Integrated

Blockchain for E-
Invoice, TReDS and
GST for B2B
transactions

APFFB Cohort 7 Group 1

Anand Thareja
Livya Maria Wilson
Nasser Khan Ghazi
Priyesh Mummidi
Roja Naidu
Siddhesh Prakash Kadam
20 April 2023
 Table of Contents
1. Executive Summary ..................................................................................................................... 2

2. Problem Statement....................................................................................................................... 3

3. State of Current Processes .......................................................................................................... 4

3.1 Current Invoice Processes ............................................................................................ 4

3.2 Current TReDS Processes............................................................................................. 4

3.3 Current GSTN Processes .............................................................................................. 5

4. Our Proposed Solution ................................................................................................................. 6

5. Our Proposed E-Invoice Module .................................................................................................. 7

6. Proposed TReDS module on ECB............................................................................................... 8

7. Proposed GST system ............................................................................................................... 10

8. The Hyperledger Fabric: Advantages ........................................................................................ 11

8.1 How it Works ...................................................................................................................... 12

8.2 Advantages of using Hyperledger Fabric........................................................................... 14

9. Conclusion: Advantages of the Proposed System .................................................................... 16

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1. Executive Summary

In recent times, with the dramatic economic growth India, the volumes of B2B invoices

have skyrocketed. The Government’s emphasis on ‘make in India’ has spurred local

sourcing of inventories. Thereby exponentially increasing the B2B transaction volume

in our country.

The Indian government has always been supportive and has nurtured the MSME

segment within the country by virtue of accommodative policies, subsidies in different

stages of business and through various subsidized finance schemes. This has led to a

boom in MSME financing.

Also post liberalization there was a flock of foreign banks seen entering the Indian

banking space, however these banks still remain servicing the metros. As a result,

they lack lending to MSME which the Indian Central Bank RBI classifies as priority

sector lending. As a result, such Banks have to purchase priority sector lending

certificates (PSL) from the Nationalized banks.

The government brought in a landmark reform in 2017 to replace various indirect taxes

in the system with one uniform taxation system called the Goods and Services tax.

With the advent of time separate systems of recording and computing the invoices and

taxes were developed, however these systems never spoke to each other and the

drawbacks of having them in silos started to emerge.

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The unification of the E-invoicing, Trade Receivables electronic Discounting System

(TReDS) and Goods and Services Tax Network (GSTN) is a task of orchestrating the

various functionalities that lie under each of the processes.

Through our study we have identified the key pain points in the existing system and

have designed a process based on the Blockchain technology which would carry out

the herculean task of orchestrating the process of Invoice registration, easy financing

options and computation and payment of tax.

2. Problem Statement

The management and settlement of B2B invoices, its financing and subsequently

computing the tax is a disjoint process resulting in the following:

 Too much reliance on paper invoices.

 Manual upload of invoice at each and every counter.

 High cost of processing invoices.

 Frauds in tax computation.

 Duplicate invoices.

 Delay in settlement.

 Need for producing physical invoice for Audit.

 No real-time tax computation.

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  No historical payment data.

3. State of Current Processes

3.1 Current Invoice Processes

The process of capturing Invoice in an electronic form was made mandatory to entities

above a threshold of volume from 1st April 2023 The process involves the seller

uploading an invoice file which is the output file of his ERP software which is preferred

to be in a JSONS format. This file is then uploaded to the IRP Invoice Recognition

Portal. The IRP system checks with the GSTN system for de-duplication and

generates an Invoice Recognition Number IRN which is unique along with a QR code

attached to the invoice which has information about the Seller, Buyer, Invoice date,

Amount and Taxes.

This JSON file along with QR code and IRN is received by the Seller, which she

further uses for sending it to the buyer, financing it on TReDS, Tax and Audit

purposes.

3.2 Current TReDS Processes

The TReDS is offered on three platforms which are built on blockchain. A TReDS, M1

Exchange and RXIL all three are owned by Private banks or jointly with Stock

Exchanges.

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The Seller has access to affordable finances from Banks and NBFC’s who participate

on these platforms to purchase Bills without collateral and without recourse on the

seller.

Every time the Seller intends to get his bills discounted he has to separately login to

the TReDS platform and upload the e-invoices.

Based on the credit worthiness of the buyer which is determined by credit rating

agencies. Each bank arrives at financing rates thereby creating a price ladder. From

which the seller selects a particular financing bank.

Once the seller appoints the discounting bank the title to the invoice gets transferred

as per the agreement signed at inception which covers this clause. The Financier

credits the discounted value of the invoice to the seller on T+1. On maturity the Buyer

makes full payment to the financier.

The system also offers financing at the buyers request in the form of reverse factoring

wherein the Buyer accepts the bids and the seller gets the money. On maturity the

buyers settle the invoice with the financier.

3.3 Current GSTN Processes

The current GSTN process allows sellers to file their monthly sales statement

(GSTR1) to arrive at the tax liability and then make the tax payment on the due date.

Also, the buyers who have already settled their invoices or are going to settle the

invoices on the agreed due date can file a claim for tax.

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On the GSTN system the process like registration, payment and returns along with

Refund processing is all done online. The advent of this system has freed up tax

payers from visiting the GST offices.

4. Our Proposed Solution

The Government's effort in unifying the identity, payments, e docs and user consent in

the form of India Stack has achieved great success. We believe that integrating or

unifying allied processes brings out many benefits to the ecosystem.

We propose to build a unified, integrated and frictionless system which will unify the

invoice management process, discounting (TReDS) and GST filing and management.

The proposed solution is built on Open source blockchain network called the

‘Hyperledger’

Owing to the properties of the network which suits well with the consensus mechanism

and the overall dynamics of the participants on the network.

We propose the E-invoice Consortium Blockchain (ECB) and applications that will

interact with the Native systems. The ECB ensures that the information is available to

all the relevant stakeholders in a secure, immutable, trusted, traceable and verifiable

manner.

The unification of all the three processes will streamline the processes in terms of

operationality, accessibility, verifiability,

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5. Our Proposed E-Invoice Module

The Seller uses his ERP system to generate the invoice at his end in a standardized

format as prescribed by the GST office. The output file of this ERP is a JSONs format

file uploaded by the user through his web-based application on the ECB.

The smart contract on the ECB will direct the invoice outbound to the IRP system

which in turn speaks with the GSTN system which checks for duplication. Once it is

approved by the GSTN the IRP generates the Invoice Recognition Number (IRN),

adds digital signature of the IRP and adds a QR code to the Invoice payload. The QR

code contains information pertaining to the Buyer, Seller, Invoice amount, date,

Maturity etc. This updated invoice is posted on the ECB.

A Smart contract notifies the buyer and seller about the Updated Invoice with IRN and

QR code.

Buyers accept the notified invoice on the ECB which is notified to the Seller through a

smart contract. Buyers and sellers can view their individual invoices any time through

the web-based application layer.

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 Fig 1. Explains the E-Invoice Module of the ECB

6. Proposed TReDS module on ECB

The TReDS module gets its feeds from the E Invoice module wherein the buyer accepts

the E-invoice and it is notified to the seller. At times the Buyer pays the invoice

immediately for cash or sight basis wherein he is routed to a payment gateway

application outside the chain.

The buyer then updated the chain with the payment reference number manually.

In case of the buyer accepting the usance bill. A similar notification is sent to the

financiers through a smart contract which checks if the invoice is accepted or not.

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Upon receiving notification of acceptance, the financiers on the basis of their prudence

and credit worthiness of the buyer provide their quotes for discounting the invoice.

The chain has a provision wherein every time the buyer makes payment either to the

seller or to the financier on the due date. Updates the chain with the relevant payment

reference no. This allows financiers on the chain to extract payment data of the buyer,

which brings out the payment pattern of the buyer in terms of aging. This data is crucial

in pricing the invoice discounting. Buyers with larger ageing will attract a risk premium

in the pricing.

Fig 2. TReDS module of ECB

The seller can, through his web-based application see quotes from various financiers

for a particular invoice. The seller then makes a choice and selects a quote. A smart

contract notifies the financier that his quote has been accepted. A smart contract then

transfers the ownership of the invoice from the seller to the buyer on the blockchain

against payment to the seller to his registered bank details.

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The Buyer then settles the invoice with the financier on due date and updates the

blockchain about it.

7. Proposed GST system

The GST Chain module on ECB: The approach that we have taken to tackle the GST

part is hybrid; the chain often talks with the native GST network because our application

at present covers only the B2B space. With there being a lot for the GST apart from the

B2B, the off chain GSTN should run parallel. All the activities pertaining to the GST

ecosystem are computed and settled on the GSTN with a copy of the transaction being

posted to the GST chain module. Activities such as registration, self-assessment, audit,

tax liability, Returns and Refunds take place on the GSTN and are notified on the GST

chain. The computation of tax liability becomes easier as the invoice is registered on the

GSTN as well as the GST chain so the tax liability is easily ascertained on the GSTN

and fed to the GST chain.

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 Fig 3. GST Chain Module

8. The Hyperledger Fabric: Advantages

We propose Hyperledger Fabric (Fabric) as the blockchain of choice for this

application. Fabric is an open-source enterprise-grade blockchain platform for

developing decentralized applications with modular architecture, privacy, and

scalability features. Fabric technology is an open-source permissioned blockchain

platform hosted by the Linux foundation and is designed for enterprise use cases

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Fabric brings numerous advantages to the table and is almost tailor-made for this

application that spans multiple domains and required integration with existing

enterprise systems and requires for stronger privacy and control of members – this is

achieved through a permissioned blockchain like Fabric.

Fig 4. Hyperledger Fabric Architectural Model

8.1 How it Works

The transaction process consists of essentially three parts:

1. Endorsement

2. Ordering

3. Validation

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 Fig 5. Hyperledger Fabric Transaction Flow

A typical transaction flow is as follows:

1. A Client initiates a transaction proposal, signs the proposal with its certificate

and then this transaction proposal is sent to a set of designated Endorsing

Peers on a specific channel.

2. Each Endorsing Peer verifies User’s identity and authorization from the

proposal payload. After this has been validated, the Endorsing Peer simulates

the transaction by executing Chaincode and then generates a response

together with a read-write set and endorses the generated response using its

certificate.

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 3. The Client consolidates and then checks the endorsed proposal responses

from all Endorsing Peers.

4. The Client then sends the transaction attached with the endorsed proposal

responses out to the Orderer.

5. The Orderer orders the received transactions, generates a new block of ordered

transactions, and signs the generated block with its certificate.

6. The Orderer then broadcasts the generated block to all Peers (to

both Endorsing Peers and Committing Peers) on the relevant channel.

Committing peers validate the transaction by checking for appropriate

certifications and version issues and the update each of their ledgers with the

received block by appending it to their local blockchains.

7. The Client receives notifications based on subscribed events from EventHub

service.

8.2 Advantages of using Hyperledger Fabric

1. Modular Architecture

Developing a blockchain application for enterprise use cases is challenging.

Blockchains do not usually come with plugin components and developers therefore

spend a lot of time building various components from scratch.

Fabric provides modular architecture, allowing for flexibility in implementing various

consensus algorithms, smart contract languages, & identity management solutions.

2. Privacy, Permissioned Blockchain

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Most businesses, and especially ones dealing with financial transactions would be

unwilling to expose all their critical information on a public blockchain. Fabric which

allows you to build a permissioned blockchain is therefore an important contender for

building a business app.

Fabric provides a Membership Service that governs user registrations and certificates

to ensure authentication and identity integrity. Fabric provides tools such as cryptogen

for certificate generation.

3. Performance and Scalability

Since there is no Proof-of-Work (PoW) consensus, and there is no mining as with

public blockchains, Fabric is highly scalable and provides for fast transactions.

4. Channels for partitioning data

Businesses and especially Financial Institutions cannot rely solely on the encryption

processes for both near and long-term security of their data. Fabric provides ‘channels’

that provide for secure exchange of data which is isolated from other data and limited

to authorized parties.

5. Rich querying capability

Fabric stores key-value pairs with each transaction. These are stored into a database

and allow for fast and rich querying capabilities.

6. Hardware protection for digital keys

Fabric provides an additional level of security by providing hardware protection of

digital keys.

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 7. Strong Community Support

Fabric has legions of developers who provide community support, which is an

important consideration.

9. Conclusion: Advantages of the Proposed

System

The E-invoice module of the chain enables storing registered invoices on the chain for

all future references. This invoice can be shared with the chain participants to carry out

various financing functions apart from the receivables discounting to the GST

functions. The same can also be downloaded from the chain for further submission to

any off-chain entities.

Since the Government is a part of the chain most of the government agencies can be

dealt with using the chain reference instead of taking paper records.

The TReDS module enables buyers and sellers to see real time quotes for their

invoices from the financiers even if they wish or do not wish to discount the invoice.

This implies that the service is ready to be delivered, no need to separately plan and

apply for it. This solves for the working capital GAP which is the major concern for the

MSEME’s.

As more businesses realize the benefits of discounting on chain it will induce cross

side network effects and will bring more banks to aggressively compete against each

other to have a share of this market.

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Banks can also use invoices or sales data available on the chain to offer existing as

well customized structured products to the client without the client even applying for it.

The GST chain enables the seller and buyers to find all their invoices on the chain.

Use it at various GST counters using the IRN.

The chain also enables the client to better understand his running tax liabilities and

thus better forecast his cash flows.

The chain ensures that everybody has the same data thus preventing disputes in

various tax processes.

The proposed solution is a one stop shop for all the participants of the chain. This will

avoid face-to-face encounters with various stakeholders.

All the above benefits are over and above the benefits of doing business on the

blockchain such as security, immutability, identity and others.

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