The introduction of Goods and Services Tax (GST) in India is a comprehensive tax reform taken done by the government. The tax has abolished many other indirect taxes that were applicable in the past. GST has a huge impact on a business’ working capital and liquidity. Explained ahead is how GST affects the working capital and its impact on business loans.
Impact of GST on working capital
Here is how GST impacts the various aspects of working capital.
GST has brought about a big change in the management of inventory. In the past, companies used to maintain several warehouses in different states to cut down on the cross-border taxation cost. It was indeed an expensive affair and the goods had to be moved from one state to another. Every time the goods shifted states, the company had to pay taxes specific to the state. This put immense pressure on the working capital of the business. With the introduction of GST, companies can easily manage a couple of warehouses in the country and when they move goods to a different state, they need not pay taxes each time goods cross the border. This helps companies to save taxes and reduces the strain on their working capital.
Purchase of raw materials
Business expenses vary from one industry to another. An importer only had to pay a 14% import duty in the past. However, he now has to pay a GST of 18% which means an increase in the working capital requirements. The same rate is applicable to the service industry.
Timeline related to tax payment
The tax payment timeline has had a huge impact on the working capital of a business. GST is levied at the time of transfer of goods. However, businesses can claim tax credit only during the sale of goods. This means the period between the transfer of goods and their sale could take up a lot of time. Businesses can only claim an input tax credit after the sales. This has a negative impact on the working capital as it declines to a great extent during the waiting period.
Impact of GST on business loans
Business loans have become costly after the implementation of GST. This is because GST is levied at 18% on the loan. This has led to an increase in the processing fees. GST on loans will lead to an increase in the cost of borrowing, which businesses should consider. However, with the potential opportunities available for businesses to grow and flourish, such a hike will seem negligible in the long term.
GST is a new tax reform that impacts all types of businesses across industries. Business owners need to understand how it works and handle the requirement of funds accordingly.
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