more frequent for large enterprises.

The real cost of non-compliance

It’s known globally that the cost of non-compliance is way higher than compliance and this is true in the case of Indian tax laws and regulations.

Today, the cost of non-compliance is measured by monetary losses and other critical business risks. Let’s take a look at them.

• Huge fines and penalties

Given the stringent laws and regulations today, any non-compliance is met with huge interest fees, penalties and fines depending on the offence. In some cases, non-compliance could also bring on legal ramifications and lawsuits from customers and network partners that are unnecessary, time-consuming, and warrant high settlement costs.

On the other hand, zero violations do not automatically equal compliance. This is a misconception that could prove expensive. One of the reasons a company may not have experienced a regulatory violation is that it just hasn’t been detected yet.

Fortunately, finance leaders have now realised that it would be more beneficial to invest in a good compliance solution today rather than pay a larger sum of money towards damages later..

Proactive rather than reactive compliance comes with a reduced risk of notices and lawsuits. One of our clients, a B2C unicorn company, reduced their default notices by 70% by automating its TDS filing process. The inbuilt, system-driven validations also minimised vendor escalations by almost 80%.

• Impact on working capital and profitability

Most businesses only consider the financial cost of non-compliance in terms of fines and penalties but fail to notice the cash flow leakages and bottom-line impact. With the recent tweaks in the GST laws, enterprises bear the brunt of their vendors’ non-compliance. For instance, suboptimal input tax credit (ITC) claims directly impact an enterprise’s working capital and profits.

We realised how big an impact this was when one of our customers, an e-commerce giant, identified mismatches in their input tax credit claims amounting to more than Rs.146 crore. This happened only due to suboptimal reconciliation of purchase invoices, a key gap in the GST return filing process. However, by switching to an AI-based reconciliation tool, they could gain an additional Rs.60 crore of input tax credit, with an ITC-matching level of 92%.

• Business disruptions

Non-compliance can be brought on due to internal errors and misjudgements or due to supplier or third-party failings. When served with notices for being non-compliant, companies typically face business disruptions until the compliance requirements are met. In some cases, new processes may need to be set up, which would further extend these disruptions. Business disruptions also bring other detrimental consequences, such as loss of productivity and monetary damages.

To mitigate business disruptions, finance leaders must look at having a single source of truth to understand and mitigate internal compliance risks and gain full visibility over their entire supply chain ecosystem.

Loss of reputation

Reputation risk is also one of the top business risks in today’s world. The power of the internet and social media has ensured that absolutely nothing can be hidden when it comes to business non-compliance. A word about the smallest breach of the law could spread like wildfire. Loss of reputation affects potential customers and other stakeholders, potential new employees, and public relations. Brand reputation, once lost, takes years to earn back. This also increases the cost of customer acquisition as the trust has to be rebuilt.

Every business decision and act of compliance today must be taken, keeping in mind business reputation. It’s always better to err on the side of caution rather than default and deal with the consequences.

• Revenue losses

Even though we have already discussed financial losses in terms of working capital and bottom-line losses, nothing is as hard a hit as revenue losses. Customers these days will refuse to engage with an unethical brand, as this would contribute to their own loss of reputation.

Self-regulatory initiatives are critical to gain customer trust and loyalty and prevent revenue losses.

How can businesses avoid the hidden costs of non-compliance?

One of the best ways businesses can avoid the hidden costs of non-compliance is by gaining full visibility over the activities of their in-house finance teams and those of their network partners. This visibility can only be achieved by taking compliance completely digital. Once finance leaders can get a holistic view of their entire compliance ecosystem, they can insulate themselves from all kinds of business risks and mitigate the cost of non-compliance.

It is important to note that while technology helps businesses reduce the cost of non-compliance, it does so by increasing its effectiveness. In fact, by using automated reconciliations, one of our large FMCG customers reduced the time taken on ITC reconciliation each month from ten days to four days..

They also cut down the time spent on data preparation and GST filings from four days to just one day. This move also came with an increase in the ITC matching percentage from 20% to 80%, thereby reducing their GST cash outflows and unblocking working capital.

Reducing the time taken for compliance-related activities translates into huge savings through reduced manpower in the long run. However, the improved accuracy that comes with it is the icing on the cake. By using a reconciliation tool, businesses can save lakhs and crores each month, depending on their turnover. At the same time, the actual cost of compliance in implementing the solution is just a fraction of the money saved.

Using an integrated platform for all business and tax compliances

To mitigate the high costs of non-compliance and the insidious risks that come with it, business leaders must look at optimising, standardising, and automating compliance efforts. Bringing all compliance-related activities under a centralised platform will help greatly decrease costs, improve visibility, and in more efficient decision-making.

Clear (formerly ClearTax) recently launched Clear Finance Cloud. It is an integrated platform that manages the entire invoice lifecycle of a company by synchronising the AP process, vendor communication, and tax compliance. The top benefits include-

• Real-time compliance,
• A Lower cost of working capital due to a reduction in the cash outflows on GST filings,
• Higher tax savings.

With critical processes on auto-pilot, enterprises can achieve the two-fold goal of de-risking non-compliance and improving their overall finance value. To learn how to transform your enterprise’s financial processes, check out the Clear Finance Cloud platform here.

After all, as Henry Wadsworth Longfellow said, “It takes less time to do a thing right than to explain why you did it wrong.”

(Brand Connect Initiative)