Impact of GST on Your Day to Day Business

The Goods and Services Tax or GST goes live on July 1, 2017, but the process of consolidation and enrolment has already begun. Aiming to standardise indirect taxation in the country as far as goods and services are concerned, the GST will have a multi-fold and direct impact on the workings of businesses, whether large corporate houses or SMEs.

A quick overview of GST will help businesses understand its implications play to its advantage.

About GST

GST is a standardisation of the indirect taxation regime across the nation, leading to subsuming of many earlier state and central tax regime laws. Now, goods and services will be taxed under four basic slabs—5%, 12%, 18% or 28%—creating a new norm in indirect taxation. Traditionally, indirect taxes have had a very significant impact on businesses, particularly on their working capital. A number of taxes such as VAT, Service Tax, Excise Tax and others have resulted in huge contributions to the government and in effect, a huge expense for businesses. The hidden nature of indirect taxes, often spreading across multiple stages of the product cycle, has been a significant drain on working capital. Typically, the proportion of indirect taxes is significantly more in tax collections in developing countries, as compared to developed countries, where the share of direct taxation is significantly higher.

With the implementation of the GST, tax buckets are set to change, as also the way of doing business, as the cash outflow and timelines are about to be significantly affected. Working capital is the lifeline of a business, one that keeps it up and running. Especially for SMEs, it helps carry on day-to-day operations, which are critical to business continuity and success.

Here are some key GST changes that will directly affect your business and working capital flows.

  1. Input tax credit changes: As per the existing taxation system, any tax paid on a business expense that is not directly related to taxable sales is not available as credit. For example, any tax paid on advertising expenses will not be available as credit. GST has a new concept called the “Furtherance of Business” under which it allows credit of any kind of input for business to be “used or intended to be used in the course of or for the furtherance of business”. Now, a businessman can claim credit for tax paid on advertising services as well, giving the businessman significant leeway. The positive outcome is that cost of operations will greatly reduce, and net margins will increase, thereby bettering the working capital flow of the business, and perhaps the line of credit in the future.
  2. Claims due to inverted duty structure: An inverted duty structure is one where inputs are taxed higher than outputs i.e., raw material excise duty is higher (12.5%) than finished goods (6%), leading to a situation where the excess i.e., 6.5% is unused and gets accumulated. Under the current regime, this excess is not refundable. With the introduction of GST, businesses can now claim the unutilized input tax credit accumulated due to inverted duty structure. This, coupled with a speedy claims process, is a boon to boost the working capital of businesses.
  3. Timeliness of input tax credit: Currently, the input credit that a businessman avails is not captured in real-time, or in other words, in line with the current tax liability of the supplier. With GST, the input tax credit amount will depend on the compliance level of the supplier, making it compulsory for the supplier to declare the outward supplies along with the tax payment.  In a way, you might be responsible for your supplier’s failure to furnish valid returns. This may mean a dip in your cash flows since the input credit tax that you have claimed will be reversed and you will be expected to pay interest too, apart from losing out on the credit. GST will thus mandate businesses to manage their vendors very effectively. Review your current vendors and continuously monitor compliance levels to avoid this concern.
  4. Advance tax payments: Under the GST regime, tax needs to be paid on advance receipt dates. This is a major change, since so far this was applicable to only service tax under the current system. Now, if an advance is received against supply at a later date, the tax is liable to be paid on the date of advance receipt. The matter becomes worrisome since even though the business pays tax in advance, it cannot be claimed under the bucket of input tax credit immediately. It can be availed only once the goods or services are received.
  5. Taxation of stock transfers: The current VAT rules do not treat stock transfers as “goods” or “services”. However, with the GST, this changes—stock transfers are included under the category of goods/services and are taxable. This change will directly impact companies’ cash flows because the tax is to be paid on the date of stock transfer, whereas input tax credit can be availed of on the date of stock liquidation. How the working capital holds up in the interim period can be a crucial element to maintaining the working capital levels of the company
  6. The impact of location in offsetting credit: The prevailing Service Tax regime allows for centralised, pan-India registration of business. As a result, there are no restrictions on availing input tax credit across locations. However, under GST, different state entities need to be registered separately. These will be under varying jurisdictions depending on whether they come under the Central GST Bill, Integrated GST Bill or the Union Territory GST Bill. There are certain restrictions to offset a Central GST tax with an Integrated GST tax and so on. This may create difficulties in offsetting tax input credits across locations. For example, you may not be able to offset tax liabilities of one state branch with another state branch. Your liquidity may not be useful, even though it is available, creating an undesirable working capital situation.
  7. It is clear that businesses will need to exert more caution as they transition to GST. A detailed scrutiny of current tax commitments and the impact of the four bills depending on operational locations must be done at the outset to ensure healthy levels of working capital. It is also recommended to explore opportunities for availing working capital finance, or options for a line of credit by looking for the latest financing products such as those offered by Capital Float. Our customised, innovative loan offerings include term finance and online seller finance among others to ease working capital woes that SMEs routinely face. Click here for more.

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Unsecured Loans – Is It The Right Option to Grow Your Business?

Achieving growth is a dream for every business, more so if it is a small or medium enterprise. Who doesn’t like expanding their production and also the revenue of their business? While business expansion is necessary, one thing which is primarily required for business growth is finance (with acumen being the second important ingredient). How does one secure business finance?

Banks and financial institutions provide the solution – business loans.

Business loans are the perfect solutions to financing which enables business growth. Banks and financial institutions lend the much-required business finance in India to business enterprises. This finance comes in two variants – secured loans and unsecured loans. Do you know what they are and how they are different?

Secured business loans

Secured business loans are also called asset-backed loans. These loans are granted on the value of an asset which is pledged as collateral for the loan. These loans are risk-free from the lender’s perspective as in the case of default by the borrower, the asset which is pledged is possessed by the bank to fulfill the loan liability.

Unsecured business loans

Unsecured loans, on the contrary, do not require any collateral or security. The loan is granted on the repayment capacity of the business which is indicated by the enterprise’s creditworthiness. These loans are granted as short-term loans which also have short repayment tenure.

Difference between the two

Both secured and unsecured business loans are fundamentally different and their differences are as follows:

 Secured Loans  Unsecured Loans
They require a security against the value of the loan  These loans are granted without the requirement of any collateral
The interest rate is low  Interest rate is high
The amount of loan depends on the value of the asset pledged for the loan The amount of loan depends on the repayment capacity and creditworthiness of the enterprise

Do unsecured loans help in business growth?

Unsecured loans are very easily available and do not require any collateral. They thus have various advantages which make them an ideal solution for quick financing. But do such loans also enable business growth? Let’s find out:

No asset backing required

Secured loans are limiting in the sense that they require business assets to be pledged as collateral. Unsecured loans are easily available and they do not require any business assets to be secured. As such these loans are not restricting. If your business is small and does not have many assets, it becomes a problem to avail a secured loan. This hinders the growth of business. Unsecured loans, on the other hand, can be availed without any assets.

The quantum of loan is not limited

Suppose you require a loan worth Rs.50 lakhs but the value of assets which are to be pledged is limited to Rs.40 lakhs. Would you be able to acquire the desired loan? Secured loans allow loans limited to the value of the asset pledged. Even in this case, the total value of asset is not allowed as loan as a margin is retained by the lender. So, if you have an asset worth Rs.20 lakhs and want a loan of Rs.20 lakhs, you would be able to avail only 80% to 90% of the value of your asset (Rs.20 lakhs in this case) as loan (i.e. Rs.16 lakhs or Rs.18 lakhs). In case of unsecured loans, the loan is granted on the business potential and creditworthiness and not limited by the value of any asset. Thus, businesses can avail an unsecured loan as per their requirement for aiding growth.

Easily available

Unsecured loans are easily available as the funds are sanctioned within days of the loan application being done. As such, these loans provide the necessary funding to businesses in a short span of time which can be used to increase business profitability and boost business growth. These loans come in handy when the business is poised to grow following a surge in demand. As the loan is easily available, high demand can be met by increasing production. High demand yields better revenue for the business and enables it to grow.

Ideal for young businesses

Businesses which are still in their nascent stage require funding to expand and grow. This funding can be easily secured through an unsecured loan as it does not require any collateral, which is hard to source for budding businesses. Thus, the growth of these young enterprises is dependent on unsecured business loans.

Unsecured business loans, therefore, play an important part in the growth of businesses. Though long term secured loans are essential for long-term finance, short-term unsecured loans help businesses meet their more immediate requirements, which has a direct bearing on their growth.

NBFCs offer unsecured business loans which are also called as business installment loans or term finance. This loan offers the following benefits to businesses:

1. A loan of Rs.1 lakh to Rs.1 crore can be availed by businesses for any of their requirements.
2. There are no hidden or additional charges under the loan. Applicants are required to pay only a small processing fee of 2% of the loan amount borrowed. Apart from this there are no foreclosure or part-prepayment charges incurred on the loan.
3. Certain NBFCs use customized credit criteria while underwriting customers. The credit offering is tailored as per the applicant’s requirement.
4. The loan is sanctioned within 3 days of successful application thus providing the funds at the earliest.
5. No collateral security is required for the loan.
6. Application for the loan can be done quickly through the online medium which reduces unnecessary hassles.

Unsecured loans sometimes prove to be that important source of funding without which businesses couldn’t have grown and achieved enhanced profitability. If you are also looking for a business loan for your business growth avail an unsecured loan today!

Oct 24, 2018

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Improving the Profitability of Private Schools

Intimidated by the long-drawn process of getting a loan approved from conventional sources such as banks and traditional NBFCs, schools in India often discard the idea of borrowing funds for improvements on their campus. They try to make the most of their limited available funds, even if it means some degree of compromise on the quality of upgrades they had planned for the school.

Such an approach does not bring any benefits in the long term. In some cases, it may even backfire. For instance, if a school purchases low-quality furniture due to inadequate funds, which causes discomfort to students/staff using it for 6-7 hours every day, it may not only tarnish the school’s reputation but also cause serious health problems for the users.

What comes as a relief is that school loans are available on easy terms from FinTech companies that are essentially NBFCs but have a streamlined digital lending model for quick disbursal of funds. From a loan for buying school furniture to any other loan for school development, they can provide funds within a week of application receipt. The application needs to be substantiated by only the soft copies of a few documents verifying the credibility of the school.

So what are the benefits of leveraging a quick school loan from such a source? Does it lead to more profitability for the educational institution?

Here’s how the benefits of these loans unfold:

Enable improvements in infrastructure and purchase of new teaching equipment

FinTechs can provide a loan for school construction which helps the borrowing institution to divide students of the same class into different sections. With this, teachers can give more attention to each student, and the quality of teaching improves. The building structure can also be expanded when a school decides to admit more students or has to advance its existing classes to higher grades.

Schools can also take a loan for smart class facilities that are sought in every private school today and have become significant for a generation growing in the digital age. Other areas where a school loan can be used include furbishing of labs and computer rooms, purchase of games supplies and investment in vehicles for transportation services.

Invigorate interest in admissions

The most direct impact of bringing improvements in school facilities is a rise in the number of students who want to be a part of the institution. While senior students can understand the benefits of moving to an optimally planned school on their own, the parents of younger children who join an academy from kindergarten will also try to place their children in such a school. Provision of excellent facilities and keeping pace with new techniques that transform the learning environment is a natural incentive for more admissions in a school.

The good repute of a school can instantly attract students who move to the city due to their parents’ job transfers and have to find an educational institution in minimum time to avoid loss of studies in an ongoing academic session.

Collection of more fees

More admissions imply higher fee collection, and constant increase in this amount eventually leads to increased profitability for schools. A school loan taken to add new facilities and create better learning experiences has multiple benefits for schools that aim to be the leaders in delivering quality education services. Evidently, the increase in their earnings also helps them to repay the borrowed fund.

Whether you need a small loan for school furniture or up to Rs. 50 lakh to finance any development process in your school, Capital Float ensures that you get it most conveniently. Visit https://www.capitalfloat.com/school-finance to apply for your fund today.

Oct 24, 2018

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Capital Float: Banker For Small Businesses – Livemint

Written by Shrutika Verma

Sandeep Bindra, the New Delhi-based e-commerce merchant who runs Pathways Marketing and Consulting Pvt. Ltd is the official distributor of consumer electronics brands such as Havells, Godrej, Usha and Symphony coolers for large e-commerce marketplaces such as Flipkart.com, Snapdeal.com and Amazon.in. Two months ago, Bindra ran out of money raised from family and friends and his pleas for debt for his two-year-old company were not entertained by any bank. “They (banks) ignored us as they do not consider companies that are less than three years old,” said Bindra. With the festival season round the corner, he needed immediate cash to sustain the fast-growing sales online. That is when Bengaluru-based start-up Capital Float came to his rescue.

Founded by Sashank Rishyasringa and Gaurav Hinduja, alumni of Stanford Graduate School of Business, Capital Float is a new-age lending solution that operates online and offers unsecured loans to start-ups, manufacturers and e-commerce merchants such as Bindra. Set up in 2013, the company has already lent to more than 70 borrowers and has disbursed over Rs.20 crore. Run by Zen Lefin Pvt. Ltd, Capital Float is modelled after Atlanta-based Kabbage, which recently raised $50 million from Japan’s SoftBank.

Hinduja, born and brought up in Bengaluru, initially joined his family’s garments business under Gokaldas Exports that was sold to private equity firm Blackstone in 2008-09. He later studied business management at Stanford where he met Rishyasringa. Rishyasringa, 30 looks after finance, business and product development while Hinduja, 32, handles sales and operations. Since inception, the company has grown rapidly and has attracted a total funding of close to Rs.24 crore from SAIF Partners and George Soros’s Aspada Investment. The start-up is drawing the attention of investors and small businesses as it offers fast, affordable and flexible working capital loans, an alternative to traditional lending institutions such as banks, chit funds and local money lenders.

Currently, it lends money to companies that are more than a year old. The amount of fund offered is between Rs.3 lakh and Rs.1 crore. Interest charged on the loan varies and is in line with banks and non-banking financial companies (NBFCs). Bindra, for instance, borrowed a sum of Rs.20 lakh at an interest rate of 18.5%.

Unlike traditional banks, Capital Float lends money to small businesses that might not have collateral, significant revenues or years of experience. But the company does not disburse loans blindly. It employs unorthodox techniques, including psychometric tests to run checks on its clients, gauages their social media reputation, and grills them on business decisions and entrepreneurial skills before lending.

According to Bindra, companies such as Capital Float take away the human element from the process of money lending and make it more data-driven with an algorithmic approach to evaluating whether the business can stand on its feet or not. “In India, a lot of access to finance is based on who you know and how good is your relationship with the branch manager of a bank,” says Bindra.

Agrees Mridul Arora, vice-president at SAIF Partners, “Lending is currently dominated by banks. However, the SME (small and medium enterprises) space is underpenetrated and given the demand perspective, a company like Capital Float has a huge potential.” Arora says online lending business makes economic sense too and counts Capital Float’s access to proprietary data from e-commerce companies as one of its strength.

Rishyasringa says the company started focusing on e-commerce as the sector was buzzing and banks failed to see the opportunity. Today, there are several thousand manufacturers who either sell directly to e-commerce portals or they sell on marketplaces. Capital Float tied up with Flipkart, Snapdeal and Myntra to meet their vendors and understand their requirements. Soon, the company realized that these small businesses were unable to grow because of working capital challenges. Today, Capital Float works with most e-commerce marketplaces and is also a part of Snapdeal’s Capital Assist, a service to provide capital assistance to small sellers.

“When we started digging into entrepreneur finance in India, the scale of the problem was staggering. Today, there is about $140 billion of formal debt provided to SMEs by banks and NBFCs but the unmet need is another $200 billion,” says Rishyasringa, who worked with consulting firms in India and in New York in the financial services and technology space before founding Capital Float

Rishyasringa calls it the “missing middle problem” that he and his partner are trying to solve in the country. “If you are a large or a mid-size corporate, banks will line up outside your door. If you are a rural farmer or artisan, the MFIs will queue up to lend you, but if you are in this missing middleRs.50 lakh to Rs.20 crore turnover range, then there are not many options available,” he explains.

Today, India has more than 30 million registered SMEs and about 35% of these are ineligible to receive any financing from banks or NBFCs. “They look at your financial statement and bank statement but there is lot more which can make these companies underwritable,” says Hinduja.

The idea to start Capital Float struck the duo during their second year at Stanford after brainstorming sessions with their professor and mentor Baba Shiv. “Nearly 10 ideas were shot down before Capital Float was conceptualized,” said Shiv, a director at the Strategic Marketing Management Executive Program at Stanford and an adviser on the board of several companies, including Capital Float. Shiv recalls how the two friends were close to developing something in the taxi services space when they discovered firms operating similar businesses.

The company today takes seven to ten days to approve a loan, which it hopes to bring down to three to five days soon. Companies such as Kabbage take only seven minutes to approve a loan in the US. However, Hinduja does not believe that a company in India can get there because of the risk involved and the lack of data available around a start-up or an entrepreneur.

To be sure, Capital Float is not the only firm in this business. It faces competition, albeit from smaller companies, such as Capital First, NeoGrowth Credit Pvt. Ltd and SMEcorner.in. A lean operation, Capital Float employees 30 people.

The company’s progress is hardly a surprise given the teamwork and similar passions of its founders. For a start, both swear by Jeff Bezos’s biography The Everything Storeas a life changing book. “We can relate to the book at professional and personal levels,” they say. Both want to get into politics at some point. “We want to solve the policy issues and see ourselves in some policymaking roles. We left the (Silicon) Valley and came to India to solve some of the problems people here face,” says Rishyasringa.

Between table tennis matches at their Bellary Road office in Bengaluru, the founders plan to make Capital Float similar to OnDeck Capital (scheduled to go public this month) or the San Francisco-based Lending Club which is all set to raise about $900 million in its initial public offering. The company is scheduled to begin trading on the New York Stock Exchange this week.

These companies not just provide short-term financing but also offer a lending platform to introduce investors and institutions to the ones raising money. “Right now, we are trying to prove to the market that we know how to lend money and we know where our mouth is but we are very quickly starting to convert ourselves into a platform and the pilots have already begun,” said Hinduja.

The question is, how long can the online money lending companies avoid competition from banks? “We are now competing with some of the banks that have realized that e-commerce is becoming an area where they need to get expertise,” says Hinduja.

Among established banks that recognize the trend are Yes Bank Ltd and HDFC Bank Ltd. Both lenders did not comment for the story.

“Companies like Capital Float will not be able to compete with banks at the pricing level whenever they jump into the game. But if these companies execute better and faster they can create a platform to work with banks,” says SAIF’s Arora.

News piece sourced from Livemint. Read the full piece here.

Oct 24, 2018