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Tax Slabs & Understanding the Dynamics of Transactions under GST

Effective July 01, India would be joining a host of 160 other countries that have implemented GST/VAT in some form. This is a big step towards streamlined taxation norms. From new indirect tax slabs to drastically different taxation procedures, the Goods and Services Tax or the GST, will compel companies and taxpayers to realign their operating models.

Tax slabs in India under GST 

The new indirect taxation regime is based on a four-slab tax structure, and goods and services feature in these depending on their nature – whether it is a luxury item, a necessity or a leisure item. A total of 1211 items have been categorised under these four tax slabs, with a bulk of them (including services) being placed in the 18% bracket.

Previous tax rate (Approximate range) GST Rate Goods Services
No tax No tax Items of daily and mass consumption such as milk, butter, fresh fruits and vegetables, fresh meat, flours, bread, salt, prasad, bindi, sindoor, stamps and judicial papers, colouring books, newspapers, bangles etc. Hotels and lodges with a tariff below Rs 1000.
~ 5% (5% VAT and no excise) 5% Apparel below Rs 1000 and footwear below Rs 500, and essentials like kerosene and coal, medicines and insulin, stents. Edible oil, tea, coffee, frozen vegetables, skimmed milk powder, cashewnuts, incense sticks. Small restaurants, transport services like railways and air which have petroleum as the main input. Job works in textiles, gems, and jewellery.
~ 9% to 15% 12% Apparel over Rs 1000, Ayurvedic medicines, exercise books, preserves like pickles, sauces, ketchups, and fruit and vegetable preserves, umbrellas and packaged foods like butter, ghee, cheese, dry fruits. Basic cell phones. Non-AC hotels, pesticides and fertilisers, business class air tickets and work contracts.
~ 15% and 21% 28% Luxury goods and sin goods: SUVs, aerated drinks, white goods, paints,  ATM/ vending machines, vehicles, personal aircrafts; Sin goods such as bidis, chewing gum, paan masala. Certain select consumables will attract an additional cess. Movie tickets above Rs 100, five star hotels, race clubs, betting and other luxury services.

– Gold and rough diamonds have been allocated separate tax percentages of 3% and 0.25% respectively.

– Certain goods such as alcohol (for human consumption), consumption and sale of electricity, stamp duty and customs duty, and five petroleum products, namely, crude oil, natural gas, aviation fuel, diesel, and petrol have been excluded from GST for the initial years.

1. The GST council has revised the tax rates on 27 goods and 12 services with effect from 6 October 2017. Click here to read the revised list.

2. The GST council has revised the tax rates on 177 goods and services with effect from 15 November 2017.

3. The 25th GST Council met on 18 January 2018, where a third round of revisions was announced on 29 goods and 53 services, with effect from 25 January 2018.

How the transactions will change

Businesses will be impacted at both ends, i.e., at the inbound transactions such as imports (international business) and procurements (domestic), and at the outbound transactions, i.e., the sales. Here are some important transformations:

Place of Supply: Currently, many businesses operate on a state-wise warehousing model as transfers between inter-state warehouses are considered as stock transfers and are not liable to pay CST. Under GST, inter-state stock transfers between warehouses will also be subject to IGST at the “Place of Supply”. For example, a supplier of steel from Jharkhand to Orissa and Kerala, will need to pay IGST on the transfer of goods in Orissa and Kerala respectively. If there is a transfer of steel from the warehouse in Kerala to the warehouse in Orissa, IGST would still be applicable, but CST wouldn’t be payable on such a transaction. This change has been proposed to discourage suppliers from having multiple warehouses and adopt a single warehousing system.

Consideration of “Time of Supply Rules”: This factor determines when goods / services are to be supplied, and therefore, when the tax is to be paid (point of taxation). Under the GST, the Time of Supply for goods and services is the earlier of the following dates: (a) the date of issuing of invoice (or the last day by which invoice should have been issued) OR (b) the date of receipt of payment; whichever is earlier. For example, if the date of invoicing is May 20 and payment is received on July 1, the time of supply will be May 20. Which means that the  government wants to collect the tax at the earliest possible point in time, and businesses must plan their working capital keeping in mind these advanced payment timelines.

Provisions of Input Tax Credit: Input tax refers to the taxes that a manufacturer or service provider pays while buying the raw material or inputs. Under the GST, a business can reduce the tax it has paid on inputs from the taxes collected on outputs. In effect, businesses will be taxed only on the “value addition”. For example, if a manufacturer is paying Rs 300 on final product and has paid Rs 200 on inputs, he can claim input credit on Rs 200 and has a tax liability of only Rs 100. This facility will bring down the overall tax expenses of companies.

Lower exemption thresholds for Small Scale Industries: Currently, small scale industries can avail central excise threshold exemption of Rs. 1.5 crore. With the GST, this limit will be reduced to Rs. 20 lakh. As a result, a company that used to avail tax exemption of 1.5 crore can now avail only 20 lakh, leading to higher tax payments.   Benefits from higher registration threshold: Businesses with turnover of over 20 lakh (10 lakh for the North East) must mandatorily register for GST. Currently, the criteria for VAT is that businesses with turnover of over Rs 5 lakh (Rs 10 lakh for North East) must register for VAT. As a result a business that was in the Rs 5 lakh – Rs 20 lakh bracket is now exempt from indirect taxation.

These are some of the business-transactional implications of the GST. Organisations will have to design and implement extensive change management exercises to align GST with their desired business outcomes. Get more information about GST on our GST blog.

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Oct 24, 2018

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3 Things To Do When Applying For Business Loans

The growth of the SME (small and medium enterprises) segment, which contributed nearly 40% of India’s exports, has been restricted by the lack of access to timely finance. Only 4% of 57.7 million small business units in the country have access to formalized finance, leaving many to rely on informal lenders, who charge exorbitant interest rates. Requirements like collateral and detailed documentation as well as the long processing and disbursement time of loans deter SMEs from approaching traditional financial institutions. Thus continues the huge gap between the need for funds by SMEs and the amount of funds actually approved as loans.

This severe shortfall needed to be addressed, especially given the importance of SMEs to India’s economy. This is where FinTech companies like Capital Float have risen to the occasion, offering new business loans that are aligned to address specific needs of the SME sector. While cutting-edge technology is being deployed to make innovative financial products available to smaller businesses, SMEs must be aware of the available finance options to take make an informed decision.

SMEs make some common mistakes when applying for secured and unsecured loans. As a result of these mistakes, their loan applications may get rejected. Here are some tips for small businesses to avoid rejection of their business loan applications.

Be organized

Banks and other lending institutions would require certain documents to verify the claims made by a business. The decision to sanction a loan is taken by the lender after evaluating the prospects of a business, its ability to repay the loan amount and its previous credit record. This is done by checking various documents certifying the presence and existence of a business, its financial statements, taxes paid by it and other documents that indicate the financial standing of the business and the business owner(s). To ensure speedy approval of its loan application, a business must organize its documents and submit these in an orderly manner to the lending firm.

Any kind of delay in submitting the desired documents may be viewed negatively by the lender and could even derail the whole process. So, every business seeking a short term loan needs to be organized about its documentation. All the papers should be ready for submission when applying online for a loan. Your swiftness in providing the necessary information along with requisite documents can speed up the approval process.

Be Mindful of Your Credit Profile

The credit profile of the business owner or owners plays a key role in the ability of the SME to secure a business loan. Ensuring a good credit profile is not difficult. This is possible by ensuring that all your credit card and bill payments are made on time. The timely repayment of all due amounts including the ones relating to any existing loans helps improve the credit score.

Often business owners ignore their credit score thinking that it would not impact their ability to secure a loan for their business. They fail to understand the significant negative impact this can have on their business. It is important for business owners to regularly check their credit scores and take the necessary steps to improve them. Such efforts can ease the process of securing finance for the business in the future. In some cases, the credit scores do not even reflect the true situation. Regular monitoring can help business owners rectify the errors in the scores and boost their chances of getting loans on time.

Have A Firm Business Plan

Seeking loans without any kind of business plan may result in the loan application being rejected. A business plan is a reflection of the goals, the purpose of a business and ways to achieve them. It shows how a business intends to operate and how much funds are needed and at what time. A clear business plan not only helps a small business to ease the process of loan application, but also to determine the specific amount of funds required. This in turn enables the business to apply for a business loan well in advance besides providing the lender clarity into the purpose for which the loan is sought.

Thus, a well laid out business plan helps a business provide answers to questions like:

  • How much loan is required and for what purpose?
  • How quickly are the funds required and for what duration?
  • What is the current financial standing of the business and when will the business be able to repay the borrowed amount?
  • Does the business need secured or unsecured loans?

With FinTech lenders like Capital Float offering an array of innovative products, small businesses also need clarity to enable them to choose the loan that is most appropriate for them. A business plan would also help with this. In the absence of a business plan, the screening process may take longer and the chances of rejection of the loan application are also higher.

A business seeking a loan should not borrow from the first lender it comes across. Instead, it’s advisable to do thorough research and compare the loan terms offered.

Capital Float helps small businesses seeking loans to identify the right type of loan for their working capital needs, besides offering multiple repayment options. The use of advanced algorithms helps to underwrite businesses uniquely, check the repayment ability in absence of credit scores and develop customized lending solutions to suit the individual requirements of potential borrowers.

Oct 24, 2018