Impact of GST on Working Capital for Businesses
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Impact of GST on Working Capital for Businesses

  • Highlights

  • Tax slabs under GST

  • How GST affects inventory management

  • How GST affects procurement of raw material

  • The tax payment timeline under GST

GST, the Goods and Services Tax, is the most radical and comprehensive tax reform undertaken by the Indian government since independence. The country has already made the switch to this new, unified, standardized system of indirect taxation, and its effects (both good and bad) have been felt across the industry.

According to the new system, there are four tax slabs – 5%, 12%, 18% and 28%. GST has a direct link with your working capital, and can impact your businesses’ available liquidity. Also known as working capital, this is commonly referred to as the ‘oxygen of a business’. Here we will tell you how GST impacts your working capital.

Inventory Management

GST has brought about a big change in inventory management. Earlier, companies needed to maintain many warehouses in different states to avoid cross border taxation costs. It was a cumbersome and expensive for businesses to manage so many warehouses, while simultaneously complying with the respective tax laws in the state. Furthermore, if these goods had to move to another state, the company would again have to pay CST, Octroi and entry taxes specific to that state.

The upkeep of so many warehouses and compliance with different tax structures put an enormous load on the in-hand working capital of the business. Now, with the introduction of GST, the company only has to strategically maintain 4-5 warehouses to fulfil demand in all the states. And, when the goods are moved, they do not have to pay taxes every time they cross the border.

Additional Read : All you need to know about GST

This leads to potentially huge savings on the working capital, as businesses need to maintain reduced number of warehouses. This lessens strain on the working capital and also allows for free movement of goods across border. Another benefit is that transit times are also reduced, owing to removal of tax collection on borders.

Procurement of Raw Materials

It was widely believed before the implementation of GST that its introduction would lead to saving of tax money in all cases. Unfortunately, that hasn’t been the case. The business expense is different from industry to industry.

For example, a manufacturer who imports raw materials from other countries, will now be levied GST of 18%. Under the old slab, only an import duty of 14% would be charged to him. Post GST, this increase in tax also results in an increase in the businesses’ working capital. This is also the case for the service industry, which will be taxed at 18% from the earlier 15%.

Due to this change, businesses need to allocate more working capital as well as set prices taking these factors into account. They also need to find out avenues of business finance that will compensate for the enhanced taxation.

Increase Your Working Capital

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Tax Payment Timeline

This feature of GST has the biggest effect on the company’s working capital, according to experts, GST is levied on the goods at the time of transfer. But, the businesses are allowed to claim tax credit only at the time of sale. The time between transfer of goods and their sale can take considerable amount of time. Businesses have to wait for the input tax credit when the sale happens. This has an adverse

impact on their working capital, which sees a sharp drop during this wait period, and requires them to take a working capital loan.

Additional Read : Everything you need to know about the life cycle of working capital

A Final Note

GST is a relatively new reform that has been introduced. As with all new reforms, this new tax regime will also take time getting used to. GST has been envisioned by experts and with the fair intention of development of the nation. This is a trying time for businesses, and for them to remain competitive, a proper business plan for utilisation of working capital needs to be put in place.

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