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GST and its Impacts on Indian SME’s Working Capital

Let’s continue with our conversation about working capital and see how GST impacts the working capital of small and medium scaled enterprises.

Management of working capital is a chaotic yet necessary task that all businesses have to take care of — as we discussed in our last post, working capital helps to stem the needs that arise from daily operational activities of a business and is required by small and large businesses alike, irrespective of their size.

With the rollout of GST, business owners have geared up to adapt to the entirely new tax structure. One important component that they have to prepare themselves and their business for, is the optimization of their working capital.

The GST has several implications on working capital of a business as well. Since the rollout of the GST is very close, it is pertinent to understand the ways in which the GST is going to affect this crucial aspect of businesses.

We have put together a list laying out ways in which SMEs (Small and Medium Enterprises) are impacted by the GST in terms of their working capital.

Here are some of the ways GST has impacted working capital of businesses:

  1. Furtherance of Business Concept:

According to the previous tax system, input tax credit was available only on inputs that were related to taxable output. For expenses that are were related to taxable sales, input credit could not be availed.

However, under GST, a feature called the “Furtherance of Business” has been introduced. Under this, credit is allowed for any kind of business input, irrespective of whether it is directly used for “taxable sales”.

This is a positive development and increases the scope for business to avail an additional line of credit. As a result, the immediate cash requirements have reduced and the flow of working capital flow has gotten better.

2. Timeline of tax payment clogs the flow of capital:

Under the GST regime, the tax is levied when the stock is transferred. As a result, businesses have not been able to claim tax credits till the time of sale, which results in a huge time lag.

And since the timeline of tax payment sees this lag, the working capital levels do experience a drop during this time.

If a business hasn’t foreseen this drop, it may face issues in conducting themselves on an everyday basis. If you are a business owner, make sure you have enough cash reserve so that you can face the rainy day and come out of it smiling.

3. Moving Goods Has Gotten Easier:

Under the previous tax regime, a lot of time and effort was spent by businesses who had multiple presences across states (warehouses, offices, factories etc.).

These businesses were bound to adhere to multiple state laws such as octroi, CST and so on while moving goods across state borders. This burden of tax compliance added to the cost of running each warehouse, increasing the company’s operational costs and therefore its working capital needs.

Under GST, companies no longer need to comply with CST, Octroi, or entry taxes, so it has become simpler and more affordable to move goods across the country.

Thanks to GST, a business can now strategically set up 4 or 5 warehouses to fulfill their demand across all the states and operate them more efficiently and locate them where it makes a better business sense.

4. Impact on the e-commerce resellers:

The government has specified a threshold limit for all the businesses. However, such limit is not applicable in case of E-Commerce sellers. All the businesses carrying out e-commerce activity are required to get registered.

Under the new tax regime, marketplace operators are mandatorily required to deduct a percentage amount as the GST liability of seller and deposit it with the government. This mechanism is being termed as “Tax Collection at Source (TCS)” under the GST law.

Eventually, the marketplace seller will have to file monthly return under GST to claim the credit of TCS collected by the marketplace operator. This will also impact the liquidity and cash flow of these sellers.

Numbers Paint An Unfavourable Picture

A majority of chief financial officers from 250 companies across sectors, according to a report, say that the implementation of the Goods and Services Tax (GST) has had a positive impact on their business, even as they identify it as a key industry disruptor, according to a survey.

However, 66% of the CFOs from sectors ranging from consumer business, energy and resources, financial services, healthcare, manufacturing to transportation surveyed said they noted a negative impact on working capital post-GST, and 55% noted an adverse impact on financing costs.

In Closing

In conclusion, working capital helps in enhancing the agility and financial growth of a business, especially when the business is classified as an SME.

Under the GST regime, the working capital of a business has been impacted, depending on its type & size. Businesses today must take a leap of faith and place their belief in the technological advancements which will help them manage their working capital.

Cloud-based solutions today serve at the pleasure of business owners with their GST filing features, along with reporting and analytical tools so that they can stay compliant and have a firm grip on their business.

Got something to say? Take the discussion to the comment board below and let us know your thoughts.

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