GST and Its Impact on Working Capital Finance

Posted by Ankit Shrivastava
May 8, 2018

NOTE: This post has been self-published by the author. Anyone can write on Youth Ki Awaaz.

Indirect taxes have conventionally had a considerable impact on small and medium enterprises (SMEs), particularly on their working capital. Multiple taxes such as service tax, VAT, excise duty, etc. had made it an extremely complex environment to do business in. Several SMEs were bearing a huge cost to adhere to the varied compliance requirements. The recent standardisation of indirect taxation across the nation subsumes many central and state tax laws. Indirect taxation now follows a new norm under the four basic slabs for goods and services – 5%, 12%, 18% or 28%. It is expected to have an extremely positive impact on the operational liquidity of an SME.

Prior to this, a small business’s working capital had been consumed to a considerable extent by the hidden nature of indirect taxes that often spread across multiple stages of the business cycle. GST implementation has changed the tax buckets and also the modes of doing business. It would assist them in predicting and aligning their requirements around the necessary liquidity for an organisation’s daily operations, which, in turn, would lead to working capital demand loan optimisation, resulting in a lower cost of capital.

Though the tax rates are currently higher for many of the industries, and may lead to working capital finance becoming marginally expensive in terms of increased processing fees etc., in the short term, these would set off due to other factors such as easier input credit planning, and cost reduction as a direct result of higher transparency. Hence, in the long term, the benefits would outweigh the immediate drawbacks for businesses.

Let us take a closer look at the impact of GST on SMEs and working capital finance.

Easier to Conduct Business

With the elimination of various charges and a singular expense structure, the techniques of indirect taxation will become less complex. Standard bookkeeping practices will be replaced by software systems, as much of the GST tax filing processes are executed through web portals. Simple tax frameworks will make it less demanding for business owners to run the business. The consistency in tax laws makes the commencement of operations easier as well.

Unified Domestic Market

With the introduction of GST, the indirect taxation barriers within and across states will be eliminated. This will organise and unify the national goods and services market. Accordingly, distribution, warehousing and sourcing will become simpler and faster among multiple states. Moreover, organisations will no longer be obliged pay interstate expenses, and the working capital can be used to build cash reserves that may be utilised to grow their business instead. The elimination of time-consuming activities such as cross-border tax procedures and toll checks result in a hassle-free and smooth flow of goods in the country. This reduces the logistics cost, which again impacts the businesses positively in terms of their working capital.

Optimum Pricing

Since GST will remove every other sort of irregular expense, the costs paid by purchasers are bound to decrease. Subsequently, the prices can be optimised, leading to a lift in demand and utilisation, which will profit SMEs and MSMEs.

Market Expansion

Earlier, companies purchased goods based on the location of business operation. This reduced the numerous tax burdens, but also led to a limited customer base in terms of sales. Alternatively, GST absorbs the area-based incentives, as the tax is destination-based as against origin-based. This opportunity can be used to expand markets for the truly competitive SMB businesses.

Become Globally Competitive

As production costs diminish in the post-GST administration, the goods and services will be estimated competitively in global markets. Along these lines, exporters will have the capacity to compete with large corporations across the globe and boost exports. This will lead to an increase in the working capital demand loan as organisations try to expand their ventures or product lines after GST.

Greater Benefits for New Ventures

Manufacturing businesses with a turnover of over INR 5 lakhs were required to make payments and register for VAT. However, with the implementation of GST, the limit has been increased to a turnover of INR 20 lakh and above. GST will also make it easier for SMEs to start new ventures or expand their product/ service line, as a uniform procedure enables centralised registration and provides an encouraging atmosphere for business owners.

Operational Transparency

GST makes the overall business operational canvas much more transparent as businesses are required to file regular tax returns online, which would result in financial institutions turning more open to working capital funding and introducing innovative loan products/ services for small and medium enterprises. In a nutshell, changes in the taxation system indicate an ease in conducting business and make it easier to start a new venture or expand one’s current operations. Certain digitally enabled NBFCs offer unsecured working capital finance to SMEs, which could be used for various purposes such as expanding into new markets, establishing plants, purchasing machinery or managing operating expenses. Moreover, such a loan can be applied online within minutes through the FinTech lender’s website or mobile application, making it simpler to apply for a collateral free demand loan to take your business to the next level.

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