The Goods and Services Tax or GST goes live on July 1, 2017, but the process of consolidation and enrolment has already begun. Aiming to standardize indirect taxation in the country as far as goods and services are concerned, the GST will have a multi-fold and direct impact on the workings of businesses, whether large corporate houses or SMEs.
A quick overview of GST will help businesses understand its implications play to its advantage.
GST is a standardization of the indirect taxation regime across the nation, leading to subsuming of many earlier state and central tax regime laws. Now, goods and services will be 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 set to change, as also the way of doing business, as the cash outflow and timelines are about to be 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.
Here are some key GST changes that will directly affect your business and working capital flows.
1.Input tax credit changes: As per the existing 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 new 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 will greatly reduce, and net margins will increase, thereby bettering the working capital flow of the business, and perhaps the line of credit in the future.
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 current regime, this excess is not refundable.
With the introduction of 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: Currently, 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 will depend 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. Review your current vendors and continuously monitor compliance levels to avoid this concern.
4. Advance tax payments: Under the GST regime, tax needs to be paid on advance receipt dates. This is a major change, since so far this was applicable to only service tax under the current system. Now, 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 current VAT rules do not treat stock transfers as “goods” or “services”. However, with the GST, these changes—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 prevailing 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 will be 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. For example, you may not be able to offset tax liabilities of one state branch with another state branch. Your liquidity may not be useful, even though it is available, creating an undesirable working capital situation.
7. It is clear that businesses will need to exert more caution as they transition to GST. A detailed scrutiny of current 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.
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