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How SMEs can adopt GST to balance working capital

The introduction of Goods and Service Tax in India is creating a problem in the cycle of working capital of business houses. Easy liquidity is crucial for a business’s day to day operation but GST is hurting the cycle of working capital and it is claimed that such initial crisis is normal with such drastic changes in the indirect tax regime. Business needs to understand the impact of GST on its every sphere. This article will discuss how SMEs can use GST to balance the working capital.

GST strengthens former input tax credit system with a broader perspective. The earlier indirect tax system of India allowed credit for a taxable sale of goods only. However, if a trader paid service tax, it was not included in the input tax credit. But GST has broadened the input tax credit concept in India. It includes any kind of input which is already used and will be used in the process of business. Thus, business houses can now freely claim input tax credit in all kind of inputs as well as input services.

The concept called ‘Furtherance of businesses’ is aiming to reduce the business cost and to increase the net margin. This positive aspect of GST is not only inspiring the entrepreneurs but also strengthening the working capital scenario in India.

The business houses need to rely on their suppliers’ compliance with input tax credit under the new GST tax structure. It’s your supplier who needs to file a tax return so that you can avail the credit on time. If your supplier doesn’t file a tax return on time, it may create a considerable dent in your cash flow.

In case, if your supplier unable to give the valid tax return, as a business house, you will be responsible to discharge the amount along with interest. It creates a double impact on your cash flow in the following ways:

  • At present, you have paid money to your respective supplier.

  • You need to pay the tax along with interest as input tax credit claim is reversed.

However, the draft law has offered 2 months of breathing window to the entrepreneurs regarding this rule. Thus, vendor management is an important issue now. Relook and review your current vendors who are GST compliant. Choose the best supplier with the GST compliance rating. If your supplier is not compliant, the vendor will lose you and vice-versa.

The GST’s launch on 1st July 2017 has created vast changes in the advance payment system. There are obligations for manufacturers, traders and suppliers if they pay a part of advance as tax under the GST regime. If they receive any advance amount against goods’ supply, they need to pay tax on the exact date of receipt of the advance.

Also after the supplier paid the tax on advance receipt, the recipient cannot claim it as input tax credit immediately. As per the rule, you can avail input tax credit once you receive the tax invoice and it is only possible after a supply of goods and service is done. Thus, as a small or medium entrepreneur, you should be careful in structuring ‘contracts’.

GST enables taxes on stock transfer to various branches as ‘transfer’ is regarded as supply of goods and services. This taxability influences on cash flow in businesses as the tax is already paid on the stock transfer date and the branch used the input tax credit when it liquidated the stock.

Due to new taxes, the SMEs may face problem regarding working capital and such situation also asks for extra working capital. Thus, they should strategically plan for opening new branches after re-examining the needs. An ‘impact analysis’ on all various locations from where you operate is also highly recommended.

The service tax has increased from 15% to 18% and this increased amount is affecting the working capital among small and medium entrepreneurs. The GST state-wise registration is also influencing the working capital because of the restrictions that are set on CGST+SGST of a state with another state.

When the input tax is higher than output tax, it leads to a situation called inverted duty structure. GST has made this inverted duty structure beneficial for business by allowing the businesses to request to claim the unutilized input tax credit which is gathered over a period of time for such duty structure. Along with a simple refund claim process, it is a blessing for the SMEs.

Working capital is a prime support in any business and learning GST’s impact on working capital is decisive. But it is equally challenging for SMEs not only to transit smoothly to this new tax structure but also understanding smart vendor management and handling input tax credit. These will assuage the uncertainties on working capital.