Impact of GST on working capital
Working Capital is synonymous to oxygen in any businesses. It is the backbone and support system to any business. A healthy working capital indicates a successful business. With GST being implemented from 1st July, there are various implications on the working capital of small and medium businesses. They need to fully understand these implications and harness GST to their advantage.
- Furtherance of Business Concept:
In the current tax regime businesses can take input tax credit only on the inputs used or linked to taxable output. This means a trader paying VAT on purchase of goods can take input tax credit only on taxable sales. Similarly, a service provider paying service tax on advertisement expenses cannot take credit on it as it will be treated as a business expense. Under GST, this will be different. GST has broadened the scope of input tax credit to include any input or services “used or intended to be used in the course of or for furtherance of business”. In this way businesses will be allowed to claim input tax credit on all inputs and input services including advertising as mentioned above.
This will further reduce cost of operation, and directly increase the net margins for businesses, thereby, strengthening their working capital.But in order to use this, businesses need to procure goods or services from registered businesses, and account for the tax paid on business overheads.
- Vendor Management under GST:
Currently input credit availed by a business is not dependent on the real time acceptance of tax liability by a supplier. However under GST input tax credit will be dependent on supplier’s compliance and responsibility to file the return declaring outward supplies along with tax payment. If this is not done then it will affect the cash flow and working capital. In a situation where the supplier fails to furnish the valid return the input tax credit claimed by the business will be reversed and the provider shall have to discharge it along with interest. This also means the seller must identify those suppliers who have on-time compliance credibility.
But there will be a 2 month window to ratify the discrepancies before reversing the ITC claim. Hence, vendor management under GST is of prime importance.
- GST taxed during the sale of goods and services:
Under GST tax is levied on transfer of stock, this means businesses cannot claim tax credit until the shipped goods are sold. GST arises on sale or transfer of the goods.This can take a long time in case of exports for the tax money paid by businesses to reach back to them.
- Increase costs for businesses:
Currently if a business is paying 14% as import duty to import goods from abroad, under GST this rate will become 18% (for most products) which is the standard rate applied. This means a 4% increase in tax and an increase in their working capital too. This is mainly done to encourage home consumption and avoid using materials from abroad. However, in the earlier phases of GST if you are straddled for working capital requirements, you can always opt for a working capital loan from www.flexiloans.com at suitable interest rates.
- Savings on warehousing cost
In order to avoid payment of taxes for shipping goods across state borders, businesses have multiple warehouses in different states. This implies additional tax burden on each warehouse, as per each State law. This is in addition to the operational costs and working capital needs that the business endures. But under GST there is free movement of goods. With GST, companies will not need to comply with CST, Octroi, or entry taxes, making it simpler and affordable to move goods across the country. This will help businesses operate their warehouses more efficiently thereby helping them manage their working capital.
These are a few ways as to how GST will impact working capital of small and medium businesses. Evidently, it may become difficult to meet liquidity requirements in the earlier phase of GST, but at FlexiLoans it is possible to make these ends meet. All you need to do is apply for a working capital loan on www.flexiloans.com.
Also read: GST IMPACT ON SMALL E-COMMERCE VENDORS