Important GST Definitions, Terms and Glossary

The GST is ready for implementation and brings with it a slew of changes that indirect tax payers and business owners need to get familiar with. Not only are businesses required to register themselves under the GSTN, they must also reassess their business in accordance with certain new terminologies to determine how the GST impacts them. A few of the important GST definitions and the registration process are briefly specified here to help you get started.

GST terms to know 

Certain essential definitions have been mentioned under the Model GST Law, which was first released in June, 2016, and then modified and released again in November, 2016.

Business : Definition: Business refers to trade, commerce, manufacture, profession, vocation or any other similar activity, including transactions related or incidental thereto, irrespective of volume or frequency, as well as supply of goods/ services in connection with commencement or closure of business.

The definition is quite wide and seems to be borrowed from State VAT legislations. Some parts have been modified to include transactions in services.

Place of Business : Definition: (a) A place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods. (b) A place where a taxable person maintains his books of account. (c) A place where a taxable person is engaged in business through an agent.

Since GST is a destination-based indirect taxation system, the place of business is a critical factor in determining the business model and taxation dues of a business that is present in many places.

Time of Supply : Definition: The time of supply is the earlier of the following dates: (a) Date of issue of invoice by the supplier or the last day by which the supplier is required to issue invoice or (b) Date of receipt of payment.

The time of supply is important since it determines the point of taxation i.e. the point in time when goods / services have been deemed to be supplied or services have been deemed to be provided and hence SGST or IGST apply.

Goods : Definition: “Goods” refers to every kind of movable property other than money and securities, but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

While the term “movable property” has been mentioned, it has not been defined in the Model GST Law, and one needs to refer to the General Clauses Act 1897 for this. It does not include intangible property such as intellectual property rights (copyrights, trademarks). Also, an item needs to be movable for it to be classified as goods.

Services : Definition: “Services” means anything other than goods.

The GST Model Law clarifies that services include intangible property and actionable claims but does not include money. There are separate definitions for supply of software, works contracts and leasing transactions, even though they fall in the ambit of services. The inclusion of “actionable claim” may create confusion where financial and commercial transactions are involved.

Software includes the development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software, and is treated as a service.

As far as leasing transactions are concerned, a finance lease would be considered as supply of goods, and an operating lease would be considered as a service under the Model GST Law,

Works Contract : Definition: It is an agreement for carrying on building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair, renovation or commissioning of any moveable or immovable property. Work Contract has been defined as a “Service”, simplifying its taxation procedure.

Supply : The GST has three new definitions related to “Supply”, i.e., Principal Supply, Composite Supply and Mixed Supply.

1. Principal Supply
Definition: It is the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary and does not constitute, for the recipient an aim in itself, but a means for better enjoyment of the principal supply.
It is generally the dominant supply in a bundle of supplies or a bundle of services. For example, in a mobile phone and the charger, the mobile phone will be the principal supply.

2. Composite Supply
Definition: a supply made by a taxable person to a recipient comprising two or more supplies of goods or services, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

For example, goods packed with insurance and packing material is a composite supply, with the good being the principal supply. Here, there is a main supply and supporting supply, which normally go together in the course of business and enhance the enjoyment of the main supply.

3. Mixed Supply
Definition: Two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Take the case of a corporate gift pack that consists of a tie, a wallet and a pen. These are bundled in a package supplied for a single price. None of the items is dependent on the other, nor necessary to be purchased together. This is a case of a mixed supply, where the individual items, which can also be sold separately, are sold together.

Aggregate Turnover : Definition: “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.

Reverse charge tax is a system where the recipient of the supply (goods and services), i.e. the client, is liable to pay the tax. Inward supplies are input supplies used as an input for manufacturing the goods or providing the service. Tax paid on input expenses can be adjusted against tax paid on output supplies, through input tax credit. This means that it cannot be treated as a part of the aggregate turnover.

Read more about GST at our GST blog for India.

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Considerations While Applying For a Business Loan at a Financial Institution

New entrepreneurs with pioneering business ideas primarily need finance to keep their operations running. Banks have encouraged the growth of small-scale industries in India since independence by granting loans to promising ventures. However, the demand for funds did not quite keep up with the supply, and this resulted in the emergence of non-banking finance companies (NBFCs). The NBFCs supported the trend of industrialisation by granting business finance to those who could not procure it from banks.

The digital technology revolution in the second decade of the 21st century has given rise to a new breed of NBFC companies – the FinTech (financial technology) lenders. Employing a new models of lending, a FinTech company uses data analytics and social media tools to evaluate the creditworthiness of borrowers.

If you have begun a new venture and are seeking a loan for business expansion, you may have wondered who will be a more suitable lender – a bank or a digital NBFC. While there is more of interdependence than competition between these two sectors, you as the borrower have the privilege to choose what suits your interests the best. The loan that are you are eligible for will also be based on your business credit history and the availability of documents in support of the application.

Mentioned below are the points that will matter in the decision-making process:

Flexibility of sending application: At present, banks in India do not work on Sundays, second and fourth Saturdays and on gazetted holidays. Because you need to visit a bank branch in person while applying for business finance, it implies that there will be days when you cannot expect the process to advance towards the disbursal of your loan. Conversely, digital NBFCs by their very nature of operational medium can be accessed for business finance any day, any time. Therefore, Even if you are completely occupied with work on week days, you can apply for the business loan on a Saturday or Sunday and can still avail the loan within a time period as short as 3 days.

Loan processing time: Usually, it takes a few weeks before you actually get the required credit through a bank loan. Most of the banks in the public sector have to follow stringent rules in verifying the credibility of business organisations before they release funds into their accounts.

If you have an urgent need for money and cannot afford to wait for long, an NBFC loan from a FinTech player will be a better option. The entire line of processes from the submission of application to the disbursal of funds is digital and is therefore far quicker.

Collateral requirement: For years, banks have been lending to both individuals and businesses based on collateral that has to be pledged for security. This could be a residential or commercial property, gold holdings or any other asset that can be liquidated in case the borrower is unable to pay off the loan in the stipulated period. Even if a public sector bank looks at the regular income earnings of the borrower, it still requires collateral for additional assurance of getting back the amount lent with interest.

On the other hand, the NBFCs in digital lending industry do not ask for such guarantees through assets. They offer their loans solely on the creditworthiness of the business, which is evaluated by its dealings in the past and expertise in the field. If you are reluctant to offer collateral or simply do not have anything substantial to pledge, a FinTech company will still be willing to grant business loans in India.

Years in business: When was your business established? How old is your venture? For how many years has your business been up and running? Traditional lending institutions like banks ordinarily ask such questions when you apply for a loan through them. Generally, banks in public and private sector lend to organisations that have been operational for 3 to 5 years. Even conventional NBFCs require about the same duration before they can approve an application for a business loan. Such conditions however cannot be fulfilled by many start-ups.

The digital NBFCs have come to the rescue of enterprising individuals by granting loan for business even if their establishment has just completed a minimum operational period A one-year-old organisation with a convincing success story can persuade a FinTech company for business finance.

Nature of operations: Digital technology and social media have given rise to enterprises that were unheard of even in the late 20th century. Online platforms today sell everything from groceries and clothes to jewellery and appliances. Tickets for airlines, rail, buses and even tables in restaurants & hotel rooms are booked with a few taps on your smartphone. There are hundreds of other great business ideas that need to be uncovered. Banks and other traditional lending agencies have not yet started offering credit in full-faith to ventures of an unconventional nature.

The good news is that digital NBFCs are willing to support this generation of businesses. The FinTech industry has been increasingly lending to e-commerce companies, digital marketing organisations and other projects that use technology innovatively. Thus, all of this encourages progress and allows talented entrepreneurs to contribute to the Make in India initiative.

Prepayment penalties: Nobody wants to be debt-ridden. When you take a personal or business loan, you also wish to pay it back as soon as possible. However, the lending policies of traditional sources of finance in India have been such that borrowers are penalised if they repay early. The banks earn through interest paid each month, and to maximise this, they grant loans for longer tenures. If you have windfall gains in business and want to pay off your debt early, you may be charged at least 5% of the loan amount as penalty. That may be quite disappointing for an astute businessperson.

The new-age NBFCs have eliminated this trouble. There are no preclosure penalties when you get business loan from a digitally operating FinTech lender. What is more, their flexible repayment options give you the liberty to pay without straining your business operations or affecting your personal funds.

If the case for borrowing from a FinTech company looks convincing and positive, you can be the next business to get a loan from Capital Float. With a set of thoughtfully segregated loan products, we will be happy to support your business in its journey towards higher levels of growth. To know more about how the online NBFC business loans in India can help you, visit our website www.capitalfloat.com.

Oct 24, 2018

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Capital Float Partners With Of Business to Provide Easy Finance to Online B2B Merchants

Capital Float, the largest digital lender to SMEs in India, has partnered with OfBusiness, a leading B2B e-commerce marketplace, to help small scale Indian manufacturers and traders avail easy funding for expanding their business. Through this partnership, buyers on the OfBusiness platform can leverage Capital Float’s Pay Later product to avail instant funds for procuring industrial materials.

Capital Float has enabled purchase financing for small scale manufacturing companies and assists them in growing their business on OfBusiness. This partnership will help in bringing these informal borrowers into the mainstream credit ecosystem. Buyers on this platform often face hurdles in obtaining timely finance to operate and expand their business, due to their lack of credit history based on traditional credit parameters. However, Capital Float’s tech and big data-driven algorithms uniquely underwrite applicants, confirming their eligibility in minutes, while also offering credit limits in real time. Some of the factors taken into consideration during the decision-making process include transaction history, cancellation rate and customer rating on the platform.

“For the first time, a partnership of this scale is focussed on enabling B2B e-commerce buyers in India. We are the pioneers of digital lending in India and the first movers in the online seller financing space. The insights we have gained by closely working with online sellers has aided us in developing this best-in-class product, custom-built to address the needs of buyers on the OfBusiness platform,” said Sashank Rishyasringa, Co-Founder, Capital Float. “Through this partnership, we aim to diversify our customer portfolio and strengthen our position in this space. Our target is to increase our present loan disbursement by three times by the end of September 2016,” he added.

Capital Float has strategic partnerships with some of the largest online marketplaces. Equipped with this rich experience in the online selling space, Capital Float is augmenting its reach by penetrating into the B2B e-commerce segment. The company is aptly placed to serve the unique needs of the sector with it’s highly customized credit offerings and swift processes.

SME financing in the manufacturing space requires deep understanding of SME’s cash flows. We at OfBusiness, are committed to building a tech-enabled ecosystem for SMEs for all their commerce and credit needs. Partnering with Capital Float has enabled us to bring customized financing solutions in the manufacturing space,” said Ruchi Kalra, Co-founder, OfBusiness.

Publications that have covered the release: 

Capital Float partners with OfBusiness for B2B finance
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Capital Float partners with OfBusiness to provide easy finance to online B2B merchants
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Oct 24, 2018

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Implications of GST on SMEs

One of the biggest tax revolutions of India is underway as businesses and tax payers are gearing up for the change. These enterprises and individuals are assessing how the GST rollout will make a difference to them. One such segment is the Small and Medium Enterprises (SME) segment, which contributes significantly to India’s GDP and exports. The positive effects from GST are expected to drive decentralization of opportunities and provide an impetus to India’s GDP. However there is some concern that some of its policy implications could slow down business, and that is what small and medium enterprises must prepare for. Gaining know-how on GST rules and implications is the first step towards becoming GST-compliant and becoming tax-savvy. This blog will help you understand which SMEs are eligible for GST and the impact on the sector as a whole.

How GST will impact business transactions

GST will typically impact any business at two ends of the spectrum where transactions are involved i.e. for input transactions and for output transactions.

  • Input transactions: An input transaction is a transaction carried out for the supply of input goods / services like raw material procurement, imports etc. Input transactions will be directly affected due to the changes in taxation levels of raw materials/industrial inputs, affecting the product or service pricing.
  • Output transactions: An output transaction is one that is done for outbound supplies or service delivery. For example, sales is an output transaction. GST will directly impact the sales by altering the taxation of the product or service being sold. Depending on the new tax slab of the goods or service, the profitability of the enterprise will be directly impacted.
    Another significant impact area is due to the concept of “place of supply” and “time of supply”, calling for more stringent supplier compliances.

Which SMEs are eligible for GST? 

SMEs are a major driver in the Indian economy, contributing to almost 7% of the manufacturing GDP and 31% of the services GDP. With a consistent growth rate of about 10%, they employ about 120 million people and contribute to around 46% of the overall exports from India.

Under the GST regime, this significant sector too is set to change. First and foremost, all businesses, including SMEs will need to register for GST under the rules as per the following threshold limits related to aggregate turnover:

Region Liability to Register Liability for Payment of Tax
North East India Rs. 9 lakh Rs. 10 lakh
Rest of India Rs. 19 lakh Rs. 20 lakh

Why should SMEs enrol for GST? 

An SME registered under GST will be recognized as a legal provider of goods and/or services. Tax accounting will be streamlined. Such an SME will be able to maintain proper accounting of taxes paid on input goods or services, and be able to utilise the inputs credit facility to enable better cash flows. GST will provide an opportunity for SMEs to digitize their transaction management, making it efficient for the future. If such an SME scales up, it will be prepared in advance to manage large-scale transactions through software. GST enrolment thus provides a window of opportunity to modernise the business and set up standards for doing business easily in the future.

Moreover, digital transactions tend to leave a digital footprint. These footprints can be used to assess the sector with greater accuracy, as Fintech lenders can create customized financial solutions for these SMEs, which are currently under-served from a credit perspective.

Impact of GST on SMEs

Overall, the SME sector seems to be skittish about the impact of GST. Here is a look at some of the pros that GST brings to SMEs.

  • Ease of starting a business: The old tax regime requires new entrepreneurs to obtain VAT registration for every state separately, with each state having its own rules. Though GST too requires businesses to register in each state, the rules for GST are more uniform and outlined clearly on the portal. This will make it easier to set up an SME.
  • Ability to compete with multinationals and multi-state enterprises: GST is a destination-based taxation system and not source-based. Locally manufactured goods by SMEs will pay the same amount of tax as imported goods from multinationals. Moreover, corporates generally ‘stock transfer’ transfer goods to escape the taxes on inter-state transfers. SMEs are not able to ‘stock transfer’ goods due to lack of infrastructure; they physically transfer goods and pay inter-state taxes, leading to higher expenses. Under GST, the stock transfers would be taxed. This will help put SMEs at par with large multinational corporations, allowing them to compete on an equal tax footage.
  • Transparent transactions: SMEs often do not have the resources (processes and people) to dedicate to tax transaction management. GST will enable an online and transparent view of tax obligations and on-goings, minimizing the need to liaison with tax authorities offline. Though it will take some initial investment now, SMEs that streamline their transactions now will be setting up future-ready systems and processes.
  • Reduced tax burdens due to rise in threshold: Under the old regime, business owners with an annual turnover of Rs 5 lakh (Rs 10 lakh in the North East), mandatorily need to register for VAT and make VAT payments. Under GST businesses above Rs 20 lakh turnover (Rs 10 lakh for North East) qualify for GST registration, which brings huge relief to SMEs. Thus, businesses that fall in the Rs 5 lakh – Rs 10 lakh revenue bucket need not register and will experience better cash flows because they are exempt from GST.
  • Better Cash flow due to input credit facility: Cash flows may increase because of facility of input tax credit, wherein businesses will be able to avail credit on input expenses such as supplies. For example, for a business that procures steel as the raw material to manufacture utensils, the businessman will need to pay tax on the raw materials procured i.e. iron ore. He can adjust the tax paid on inputs from the taxes collected on outputs. This means that only the actual “value addition will be taxed.
  • Better logistics: GST will help eliminate time-consuming border tax protocols, allowing for free flow of goods across borders. This will result in savings in logistical costs. CRISIL estimates that the logistical cost for companies manufacturing bulk goods will be reduced by around 20%.

Key Concerns around GST

  • Investment to go tech-savvy: SMEs are typically not used to managing complex tax compliances, but GST will need SMEs to go digital. SMEs may need to hire or consult with GST experts to bring about a technology makeover resulting in additional expenses.
  • Reduced tax exemptions: SMEs are eligible to avail a central excise threshold exemption of Rs 1.5 crore gross turnover; under the GST regime this exemption will reduce to Rs 20 lakh. As a result, SMEs with turnovers between Rs 20 lakh and Rs 1.5 crore will not be eligible for this tax exemption. This is an additional cost that will pinch SMEs that were previously used to being tax exempt.
  • Higher tax rates may impact profitability: Despite assurances by the Finance Minister that overall tax slabs will not increase, the GST slabs indicate otherwise. The services tax rate has distinctly increased from 15% to 18%. Higher tax outflows means lesser profitability.
  • Strict tax-compliance norms means more costs: GST will bring in an era of stringent compliance. For example, purchase invoices raised will have to be reconciled with the supplier of the goods. These invoices have to be uploaded by the entity by the 10th of every month and will need to be reconciled by the 15th of every month. SMEs are not used to carrying out such detailed and timely tax transactions and will need to hire personnel to help with tax management and compliance.
  • Supplier-side compliance will affect the GST compliance rating: The ability of an SME to claim refunds is a direct result of its GST compliance rating. Going ahead, SMEs will be accountable for their suppliers’ non-compliance and they may take a hit on their Compliance Rating due to non-compliance at any leg of the operating cycle, right from procurement to service. Maintaining compliance records, periodic audits will need to be instated to ensure compliance of all stakeholders. This responsibility of supplier-side compliance is an added cost to the company.
  • Time lag in input credit process: Input credit will only be available after a supplier declares the particulars of the supply and after these details are validated by the buyer electronically. Thus, a supplier is heavily dependent on the buyer’s response, leading to a probable time lag in availing input credit. Moreover, the timeline for claiming input tax credit is very limited— before the due date of filing returns for September of the next financial year, or, the due date of filing annual returns, whichever is later.

GST is all set to usher in an era of simplified taxation. SMEs must decide on the right investments to optimise the benefits of the change. This means investing time and resources in understanding the change, getting the right people and processes to change the way they do business to ensure GST-adherence. Such SMEs will emerge future-ready and poised to scale their business like never before.Get more information about GST on our GST blog.

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Oct 24, 2018