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.
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.
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.
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.
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.
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