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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
During the lifecycle of a business, there are times when the inadequacy of working capital threatens the flow of operations and hinders growth. Traditional lending institutions in India such as banks rarely provide assistance in such situations, as they generally demand collateral, which small business and young entrepreneurs may not possess. An unsecured business loan can take care of routine business expenditure such as maintenance of machinery, making payments to suppliers and purchasing raw material. It can also be useful for business expansion activities such as purchasing new machinery or expanding premises.
Moreover, all small and medium enterprises need funds to seize new opportunities for growth, and the window for such opportunities is usually small. In such a scenario, there is a need for quick access to funds. The loan repayment schedule also needs to be synchronous with the expected revenue flow from a business venture. Hence, an unsecured business loan taken from a FinTech company works best for them, as it is disbursed much faster than a loan from a bank. Further, these FinTech companies ensure that an SME is always at ease while paying the loan instalments.
Unsecured loans are turning extremely popular amongst small businesses communities. These are a few reasons why.
They help strengthen the business finances
A suitable business growth opportunity can present itself at any time, and therefore a small business needs to have access to adequate resources at all times. In case the cash flow situation is imperfect or there is a working capital requirement to meet routine business expenses, it helps to take an unsecured loan for a short period until the situation improves. This ensures that a small business will never find itself at a disadvantage when a new opportunity presents itself. Such loans from FinTech companies do not come with any prepayment penalty, and their tenure can vary from a few months to a couple of years.
Faster approval and quick access to funds
The digital revolution and the subsequent development of IT systems and processes have led to the rise of new age FinTech companies over the past five years. FinTech companies in India follow a completely different approach to the unsecured business loan market, as they use innovative technologies to profile, design and disburse loan products for small businesses. Even the application for an unsecured loan can be made online or through the mobile app, and all supporting documents such as bank statements, tax statements, previous loan statements, KYC documents, business receivables and other relevant documents can be uploaded in digital format. The use of advanced analytic techniques allows these companies to process a loan application within minutes. Upon approval, the loan amount is transferred to the borrower’s bank account within a few working days.
An unsecured loan product for every business
Extensive use of technology enables FinTech companies such as Capital Float to design new loan products that are meant to fulfil varying business needs. The loan product, Term Finance, is meant for small businesses that have been in operation for more than two years and have been doing good during that period. Such businesses can take business loans from ₹1 lakh to ₹1 crore for a duration of a few months to three years.
Supply chain finance is meant for small businesses that have blue-chip companies as customers. Such businesses can take up to 80% of the pending invoice value as an unsecured loan. The loan can be repaid either as monthly instalments or at one go upon receiving payments from the customer.
Unsecured loan products designed to support digital economy
Online Seller Finance is another loan product from Capital Float that is designed for businesses that generate revenue through e-commerce marketplaces. It provides up to 200% of the monthly sales volume as advance to such businesses. This money can be used to accelerate business growth online.
Similarly, merchants that receive the bulk of their payments through PoS terminals can avail up to 200% of their monthly card settlement value as advance through a customized finance product called Merchant Cash Advance. The loan amount can be repaid through the deduction of a fixed percentage from card settlements in the subsequent months.
Get loans on the most favourable terms
Capital Float offers loans at the most competitive rates. These unsecured loan costs can be brought further down by choosing the right loan product. Capital Float charges a flat 2% processing fee for all their loan products, and there are no other hidden charges. Another great benefit is the flexibility offered in loan repayment, which is linked to the business receivables.
Indeed, new age technology driven FinTech companies have eased the pain in procuring funds from the unsecured loans market in India, and small businesses can look up to them as a partner in their business growth.
At Capital Float, we fully understand the business challenges faced by small businesses and have therefore designed the unsecured loan products in such a way that businesses can focus more on business growth rather than on worrying about getting business finance. Our customised plans ascertain that you get just the right product that suits your unique need.
To find out the product that best suits your business, click here.
Oct 24, 2018
E-commerce in India is growing at a rapid pace. It’s a highly competitive space as it gives opportunities to thousands of small sellers as well as big brands. However, to compete with the larger players, several sellers face the challenge of sufficient capital.
Be it in day-to-day operations, meeting sudden demand rise or to build a brand value, capital is all that you need to keep your venture growing. Loans are one of the most convenient financing options available for most online sellers. This is to expand their business and to manage gaps in cash flow. Be it a big brand or a small seller, financial backing is much needed to grow on e-commerce platforms.
Leading e-commerce companies have tie-ups with many financial institutions such as banks and NBFCs. These partnerships help encourage sellers on e-commerce platforms by providing them finance, mainly in the form of working capital.
Many financial institutions are working in collaboration with e-commerce companies. They have rolled out financing schemes for their online merchants and sellers. Lenders collect the database of sellers from the partnered e-commerce company. They then determine the quantum of loan and the interest rate for the potential borrower. Usually, loan amount varies from Rs 1 lakh to 100 lakhs.
Some lenders offer higher loan amounts depending on the pattern of the business. These e-commerce loans are offered to online sellers at a competitive rate with flexible repayment tenures.
Interest rate offered varies from 11% to 15 %, depending on the various factors and business record of the seller. It involves a quick and easy application process and minimum documentation.
E-commerce loans can be applied online through a simple process of form filling. Approvals are instant in most of the cases. Seller should be registered with the respective e-commerce company to avail the financing scheme. Usually, e-commerce loans are unsecured loans, i.e. loans without any collateral.
Lenders focus on many records related to the seller. Here are some of the Influencing factors based on which lenders determine the quantum of e-commerce loan:
1) Cash Flow Management:
When you are selling products online, it’s important to ensure healthy cash flows. Online sales are quite difficult to predict, especially during the festive season and on big sale days. Failure in your marketing strategy can leave you with a lot of inventory that you could not sell. Seasonalities are common in the online selling business. You may end up facing cash flow problems, which ultimately lead to a financial crunch. Effective management of cash flows is a vital element. Lenders take your cash flow forecast statements into consideration while determining the loan limit.
2) Past Record:
Lenders take into consideration the entire business record of the seller since inception of the enterprise. Some of the documents taken into consideration are:
- Business license,
- Incorporation or registration details
- Timely payment of sales tax etc.
The lender will then check your business plan and the performance since inception. They do this to understand the pattern and size of your business. So, be mindful of maintaining a good business record right from the onset.
It’s important for online business owners to keep their records updated. With good records, you may get a preferential rate on credit.
3) Operational History:
Numbers of years in business counts more in getting the e-commerce loan approved. Generally, most of the financial institutions provide e-commerce loan to online sellers with more than a year of operation. The biggest fear for lenders when providing loans to online sellers is the possibility of default. Hence, stability of business is taken into consideration. Your entrepreneurial experience plays a major role in getting a credit facility for your online business.
4) Return on Sales:
The efficiency of your business is measured basis the return on sales. Lenders consider the ratio of profit and sales to determine the credit limit that they can offer. The loan amount is determined by lenders based on your sales records of the last six months.
5) Type of Business:
A lender decides the percentage of finance that they can offer to an online seller. It depends on the type of business. If your business is fast moving and the frequency of buying such products is more, you are likely to get higher loan.
6) Customer Satisfaction and Review:
Earning customer loyalty and trust is key to being successful in online selling. The first impression of a seller needs to be good for customers to consider purchasing from the seller. Positive customer feedback will ultimately lead to more business. This creates more demand in the online marketplace. Customer review and rating defines your service quality. This helps you in building brand loyalty on the e-commerce platform. High customer satisfaction will ultimately boost your sales. This creates competitive advantage for you in the online marketplace. Lenders consider these elements to evaluate the level of your service quality.
With many e-commerce companies collaborating with financiers, availing credit for online businesses is no longer a challenging task. As lenders partner with e-commerce companies to offer customized finance solutions to e-sellers, more opportunities are available for new entrepreneurs to explore the online selling business.
Raising working capital for an online business is now convenient. It has become easy with the financial assistance from e-commerce companies.
With the help of details like:
- Cash flow forecast,
- Number of years of business experience,
- Sales volume
- Customer satisfaction report, etc.
Financial institutions are able to underwrite e-commerce loans for online sellers.
Oct 24, 2018