Impact of GST on your company’s working capital

The GST system that will hit the market in less than 3 months will impact millions of businesses in India. While there are many areas where these businesses will need to adapt, adjusting working capital will be crucial for surviving this transition.

Why is working capital important?

Working capital is the money a company has available for the everyday operations and is essential for the short term wellbeing of the company. If your company doesn't have enough money for the your day to day expenses then you might find yourself in a situation where you are unable to operate your business.

Take a look at GST’s effects in a couple of business cases and have a better understanding of it’s impact on working capital.

Free movements of goods

Under the current tax regime, many businesses keep multiple warehouses across different states to avoid the extra taxes on interstate trade. Every state has different laws and entry taxes, making it a burden on companies to comply with all of them. This increases their costs, which affects their working capital if they do business all over India.

Under GST it will be much simpler to move goods across different states. Companies won’t need to pay entry taxes, which means they will be able to operate warehouses more efficiently and locate them where it is more convenient for the business.

For example a fashion company that manufactures their products in Kerala, transports them to its warehouses all over India, in bulk. Every time they cross a state border they have to pay CST of 2% plus an entry tax of 1% when the goods enter the state where they will be sold. This means all these taxes will increase the price of a product, but the company can’t claim tax credit for any of these taxes.

The company has large operating costs because it has to maintain many warehouses to avoid paying CST and entry taxes every time their goods are transported to a different state for sale. This in turn requires a large amount of working capital to manage their daily operations.Under GST, this company could set up fewer warehouses to deliver their products across all states and save money both on taxes and on operational costs.

Business expenses

The change in your business expenses will depend on the operating costs and profits margins. For instance, if you are a manufacturer who procures raw materials from other countries, with a standard GST rate of 18% you’d have increased costs.

Say you import wood from China to make furniture. Under the old system, you’d have to pay an import duty of 14%, but under GST you’d pay 18%. This increase in tax, also means an increase in your working capital, as you have to pay GST monthly as opposed to quarterly in the existing taxation system.

Take account of these factors when you set your prices and assess the amount of working capital your company needs.

Increased prices for services

Even though GST has its benefits and will save money tax money, it’s not the case for all types of businesses. For instance, services will be taxed at 18% under GST, as opposed to the 15% current tax rate.

Service based businesses will have to plan how they will deal with this increase and how it will affect their working capital, as the amount of taxes paid will be greater than before. A smooth transition means being prepared for situations like this before GST hits the market.

These are a few areas where GST will impact a business's working capital. Remember that getting the right information and preparing your business for the transition is the key to successfully adopting the new system.

GST Explained

What is GST bill?

GST, short for Goods and Services tax, is a new tax that will be imposed on the sale and purchase of goods and services in India. GST is meant to replace all taxes in India with a single unified tax applied to value addition instead of the total value of the product at each stage in the supply chain.

This method provides credit for the input tax paid on the purchase of goods and services, which can be offset with the tax to be paid on the supply of goods and services. As a result, this reduces the overall manufacturing cost, with the end customer paying less.

Which goods and services are exempted from GST?

With certain current taxes remaining, the following goods and services will be fully or partially exempted from the GST

What are the GST benefits for your business?

Free movement of goods: Business owners will be able to sell more in other states without having to worry about interstate transaction costs. With GST, the entry tax will be eliminated, which will save time and money spent.

What taxes does GST replace?

Currently, there are many indirect taxes that both the state and central governments are collecting on every purchase and sale.

How will GST work in practice?

The GST will follow a similar model with the one before it

What is the proposed GST rate?

GST will have a 4-tier tax structure

Why is GST being introduced in India?

One of the main reasons for GST being introduced in India is the tax burden that falls both on companies and consumers. With the current tax system, there are multiple taxes added at each stage of the supply chain, without taking credit for taxes paid at previous stages. As a result, the end cost of the product does not clearly show the actual cost of the product and how much tax was applied. This cascading structure is too complex and inefficient.

How will Inter-state transactions work in GST?

For inter-state transactions, the Centre will levy Integrated GST (IGST), which is equal to the average of the CGST and SGST rates. After applying IGST, CGST and SGST credits received from purchases, the seller will then pay the remaining IGST on the added value.

What is the exemption limit in the GST?

Businesses with turnover revenue of 20 lakhs and above will have to register and file for GST returns, with a threshold of 10 lakhs for businesses in the north east and hill states.

How will imports be handled in GST?

A combination of CGST and SGST will be applied to the import of goods and services that come to India. Tax benefits and credits will be given to the state where the imported goods and services are consumed.