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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Small and Medium-Sized Enterprises (SMEs) have received a tremendous fillip of late, with the Government pitching in to give a hands up to this very vital business sector. SMEs engaged in businesses ranging from electronics to ad services, or from engineering to textile to handicrafts routinely face a cash crunch that handicaps their everyday operations, as well as hampers plans for expansion.
SMES and the short-term loan
It takes immense courage to begin your business, and taking risks of establishing, sustaining, and expanding it can be prohibitive for many. Financing is the fundamental issue here, and many businesses are compelled to shut shop or to approach banks in order to raise short-term business loans.
Finances are the lifeblood for any enterprise, and any business plan worth its salt must include sound planning for fund sources as well. Short-term business loans and short-term finance are available in plenty and offer SMEs a chance to overcome their temporary financial problems as also provide an opportunity to expand their business. However, these loans are not without pitfalls. Here are some tips that will help an SME to take a well-considered decision when it comes to applying for short-term business loans:
1. Do your homework
SMEs are recommended to do adequate research to identify the option that are most suitable to them. Occasionally, and especially if the borrower has a good credit score, a simple overdraft or line of credit can help the SME to tide over their cash flow problems. Bank loans carry low-interest rates, but the paperwork involved and time taken to sanction can be burdensome. Crowdfunding, inventory financing, and credit card financing are options that can be explored. Promoters also help to finance a large chunk of working capital requirements. But if a short-term loan is a final option, a careful look at the costs involved can help to tip the scales over.
2. Try online loans
Short-term online loans are meant to be repaid anywhere between 90 days to three years. They are quick, convenient and flexible. A good deal of the paperwork process is cut off and friendly financiers also help eliminate the traditional application method of back-and-forth conversation. The huge advantage lies in not necessarily having to offer collateral. Provided an SME finds the right fintech lender, they can benefit from the speed of digital processing. Additionally, preclosure penalties and hidden charges are also avoided. Genuine financiers will also provide the convenience of flexible loan tenures.
3. Measure business liquidity
There is always a possibility that even a profitable SME can run into cash-flow problems, regardless of the numbers reflected on the cash-book records. Delays in receivables have hurt many a lucrative business, and are in fact a common cause for cash-flow mismatches. In such cases, measuring the liquidity of the business can be very useful for an SME in order to find an alternative way to mitigate problems of a cash crunch. The proper evaluation of liquidity can be extremely beneficial, and can be measured in two ways:
Quick Ratio It shows the capability of business in covering current liabilities with current assets, and utilises the formula:
Quick Ratio= (Current Assets – Inventory)/ Current Liabilities
It is measured by calculating the difference between the current assets and current liabilities, with the formula:
Working Capital = Current Assets – Current Liabilities
Getting these figures in hand can help measure business solvency, and thus available funds can be duly channelised and prioritised.
4. Capitalise on credit score
It pays to maintain a good credit score history, in more ways than one. A good credit ranking can help you bargain for lower interest rates on short term business loans. Also, it opens up room for tapping into other means of raising money, such as getting into partnerships or seeking non-traditional lenders for funding.
On occasion, the lender may analyze both your business and your personal debt load, in addition to your credit score. If any of these is already high, the lender may hesitate to extend or provide fresh credit for your business. So, it is important to keep a tight rein over your credit utilisation, so that the services offered by the lender are not affected by your credit score.
5. Check APR
While comparing and selecting the best short-term business loan and finance service, one must always keep in mind the number of applications they are filing for apply for the term loan. After receiving multiple loan offers, one must select the most suitable loan offer by comparing the Annual Percentage Rate (APR) of every term loan lender. This is perhaps the most important calculation to estimate how expensive a loan is. Once you understand the logic of short-term business loans, it is easy to decide whether or not getting a particular loan is a right choice in terms of its actual cost.
6. Be ready for lender’s queries
Things don’t end here. There are chances that the lending party can contact the SME for verifying their documents that they submitted while applying for term loan. Thus, the SME owner must always be ready for answering any query regarding their documentation or regarding their future goals for the company. A small preparation toward this can prove to be very beneficial in getting a loan finalised. Ergo, shortfalls of cash may be inevitable, but not insuperable. A little bit of math and careful consideration of the choices can help you get the cash you need—hopefully at the price you can afford— without having to fall into a debt cycle.
Oct 24, 2018
SMEs are sometimes cash-crunched to provide credit to their customers. These customers often ask for 30-60-90 day credit after raising an invoice. Due to the absence of negotiating power, SMEs are often arm-twisted into accepting delays in payment. The gap in cash flows resulting from delayed receipts affects the performance of a company and its ability to run smoothly.
Such situations can now be easily avoided by using Supply Chain Finance, which allows a business to raise the necessary funds by using its receivables. Read on to know more about how supply chain financing can be a powerful tool for boosting the cash flows of your business.
When is Supply Chain Invoicing Needed?
Businesses offer a credit period to customers after executing an order and raising an invoice, since this helps them establish a stronger relationship with customers, build customer loyalty and receive recurring orders. While on one hand, SMEs need to deal with delayed payments from clients, they do not have the negotiating power to delay payments to their suppliers. Moreover, they need funds to make overhead payments and provide salaries to their employees. Even the most profitable SMEs may face cash crunches due to the time lag between having to incur expenses and actually receiving payments from clients.
If not fulfilled in time, this shortage of funds can weaken the smooth functioning of the business. This is where supply chain invoicing for small businesses comes to the rescue. The invoices are like an asset for a business, and can be used to overcome cash flow issues. Supply chain invoicing uses the accounts receivables of a business as a means to increase liquidity.
Invoice Factoring Versus Supply Chain Invoicing
There are two ways in which a business can use its invoices to infuse cash into its operations: invoice factoring and supply chain invoicing. With invoice factoring, a business sells its outstanding invoices, often at a significant discount, to a third party. Supply chain invoicing allows a business to use its outstanding invoices as collateral to secure a loan. Often businesses do not prefer invoice factoring since they do not like the idea of a third party contacting their clients to recover an invoice. This can have a bad impact on the relationship between an SME and its customers.
Supply Chain Invoicing for Small Business
If a small business has outstanding invoices, it can use these to inject cash into its operations. Capital Float’s Supply Chain Finance product does exactly that. The best news is that the benefits do not end there.
Fast Loans: For any business, especially an SME, timing of receiving funds is critical. Using cutting-edge technology, FinTech companies like Capital Float are able to meet the most urgent working capital needs of small businesses. In fact, the Supply Chain Finance product uses data-driven criteria to approve a loan within hours and disburse the sanctioned funds within just three days.
Convenient Application: One does not need to visit a financial institution and stand in any queues to apply for supply chain invoicing from a FinTech lender. One can apply online, at any time and from anywhere. With such options available, an SME can say goodbye to the hassles of obtaining a loan from a traditional bank. The application process for Supply Chain Finance is so smooth and easy that one can complete the application form even while traveling from home to the workplace. What’s more, Capital Float has a mobile app that makes the application process even easier. The complete process involves filling up a form and uploading the required documents, which takes less than ten minutes.
High Loan Amounts: An SME can receive as much as ₹1 crore to inject into its business. From as low as ₹1 lakh to as high as ₹1 crore can be secured to be used as working capital or to fund the growth of a business. An SME can borrow as much as 90% of the value of the outstanding invoices. One can use the supply chain finance calculator to get an idea of the amount the business can borrow.
Flexible Loan Tenure: With Supply Chain Finance, one can have a repayment plan between 30 – 180 days. The greatest feature is the one time bullet repayment option, which allows a business to repay the loan in one go, thus reducing the interest burden. Else, the business can repay the loan in easy monthly instalments.
Minimum Documentation: In order to Apply for Supply Chain Finance, a business would need digital copies of only a few documents. These include audited financials for the past couple of years, VAT returns and bank documents for the past six months, KYC documents of the business owner and the SME, invoices for the last three months and sales ledger for the last six months.
Do you raise invoices and then need to wait weeks or months for clients to pay? Did you know your cash requirements could be met with supply chain financing?
Now a business can secure the required financing without pledging any assets. The invoices are all that a business needs to infuse cash immediately into its operations. Revolutionary products like Capital Float’s Supply Chain Finance have helped solve the cash flow problems of many businesses. Moreover, being technology driven, there is complete transparency in the fees for this service. There are no hidden costs in acquiring this loan product.
Oct 24, 2018
Cashflow is the lifeblood of any organisation, including schools. Unlike most small and medium enterprises that have unstable revenue because of variations in customer purchases and seasonal cycles, schools are usually assured of a running income from the fees paid by the students each quarter. However, cashflow management is as serious a task for educational institutions as it is for any other business.
With the fee they receive, schools have to pay their teaching and administrative staff, maintain the campus, periodically purchase lab equipment, sports supplies, furniture and other items, and keep some reserves for unforeseen expenses. When money falls short of requirements, they may have to apply for loans from a school finance company. In addition to banks, FinTech organisations have stepped forward as significant providers of school finance in India.
Whether a school manages its operations with its earnings or takes the support of school finance, it is essential to handle the fund prudently. The following tips for cashflow management in schools can help the owners avoid severe financial constraints:
Anticipate future requirements: Will some students be leaving the school to change their board (CBSE, State Board, ISC, IGCSE) from the next academic year? Will you be hiring any new staff members? Does the school need to replace any furniture or teaching equipment? It is good to have a basic idea of such needs as they have an impact on your earnings and expenses. If you feel that the outflow of cash could be more than the inflow and reserve funds, it may be necessary to apply for school finance.
Make arrangements with vendors: If you have developed long-term relationships with the vendors who regularly supply lab materials, sports gear, canteen groceries and other provisions to your school, you can make occasional arrangements on payment terms. As an example, if your regular pay cycle from the receipt of invoice is 30 days, it can be extended to 45 days in a period when you are spending funds on additional works in the school.
Work to maximise cash inflows: With constant improvements in your education services, you can attract new students, which will have a positive impact on your earnings. Schools that have classes till Standard VIII but have a reasonably high strength of students can work with an education board to upgrade to Standard X or XII. To facilitate the construction of a new building and for additional campus amenities, you can apply for school finance by sending a quick digital application to a FinTech company. The revenue generated from fees paid by students in new upper classes will help you to pay off the borrowed amount and interest in small EMIs.
Stay connected to lenders: If despite your best efforts on cashflow management, money falls short of requirements, remember that funding for schools in India is available on easy terms from a FinTech school finance company. You can get a collateral-free loan, and you need to submit only the soft copies of eligibility proving documents when you choose a FinTech company as your lender.
Capital Float is a friendly FinTech organisation providing school finance to recognised educational institutions that have functional classes till Grade VIII or above and collect a yearly fee of minimum Rs 75 lakh.
Oct 24, 2018