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GST is a standardization of the indirect taxation regime across the nation, leading to subsuming of many earlier state and central tax regime laws. Goods and services are taxed under four basic slabs 5%, 12%, 18% or 28% creating a new norm in indirect taxation. Traditionally, indirect taxes have had a very significant impact on businesses, particularly on their working capital. A number of taxes such as VAT, Service Tax, Excise Tax and others have resulted in huge contributions to the government and in effect, a huge expense for businesses. The hidden nature of indirect taxes, often spreading across multiple stages of the product cycle, has been a significant drain on working capital. Typically, the proportion of indirect taxes is significantly more in tax collections in developing countries, as compared to developed countries, where the share of direct taxation is significantly higher.
With the implementation of the GST, tax buckets are changed, as also the way of doing business, as the cash outflow and timelines are significantly affected. Working capital is the lifeline of a business, one that keeps it up and running. Especially for SMEs, it helps carry on day-to-day operations, which are critical to business continuity and success.
GST Impact on business loans
Business loans became expensive after the implementation of GST. This is because the GST levied at the rate of 18%. This increased the processing fees on these loans making it marginally expensive for borrowers. Nonetheless, the potential growth opportunities available to businesses make this small increase almost negligible in the longer term.
Here are some key GST changes that affect your business and working capital flows.
1. Input tax credit changes: As per the taxation system, any tax paid on a business expense that is not directly related to taxable sales is not available as credit. For example, any tax paid on advertising expenses will not be available as credit. GST has a concept called the Furtherance of Business under which it allows credit of any kind of input for business to be used or intended to be used in the course of or for the furtherance of business. Now, a businessman can claim credit for tax paid on advertising services as well, giving the businessman significant leeway. The positive outcome is that cost of operations greatly reduced, and net margins increased, thereby bettering the working capital flow of the business, and perhaps the line of credit.
2. Claims due to inverted duty structure: An inverted duty structure is one where inputs are taxed higher than outputs i.e., raw material excise duty is higher (12.5%) than finished goods (6%), leading to a situation where the excess i.e., 6.5% is unused and gets accumulated. Under the regime, this excess is not refundable. In GST, businesses can now claim the unutilized input tax credit accumulated due to inverted duty structure. This, coupled with a speedy claims process, is a boon to boost the working capital of businesses.
3. Timeliness of input tax credit: The input credit that a businessman avails is not captured in real-time, or in other words, in line with the current tax liability of the supplier. With GST, the input tax credit amount depends on the compliance level of the supplier, making it compulsory for the supplier to declare the outward supplies along with the tax payment. In a way, you might be responsible for your supplier’s failure to furnish valid returns. This may mean a dip in your cash flows since the input credit tax that you have claimed will be reversed and you will be expected to pay interest too, apart from losing out on the credit. GST will thus mandate businesses to manage their vendors very effectively.
4. Advance tax payments: Under the GST regime, tax needs to be paid on advance receipt dates. So far this was applicable to only service tax under the current system. If an advance is received against supply at a later date, the tax is liable to be paid on the date of advance receipt. The matter becomes worrisome since even though the business pays tax in advance, it cannot be claimed under the bucket of input tax credit immediately. It can be availed only once the goods or services are received.
5. Taxation of stock transfers: The VAT rules do not treat stock transfers as “goods” or “services”. However, with the GST, change stock transfers are included under the category of goods/services and are taxable. This change will directly impact companies’ cash flows because the tax is to be paid on the date of stock transfer, whereas input tax credit can be availed of on the date of stock liquidation. How the working capital holds up in the interim period can be a crucial element to maintaining the working capital levels of the company
6. The impact of location in offsetting credit: The Service Tax regime allows for centralized, pan-India registration of business. As a result, there are no restrictions on availing input tax credit across locations. However, under GST, different state entities need to be registered separately. These are under varying jurisdictions depending on whether they come under the Central GST Bill, Integrated GST Bill or the Union Territory GST Bill. There are certain restrictions to offset a Central GST tax with an Integrated GST tax and so on. This may create difficulties in offsetting tax input credits across locations.
7. A detailed scrutiny of tax commitments and the impact of the four bills depending on operational locations must be done at the outset to ensure healthy levels of working capital. It is also recommended to explore opportunities for availing working capital finance or options for a line of credit
Importance of GST
Even though GST makes availing of a business loan marginally more expensive, it brings positive change for business owners. Here are four ways in which GST will be an important tax modification, especially for business owners.
1. Simpler tax systems
With the elimination of multiple taxes and a singular tax structure, the procedures became simpler. The market became reduction in paperwork and complexities in accounting principles. Simple tax systems will make it easier for owners to conduct business.
2. Competitive pricing
Since GST eliminates all other types of indirect taxes, the prices paid by consumers decreased. As a result, there is a boost to demand and consumption, which benefits business owners.
3. Boost in exports
As production costs decreases in the post-GST regime, the Indian goods and services are priced competitively in international markets. Therefore, exporters compete with global manufacturers and boost exports. Lenders take advantage of this potential growth by increasing disbursement of commercial loans to businesses.
4. Un-fragmented national market
With GST entry tax barriers are eliminated, which resulted in an un-fragmented national market for goods and services. As a result, sourcing, warehousing, and distribution became easier and quicker among the states. Businesses no need to pay interstate taxes, which increase cash flows that are used for expansion.
A Banks and non-banking financial company (NBFCs) has an increase in the demand for business loans as organizations expands their ventures after GST.