Understand the Changes in Working Capital management Among SMEs Under GST

Understand the Changes in Working Capital management Among SMEs Under GST

Under GST, businesses must ensure that they do not default because they might lose their rating, and this might eventually kill the business. Working Capital management must be looked at carefully under GST regime.

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SMEs are huge chunk of Indian economy. Their contribution in terms of size is exponential. And a majority of them are yet to have adequate understanding and readiness towards the game changing GST regime.

In an interaction with the Faiz Askari of SMEStreet, Satya Pramod, CFO – Tally Solutions, gave a great clarity on the upcoming GST regime that the country is set to witness. From the perspective of working capital there is a lot of clarity and understanding which is needed to be explored and understood.

Edited excerpts

GST, a comprehensive indirect tax system, is a few months away from rollout. Businesses need to understand the implications of GST on various day to day operations. Please unleash GST’s impact from the perspective of working capital management among SMEs?

Satya Pramod: Working capital is the lifeline of a business to carry out day-to-day operations. Managing working capital efficiently is a problem that plagues both small and large businesses. Inability to manage working capital may have adverse effects, including premature closure of businesses.

Therefore, let us take a look at the ways in which GST impacts the working capital for SMEs. You will begin to understand how you can use GST to your advantage.

Introduction of “Furtherance of Business” as a concept for Input Tax Credit

What changes are expected in the process of Taxation, please share perspective on Input Tax Credit?

Under the current regime, input tax credit is available only on inputs which are used or linked to your taxable output. For example, as a trader, input VAT paid on purchase of goods will be available as credit only on making a taxable sale. However, any tax paid on business overheads is not allowed as credit. For example, service tax paid by a trader on advertising services for business purposes is not allowed as credit, and should be treated as business expenses.

In GST, the concept of input tax credit is broadened to include any input or services “used or intended to be used in the course of or for furtherance of business. Therefore, businesses will be allowed to claim input tax credit on all such inputs and input services. In the example used above, a trader can claim credit for tax paid on advertising services.

This concept of “furtherance of business” will reduce your cost of operation, and directly increase the net margins of your business, thereby, strengthening your working capital.

In order to leverage this, businesses need to procure goods or services from registered businesses, and account for the tax paid on business overheads.

What is the possible impact on Input Tax Credit in the GST regime?

Under the current regime, the value of input credit availed by you is not dependent on the ‘real time’ acceptance of the tax liability by the supplier.

However, under GST, input tax credit will be dependent on your supplier’s compliance i.e. your supplier should file the return declaring the outward supplies along with the tax payment.

If your supplier does not comply, it will cause a major dent to your cash outflow. For some reason, if your supplier fails to furnish the valid return, the input tax credit claimed by you will be reversed and you will be asked discharge it along with interest. There will be a twin blow to your cash outflow:

  • You have already paid your supplier.
  • Since ITC claim is reversed, you have to pay the tax along with interest.

However, there will be some breathing space since the draft law provides a window of 2 months to ratify the discrepancies before reversing the ITC claim.

Therefore, vendor management under GST is very crucial. It will be one of the enabling factors for timely claim of input tax credit on your inward supplies, where the supplier has on-time compliance credibility. You need to re-look at your current vendors, and review and identify vendors who are compliant. GST compliance rating will help you choose suppliers who are better compliant.

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