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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1. When expansion is imminent
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Often, traditional banks either work too slow or fail to understand your business goals. Capital Float’s products are the best fit in such situations, and are tailored to fulfil unique credit requirements. Thus, small business goals such as expansion or renovation plans become achievable and affordable through alternative lending means.
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Sustaining a business in the current digital ecosystem requires continuous supply of inventory. This is especially true for companies working in the online space. Expanding to new marketplaces and staying ahead of the competition entails having enough inventory to meet customer demands. Falling short may jeopardise the reputation and prospects of B2B or B2C companies.
A business can conveniently avoid running into such a situation with Capital Float’s loan products. Enabling several types of small and medium businesses to replenish their inventory ahead of a season, these loan offerings take care of your seasonal inventory purchases. They involve short-term loans which companies normally pay off from profits once the season is over.
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Costs pile up long before the first sign of profits. Businesses invariably require working capital or daily cash for taking care of operations, which may range from repair of equipment to payment of salaries. Till the time a fledgling company can earn enough to cover its working capital needs, business loans come in extremely handy. Capital Float caters to a wide range of companies that require small business loans for running daily operations. Easily available without the hassle of lengthy paperwork and excruciatingly slow disbursement times, such loan offerings ensure smooth working of an enterprise. Easy access to timely credit is critical. This is especially true for startups, which require a certain amount of hand-holding initially. Working capital, which can be easily sought through a small business loan, ensures a comparatively smoother running of business.
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To upgrade the quality of education delivered in their school, authorities running the institution may occasionally need to apply for loans. The first thought that strikes while contemplating Indian school finance is one of approaching a bank. The low rate of interest and general trust in the banking system draws many private schools to these established lenders.
Although banks offer loans to businesses and other organisations, when it comes to financing educational institutions, things can be rather challenging, and it may take long before the school actually receives the requested amount for use. The reason for this is complex eligibility criteria and the long list of documents necessary to get the loan application approved.
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Is there any other alternative for private school financing? Can these institutions securely apply for their loan and get the amount in minimum time without going through the hassles of submitting numerous documents and arranging for collateral? The answer, fortunately, is ‘Yes’.
Keeping up with the plans of promoting quality education in India, digitally operating non-banking finance companies (NBFCs) called FinTech companies have come up with a borrower-friendly lending model. They provide school finance on easy terms and conditions that merely require the borrowing institution to:
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Capital Float is a leading school finance provider in the Indian FinTech industry. We offer quick loans of up to 50 lakhs to fund school development. To know more about our finance options, call us at 1860 419 0999.
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