The new Goods and Services Tax (GST) is a unified tax structure that was implemented by the Government of India on 1 July 2017. The new regime has ushered a significant change in taxation levels and rules associated with it. On an average, we see the tax slab increasing from 15% to 18% for most of the services. While this may translate to higher cost of services to the end consumer, GST also presents a whole lot of opportunities, pushing ease of business.
Services Sector in India: An Overview
India is a strong services-led economy with the sector generating a significant chunk of employment opportunities and contributing to the GDP. It contributed around 66.1% of India’s Gross Value Added (GVA) growth in 2015-16, is the biggest magnet for Foreign Direct Investment (FDI), and an important net foreign exchange earner. Some of the core areas of service are IT and ITES, banking and financial services, outsourcing, research and development, transportation, telecommunications, real estate and professional services.
Some of the positive impacts of GST on service providers are:
Clear distinction between goods and services: The old regime does not clearly distinguish between goods and services, leading to many instances of double taxation. For example, software is often treated as a good and as a service. The new regime clearly distinguishes goods from services, and also defines principal supply, composite supply, and mixed supply separately. For example, when an individual books a Rajdhani train ticket which includes meals, it involves a composite supply wherein the ticket and the meals cannot be sold separately. Since the transportation of the passenger is the principal supply, the rate of tax will only be charged on the ticket. Alternatively, for items that can be sold separately, but are sold together, like a hamper of snacks and aerated drinks, the rate of tax applicable on the higher product will be levied on the composite supply. There are also separate definitions for supply of software, works contracts, and leasing transactions to bring in more clarity and transparency on their taxation rules.
Streamlining of taxation for intra-state service providers: Due to the state level taxes being subsumed, it will become easier for service providers that operate within the state to know their tax obligations better. Such companies can move away from multiple tax calculations. For example, a CD with software incurs Excise, Service Tax, and VAT under the old regime; this is simplified to one unified rate under GST, making tax calculations and administration easier for intra-state service providers.
Input credit facility: VAT payment under the old regime was not eligible for setting off against output liabilities. The input credit facility is now made available to service providers as well, wherein tax paid on any inputs can be claimed and adjusted against tax paid on output. This will result in direct cost savings for service providers and may even offset the expected rise in end pricing. For example, an AC fitter who paid tax on the raw material for AC fittings (pipe, tape, solder etc.) will be able to claim that tax, and end up spending less on the cost of fitting the AC. This cost advantage can spill over to the customer as well.
Regularised return filing: The old service tax system required two half-yearly returns for services businesses. Under GST, this has been replaced by a number of returns provisions, depending on the type of taxpayer and the type of business:
|Return||Type of tax payer||Timeline of filing return|
|GSTR 1||For outward supplies of sale (for registered taxable person)||By 10th of the next month|
|GSTR 2||For inward supplies received by a taxpayer (for registered taxable person)||By 15th of the next month|
|GSTR 3||Monthly return for registered taxable person (except for Compounding Taxpayer)||By 20th of the next month|
|GSTR 4||Quarterly return for Compounding Taxpayer/Composition Supplier||By 18th of the next month|
|GSTR 5||Periodic return by Non-Resident Foreign Taxpayer||By 20th of the next month|
|GSTR 6||Return for Input Service Distributor (ISD)||By 13th of the month succeeding the quarter|
|GSTR 7||Return for Tax Deducted at Source (TDS)||By 10th of the next month|
|GSTR 8||Annual Return for e-commerce operator||By 10th of the next month|
While a shorter timeline for filing returns might seem overwhelming, regularisation in return filing will result in better streamlining of taxes. Since all these returns are required to be submitted online through a common portal provided by GSTN, the process is simplified and will help the government weed out regular defaulters. This in turn will result in a major boost in the contribution of the Service sector to the GDP.
Service providers, however, are concerned about the following aspects:
- State-wise registration will be required: In the old regime, a service provider could operate with a single place of registration, since services were taxed only by the Central government. For example, if an IT services provider was present across states, they could carry out tax and delivery transactions from the main location. However, now a service provider that is offering services across states must register each place of business separately in each state. This is because the new GST regime entails taxation of services at “location of service recipient”, which will differ for different states. This means service providers will need to register afresh in new states and then carry out tax transactions separately in each state. For example, an IT company like TCS that has a widespread presence across states will need to decentralise service delivery.
- Decentralised reporting will add to costs: Under GST, the “location of service recipient” is the key criterion for how a service will be taxed. Tax considerations will be related to the place the service is being delivered, and even a pan-India service provider with several “locations of service” will need to maintain state-wise records of input credit, audits, service consumption, etc. For example, earlier a service provider like TCS would enter into a single contract with the client, based on its main location, and then would discharge service tax based on the single-service tax registration model. GST will decentralise service delivery models, ensuring various TCS units adopt their own tax reporting and tax management. While this need for decentralised tax tracking and processing is an immediate cost to service providers, it presents a very real opportunity to streamline reporting and compliance measures for the future.
GST offers clear benefits to the services sector, and while some of these measures entail additional cost and effort in the short term, businesses can look forward to simpler operations with the new taxation laws.
All in all, services industries must gear up for better ways to manage business. Now is the time for them to equip themselves with the right people, processes and technologies, and emerge as service providers of the future.
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India is amongst the fastest growing economies of the world, with retail trade contributing an estimated $600 billion+ to the economy. The impact which GST, the unified indirect tax structure introduced by the Government of India on July 1 2017, brings on such a major economic lever will be highly significant.
Further, the implications of this new taxation procedure on the trader will vary on the nature of the trade, i.e., wholesale or retail. In this blog, we explain the opportunities within the new tax reform that traders can leverage, and discuss how they can prepare themselves from a GST perspective. Read on to know the effects of this latest indirect tax reform for:
1. For Wholesalers:
The wholesale market is fundamental to extending the reach of goods and services to the interiors of the country, especially the rural markets. Most wholesalers operate in cash transactions because of which there is a good chance that some transactions are not accounted for, which was previously a concern but ceases to be one under GST.
Given below are the main advantages that GST brings to wholesalers.
- Transparent tax management: The introduction of technology into the taxation system can be a blessing in disguise, an opportunity to bring about transparency in tax management. Rather than relying on cash transactions, wholesalers will now get an opportunity to go digital. They will also be able to avail the facility of input tax credit. Input tax credit is where the businessman will be able to claim tax on all input goods and/or services. For example, if a wholesaler is renting a tempo for transport of goods, going ahead they will be able to claim the tax paid on the rental and receive it as input credit. They will thus be able to reduce the final market price of the transported goods by making up for that amount.
- Financial streamlining: Because the entire supply value chain including tax flows will be on GST records, wholesalers will be better connected to retailers and suppliers. For example, the payment for a consignment will reflect in the accounting records of the supplier company as well as the wholesaler, leaving no ambiguity about payables and receivables. This will make it easier to process payments and get tax returns in a timely manner, thereby improving the cash flows of traders. A reliable positive cash flow will help build confidence in the new regime, by making working capital available and aiding opportunities to grow the business.
- Reorganization of supply chain: GST will enable high visibility and streamlining of the supply chain, providing wholesalers with a transparent view of supply movements. For example, taxation at the “place of supply” is already mobilizing FMCG companies establish fewer warehouses, the sizes of which will be larger than before. This will aid business efficiency in the long run. However, in the initial transition phase, many wholesalers may undergo de-stocking since they would have already paid VAT on their current stocks, and would like to avail of the input tax credit on the basis of the GST rules.
- Ease of borrowing through digital lending: Because financial and tax transactions will now be recorded in the GST system, even small traders will have digital records of their company finances and credit status. These digital records will act as a ready reckoner of information when a trader opts for a loan. Financial institutions and online lenders like Capital Float can now easily assess the loan eligibility of small traders such as Kirana owners by accessing this data, and provide them quick and easy loans. Borrowing funds online and doing business will now be easier.
2. For Retailers:
Almost 92% of the retail sector in India is unorganised, operating in cash payments. They are, essentially, the tangible representation of FMCG multinationals to end-consumers; yet they are challenged by chronic issues such as the lack of technology enablement and low operating margins. A majority of the retail market consists of “kirana stores”, which are often the smallest link of the trade chain.
Here are the benefits of the new taxation system for retailers.
- Input tax credit facility: As mentioned for wholesalers, retailers too would be able to claim taxes paid for input products and services availed. This will present a cost advantage to retailers. For example, under the previous tax regime, if a retailer purchases a refrigerator to store perishable goods, they were not able to claim credit for tax paid on it. Under GST, they will be able to claim the tax paid on the new refrigerator when they file their taxes. This will be possible due to tax connections reflecting in the GST value chain at each stage of the transaction. Availing input tax credit means financial gain.
- Ease of entry into the market: The market is expected to become more business-friendly due to the clarity of processes related to procurement of raw materials and better supply logistics. This is a good opportunity for new suppliers, distributors and vendors to enter the market. The registration process has also become very clear under the GST, aiding entry into the market.
- Retailer empowerment through information availability: Small retailers often do not have complete visibility into their stock receipts, payments, etc. and are forced to blindly rely on the word of the supplier. GST will streamline these supply and cost challenges and empower the retailer with readily available information through digital systems. For example, when different types of bills like invoices, credit and debit notes, etc. are stored digitally as proposed by GST using accounting software, these will provide retailers with real-time reports on sales, stock information and live balance sheets, in addition to performing error checks before placing an entry into ledgers.
- Better borrowing opportunity: The retailer scope for business growth can be increased by increasing the retailers’ access to finance. This is where Fintech lenders like Capital Float step in – they can ease their passage to the new tax regime. Capital Float recognises the financial challenges these small business players face and strives to bridge this gap by financing them with small ticket loans. As “kiranas” move onto GSTN, Capital Float will be able to better serve this micro-entrepreneur segment, helping them overcome upcoming challenges by leveraging the GST-enabled digital footprint.
However, like any new reform, there are certain challenges that need to be addressed. We see that both retailers and wholesalers must manage the following eventualities of GST implementation.
! Higher costs of input services: Input services such as manpower, legal, professional services, auditor services, travel expenses, etc. will now be taxed at 18% as against the earlier bracket of 15%, leading to higher costs to the wholesaler.
! Additional costs to upgrade technology: Many wholesalers, especially rural ones, are not technology-savvy and will need to rely on help from their supplier companies to undergo a technological transformation. This means that supplier companies may need to increase commissions for wholesalers— an added cost to the company, or wholesalers and retailers themselves will need to invest in new systems, incurring additional expenses.
3. For Importers and Exporters
According to the financial reports of 2016, India is the 16th largest export economy in the world with the net value of exports contributing to one-third of the GDP. The subsuming of various local state level taxes will have a direct impact on imports and exports, a critical component of trade. For example, the Countervailing Duty (CVD- an additional import duty levied to offset the effect of concessions or subsidies, currently 0% or 6% or 12%) and Special Additional Duty (SAD- a special kind of customs duty paid on imported goods currently at 4%) have been done away with under the new GST regime. However, Basic Customs Duty continues to be applicable and importers will need to pay it as per previous rates.
Here is a look at the overall impact of GST on trade:
- Imports Taxation: Every import will be treated as an interstate supply, and will be subject to Integrated Goods and Services Tax (IGST) along with Basic Customs Duty (ranging between 5% and 40% depending on the good imported). This implies that IGST will be levied on any imported item, based on the value of the imported goods and any customs duty chargeable on the goods (say 10%). IGST is a combination of SGST (say 9%) and CGST (say 9%). For instance, for an import item worth Rs 10,000:
|Total Duties + Taxes Payable||Basic Customs Duty (10%)||GST (18%)||GST Cess(if applicable)|
Thus, imports taxation is an added tax liability for retailers who import goods or services.
- Exports Taxation: Exports will be treated as zero-rated supply, i.e., no GST will be charged on exports. This is in line with the “Make in India” campaign that aims to make India a global manufacturing hub, for which exports are important.
- Import of Services: The new clause of import of services places the onus of tax payments on the service receiver when the services are provided by a person residing outside India. This mechanism is called reverse charge and will apply in certain scenarios. For example, if the assessee has no physical presence in the taxable area, then the representative of the assesse will be required to pay tax. In the absence of representation, the assesse has to appoint a representative who will be liable to pay GST. Another example is when a registered dealer is buying goods or services from an unregistered dealer. In this case, the registered dealer will have to pay the tax on supply.
- Need for restructuring working capital: A major shift is that GST is based on “transaction value” rather than MRP. In the old system, CVD was charged as a percentage of the MRP. Under GST, IGST will be charged as a percentage of the transaction value. This will affect the cash reserves of retailers and wholesalers, and they will need to reassess their working capital needs.
On the whole, GST is expected to bring domestic players at par with large multinational corporations due to the renewed import and export norms and the rules for FMCG suppliers. This is a good sign for Indian trade and exports in general, and thus the implementation of GST shows promise to propel India onto the international trade arena.Visit our GST blog to know more about GST and keep track of latest.
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Oct 24, 2018
What is Working Capital?
Working capital is the difference between the total number of assets and the total number of liabilities in a company. This amount is spent on executing day-to-day operations in a business. As a result, it is used as an index to measure the health of a company. Enterprises with high working capital are often strong businesses.
What are the Uses of Working Capital?
In most situations, working capital is used to run operations. A well-managed business will also use it’s working capital to achieve growth. For instance, an online seller would spend to add a new type of product to his portfolio. A retailer may liquidate funds to increase his store size by adding a new section to his outlet.
Other uses of working capital include:
• Equipment and inventory purchases
• Hiring, salary payments and employee training
• Unforeseen expenses
What are the Outcomes of Low Working Capital?
Responsible financial management may help companies secure higher levels of working capital. On the contrary, poor management of capital could result in the following issues:
• Bankruptcy risk: In the case of negative working capital, SMEs use money received from creditors to finance business operations. Businesses run the risk of bankruptcy due to the lack of sufficient income to counterbalance the expenditure.
• Lack of investment opportunities: Investors are less likely to consider companies which regularly have low or negative working capital. This demonstrates that the company is not being run effectively.
• Missed growth opportunities: With large amounts of positive working capital, businesses will have money to spend on pursuing growth. With negative or low working capital, businesses may find it difficult to capitalize on investment opportunities. Low working capital could have stifling effects on the ambitions of any businessman.
• Trade discounts: Many suppliers will offer substantial discounts if they are paid on time. Low or negative working capital can make it difficult to meet payment obligations which, effectively, increases the cost of inventory.
What are the Ways of Accessing Working Capital Finance with Capital Float?
At Capital Float, we offer a wide range of financing options for small and medium scale businesses. By providing quick and easier access to funds and with flexible repayment options, we can give businesses the right financial support to help them achieve their next milestone.
We offer Online Seller Finance to e-commerce sellers who operate on online marketplaces. Through a simple online process, the seller can apply for a loan and receive funds in three days. The loan tenure ranges between 90-180 days and is repaid on a biweekly basis. This loan is ideal for sellers who are looking at expanding into other marketplaces, increasing their product portfolio or purchasing higher volumes of stock.
Term Finance is applicable for traditional businesses that have been operating for three years. The loan tenure varies between six months to three years. Small scale manufacturers, retailers and distributors can use this loan to meet short-term investment requirements and finance inventory purchases.
Invoice Finance helps SMEs convert their invoices into cash, that can be channeled into financing business operations. This loan product has an exclusive feature of one-time bullet repayment mode, which might suit the cash-flow needs of several SMEs.
We also provide Merchant Cash Advance which will interest vendors using point-of-sale machines with consistent card settlements. Merchants can receive working capital finance of up to 150% of their monthly card swipes within three days of the loan application.
Our unique product called ‘Pay Later’ is a rolling credit facility, that enables the borrower to make multiple drawdowns within a predefined credit limit. The borrower pays interest on the utilized amount and not on the entire limit. By repaying the amount utilized, the borrower resets the credit limit, thereby instantly availing the facility in whole. Click here to read more about ‘Pay Later’. You could read about the product features by clicking here.
Oct 24, 2018
Written by BW CIOWorld
Capital Float is a digital platform that provides capital finance to SMEs in India. They offer short-term loans that can be used to purchase inventory, service new orders or optimize cash cycles. Vaibhav Singh, Associate Vice-President, Business Development, Capital Float, in a chat with BW CIOWorld shares some insights on e-commerce in India.
The e-commerce boom has birthed young entrepreneurs with limited transactional history that directly impacts their accessibility to credit. Capital Float has identified this opportunity and has launched new debt products to serve this rapidly growing segment. Most banks continue to implement underwriting models on online sellers which were originally designed to underwrite debt of offline sellers, argues Vaibhav.
“At Capital Float, we have built our underwriting model bottom-up based on evolving data and metrics to identify creditworthiness of online sellers. The approach is tailored to be more relevant to online businesses and offers more accurate results, says Vaibhav. Explosive growth in the e-commerce segment has overwhelmed traditional banking institutions and companies like us are able to share the burden of offering credit to unserved SMEs in the market.
E-Commerce platforms are attempting to standardize processes while increasing scope and scalability of existing sellers. This effort is likely to cause a churn in the seller e-community creating a metaphoric sieve through which sellers will be filtered. Consequently, the best performers will experience geometric growth, increasing competition between sellers in the space.
Building individual brand identity would be a challenge
The nature of the business fosters competition on the basis of pricing. In the attempt to offer best prices, sellers would be challenged to build their individual brand identity. Accessibility to credit through traditional channels will continue to remain a hurdle for e-commerce sellers in the foreseeable future, as conventional sources of credit begin to adapt to the dynamic capital environment. The fiery growth in the e-commerce segment can only be sustained if companies like us are able to share the burden of offering credit to unserved SMEs and ecommerce sellers in the market.
There will be a slow change in the mindset especially in a hitherto human-intensive space like lending. People have to become comfortable with trusting machines to do everything a man can do; stepping in only where expressly human traits of experience and intuition are needed, even if this means that at volumes approaching statistical significance, we let a few true-positives slip through in the interest of overall productivity. It’s about slowly giving up control and trusting technology to pick up the slack.
Algorithms and big data will drive eCommerce growth
Capital Float has used technology innovatively to ensure that seller in the ecommerce domain have access to collateral free working capital loans and enable business growth in a simple and efficient manner. Leveraging analytics, algorithms, big data and other disruptive technology trends to make lending decisions quickly based on verifiable data thereby ensuring efficient and fast turn-around time is the future. Technology has also enabled Capital Float to expand business faster and reach out and support the SME and seller community across India. The acceptance of new forms of technology would only fast forward the growth of facilities needed to continue the growth of ecommerce.
– See more at: http://bwcio.com/accelerating-the-growth-of-ecommerce-in-india/#sthash.zDdwY1Q3.dpuf
News piece sourced from BW CIO World. Read the full piece here
Oct 24, 2018