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Impact of GST on Working Capital for SMEs

Inability of managing day-to-day business operations (working capital) can have adverse effect leading to businesses closing down. Hence, let us explore the ways in which GST impacts the working capital for small and medium businesses.

Impact of GST on Taxability of Advance Payments

Many businesses today go by the advance against supply of goods/and or services method. While the idea behind it could be to feel secured about receiving a part of the payment to perform trade, but in taxable terms, advance receipts exist only in Service Tax. If anyone paid advance before the time of supply of goods or services, he/she will have to pay GST on it as well. For example, if a buyer has given order for buying mobile phones amounting to Rs. 5 Lakhs and gave advance of Rs. 3 Lakhs, then he/she will have to pay GST on that advance to the supplier at that time only.

Moreover, though the tax is paid by the dealer on advance receipt, the recipient will not be able to claim it as input tax credit immediately. This is because ITC will be available only on the receipt of tax invoice and once the said goods or services are received by him. Post this, the same chain of claiming input tax credit with a mandatory declaration needed from the supplier will come to surface.

Impact of Stock Transfer to Branches

Currently there is Excise Duty for manufacturers, Sales tax for Sales, Service tax for services and so on. Under GST there will only be a single tax reform, and all stock transfers with or without consideration will be taxable. This will account to seamless flow of input tax credit across businesses in India.

However, the taxability of stock transfers under GST will have an adverse impact on cash flow, because tax paid on the date of stock transfer, will be effective for ITC only when the stock is liquidated by the receiving branch. Also, if there is cross branch transfer, there will be tax levied on each transfer. Hence it is advisable to examine the requirement of brach units, engage into effective planning of branches, and leverage cross branch transfers to reduce the impact on working capital.

Impact of ‘furtherance of businesses’

With GST implementation, businesses will be permitted to claim input tax credit on business expenses which are ‘used or intended to be used in the course of, or ‘furtherance of businesses’. Considering that under the current tax regime, Input tax credit is not allowed on business overheads. For example, service tax paid by a supplierfor business related advertising services is not allowed as credit, but considered as business expenses. To avoid such cases, it is advisable to procure services from GST registered businesses, and account for the tax paid on business overheads.

Impact on Input Tax Credit

Under the current regime, there is no ‘invoice matching’ criteria for businesses to depend on the ‘real time’ acceptance of the tax liability by the supplier. But, with GST, input tax credit will be hanging on your supplier’s capabilities to furnish the valid return and file the return declaring the outward supplier and the tax payment. Incase your supplier fails to comply with these GST norms, then you will have to pay for this. How? The Input Tax Credit claimed by you will come back on you as the GSTN authorities will ask you to discharge it with interest. Although there will be a notice period of  2 months for you to modify the discrepancies before reversing the ITC claim.

As mentioned earlier in ‘furtherance of businesses,’ for managing working capital operations it is important to ensure you work with GST registered suppliers only. This is a cycle which requires utmost discipline. Say if you are not disciplined about being compliant, you might lose your customers, just how your supplier will lose you if he is not compliant.

Impact of GST on Inverted Duty Structure

Inverted duty structure impacts the working capital of domestic manufacturers quite adversely where the duty on the inputs (raw materials) is much higher than the duty applicable on the output (finished product). With GST this structure will change as refund of the accrued credit will be allowed to claim (the unutilized input tax credit accumulated due to inverted duty structure).

This is a major relief to businesses in the pharma and jewellery sector, as they will be able to claim 90% of refund, which will be disbursed on provisional basis and 10% after verification.

Impact of GST on Input Tax Credit during Transitioning to GST

Under GST, the taxes paid on the closing stock held on the date of transitioning to GST will be allowed as input tax credit on meeting specific conditions laid down by the law. A manufacturer can therefor carry forward the balance of the CENVAT credit available on closing stock before GST is implemented. This ideally means that that closing balance of CENVAT credit must reflect in the last return filed by the taxpayer. Also, that it should be eligible as input tax credit under the new GST.

This will help SMEs in filing the additional working capital needs of the business.

 Impact of GST on Service Sector

Currently, Service Tax is centralized and it is levied at 15% on the net amount. Post GST, a service provider will have to pay service tax at the rate finalized for the services. Hence, if the service tax for any particular service is at 18% tax slab, then it will be expensive by 3% compared to 15% of Service Tax under the current regime. Here, GST will have a major impact on outflow as it increase and the need to increase the working capital will arise.

In Conclusion

While this new tax regime’s appearance is apparent, so is its impact on working capital for SMEs. Hence it is of prime importance for SMEs to understand and adopt GST to be able to ensure smooth  working capital operations in their business.

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