Impact of GST on Working Capital for Businesses

GST, or the Goods and Services Tax, is a radical tax reform brought to effect by the government of India with the aim of streamlining the taxation system and improving the economy. The GST system replaces the erstwhile indirect taxation system, and is unified and standardized in nature. To know what taxes has GST replaced, and why, click here.

After it came into effect on July 1, 2017, businesses as well as individual taxpayers were affected by the changes that GST brought about. Businesses were impacted upon significantly across the country, especially those with presence in more than one state and with interstate operations. Large scale providers of goods and services as well as SMEs felt the impact in terms of finances and operation.

What is GST?

GST enables standardization of indirect taxes under the slabs of 5%, 12%, 18% and 28%. The changes brought about by the new rules has directly impacted working capital loan and cash flows for businesses.  A reassessment and realignment was needed by most businesses in terms of taxation levels, credit lines and time-frames.

While Value Added Tax, Excise Tax, Service Tax and other local and central taxes were subsumed, certain taxation slabs increased; for instance there was a significant jump from 15% taxes under Service Charge to 18% under the third GST slab. Resultantly, levels of available working capital for instant use needed to undergo changes. You can read all about GST here.

Impact of GST on working capital

A key factor to ensure the health of any business is an available and adequate working capital. A periodical assessment of working capital requirements is essential for the smooth functioning of a business. If the tax bucket that your business falls under changes significantly with new rules and regulations, your working capital needs to be modified accordingly.

With the advent of the new GST regime, rules for availing a line of credit needed to be revamped along with changes brought about in time-lines. Businesses as a result required to be extra vigilant and many looked for multiple sources of working capital.

Also, with GST, timeline for payments has changed. According to the new rules, tax will be levied when the transferring of stock takes place. During this time the levels of working capital generally experiences a drop.

At the end of the day, a working capital is key to sustaining the day-to-day business operations. Especially in the case of SMEs with medium to low financial reserves, having working capital that is adequate is reflective of good health of the business in terms of finances. If your working capital is affected by GST, you may consider opting for a working capital loan.