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Taxes Subsumed under GST & the Components of GST

With the Goods and Services Tax (GST) set to roll out on July 01, 2017, expectations and anxieties are high with individual taxpayers and businesses trying to gear up for a brand new tax regime.

Components of GST

To be able to make the most of the new indirect taxation law, taxpayers need to understand its components well.

The GST Council which was set up by the Central Government to execute GST implementation, has proposed a new tax framework-structure for GST.

First and foremost, GST represents a “One Nation, One Tax” outlook, which is necessary to do away with multi-tax regimes that lead to inefficiencies such as cascading taxes, levy of excise at the point of manufacturing and lack of uniformity in tax levies. Currently, Goods and Services are taxed under various disparate tax categories such as Excise Duty, VAT or Central Sales Tax, Service Tax (in the case of services dispensed) and Customs Duty (for imports). Some of these taxes are levied by the Central government, and others by the state government. A unified approach— GST— will help do away with these complexities by enabling a single tax regime right from manufacturer to consumer. It is important to know that GST is a destination-based tax i.e., the tax is credited to the taxation authority whose jurisdiction prevails at the place of consumption (also called the place of supply). Moreover, GST will be levied on value-addition, by allowing for input tax credit at each stage of the transaction chain.

GST Structure

GST will have four slabs of indirect taxation: 5%, 12%, 18% and 28%, with goods and services attracting any of these slab percentages depending on various factors such as being a luxury good/service. The current indirect tax structure will give way to a Dual GST model, with the Centre and States simultaneously levying GST on a common tax base, as follows:

  • Central GST Bill (CGST): For intra-state transactions related to supply of goods and/or services, levied by the Centre.
  • State or Union Territory GST Bill (SGST or UTGST): For the supply of goods and/or services in the States and Union Territories, levied by the States/Union Territories.
  • Integrated GST Bill (IGST): For inter-state transactions and imports related to supply of goods and/or services, carried out by the Centre.

Under this structure, the CGST and SGST/UTGST will be levied simultaneously on the same price or value. Here is an example of how this will happen: Consider a steel supplier who manufactures in Jharkhand and supplies steel to another company within Jharkhand. Let us assume the rate of CGST to be 10% and SGST to be 7% and the selling price of the steel to be Rs. 100. The supplier will charge the client a CGST of Rs 10 and SGST of Rs 7. The supplier needs to deposit Rs 10 in his Centre taxation account, and Rs. 7 in the State taxation account. Due to input credit facility, the supplier has the option of setting off the total payment (Rs 17) against the tax he paid on his purchases or inputs. However, these credit values cannot be mixed—for CGST-setoffs he can utilize only the CGST credit; for SGST-setoffs he can utilize only SGST credit.

Dual GST

A Dual-GST is particularly suitable for the Indian economy because in India both the Centre and States are assigned the duty of levying and collecting taxes. So far, the Constitution clearly demarcated the tax levying and collection duties of the Centre and State, with the Centre responsible for taxing the manufacture of goods, and the State responsible for taxing the sale of goods. For services, only the Centre was allowed to levy Service Tax. To override this segregation of power, and enable the smooth implementation of GST, a Constitutional amendment (Constitution Act, 2016) was made so as to simultaneously empower the Centre and the States to levy and collect this tax. With this amendment, the Dual GST regime will now align well with the fiscal federal protocols of India.

Taxes subsumed under GST

The following are the disparate taxes (levied by the Centre and States) which will be subsumed under the new dual-GST regime.

(A) Taxes currently levied and collected by the Centre:

  • Central Excise Duty
  • Duties of Excise (Medicinal and Toilet Preparations)
  • Additional Duties of Excise (Goods of Special Importance)
  • Additional Duties of Excise (Textiles and Textile Products)
  • Additional Duties of Customs (commonly known as CVD)
  • Special Additional Duty of Customs (SAD)
  • Service Tax
  • Central Surcharges and Cesses so far as they relate to supply of goods and services

(B) Taxes currently levied and collected by the States:

  • State VAT
  • Central Sales Tax
  • Luxury Tax
  • Entry Tax (all forms)
  • Entertainment and Amusement Tax (except when levied by the local bodies)
  • Taxes on advertisements
  • Purchase Tax
  • Taxes on lotteries, betting and gambling
  • State Surcharges and Cesses so far as they relate to supply of goods and services

The taxes to be subsumed were decided after intense debate and consideration of some core principles that were in line with the GST ethos. Each tax was first examined to ensure it qualified for indirect taxation and was related to the supply of goods or services. Moreover, a tax which was to be subsumed needed to be part of the transaction chain right from imports through manufacturing to the provision of services and the consumption of goods/services. Another important criteria to allow a tax to be subsumed was that the subsumation should lead to free flow of tax credit at Intra- and inter-State levels. Also, the revenue considerations of both the Centre and the State were taken into perspective while arriving at the final list of subsumed taxes.

Clearly, the change is huge, and the sooner consumers and businesses get familiar with the implications on Term finances, the better they will be equipped to benefit from the new GST reforms.

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Oct 24, 2018

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Working Capital Financing: Why It Is Essential For The Success Of a Business

India is on the path of robust economic growth. According to official figures, the economy was valued at $2.2 trillion in 2016, making it the world’s seventh largest economy in terms of nominal GDP. The Indian economy is expected to reach the $5 trillion mark by 2025, according to a report published by Morgan Stanley in February 2017. India seems to have all the right ingredients in place to achieve this phenomenal growth; the country’s millennial population is massive, there’s availability of cheap labor, the government’s policies are favorable, Indians have exhibited high adoption of the latest technological advancements and the SME segment is growing at a fairly healthy rate.

The SME (Small and Medium Enterprises) sector is critical to the development of the Indian economy. It contributed 40% of the nation’s exports and 45% of total manufacturing output in 2015. The segment’s contribution to India’s GDP is expected to grow from 17% recorded in 2010-2011 to 22% by 2020.

Despite these facts, the SME sector has witnessed some challenges with regards to financing. The need for cash to manage daily operations and the inability to access commercial finance have hindered the development of SMEs.

Why is Working Capital So Critical for Any Business?

All businesses need some funds to run their daily, weekly and monthly operations. Working capital is, therefore, essential for the smooth working of a business. The main reasons for working capital being so important are:

Enhances Solvency: Working capital aids a business to operate smoothly and meet all its short-term expenses, including purchasing raw materials, payment of salaries and meeting overhead expenses. Some of these payments cannot be delayed. Having sufficient liquidity helps the uninterrupted flow of production; thus, maintaining the solvency of a business.

Increased Goodwill: When a business is able to promptly meet its regular expenses and pay salaries on time, it generates goodwill, not just internally with employees but also with suppliers and distributors.

Uninterrupted Supply of Raw Materials: Quick payments ensure regular supply of raw materials. Suppliers of raw materials are usually apprehensive about small businesses being able to make the payments and do not offer a suitable credit period. The inability to pay suppliers can result in production coming to a standstill.

Improved Ability to Face Any Crisis: Apart from the smooth functioning of business operations, working capital ensures that any financial emergency can be handled with ease. Sometimes businesses face an unforeseen event, like an order being rejected, unfavorable weather conditions or the unavailability of a particular resource. A business that has sufficient liquidity can cushion itself against such situations. Thus, the financing of working capital defines the financial health of a business and how smoothly it can operate under different circumstances.

Why is Working Capital Finance So Difficult to Get for SMEs?

The most critical challenge that even profitable SMEs face is the lack of working capital, given their inability to access commercial finance. Public sector banks are burdened by bad debt loans to offer any support to these companies. Traditional banking institutions are apprehensive about offering commercial finance to SMEs and place stringent eligibility criteria for approval. Most of their loans require collateral to be furnished even for financing of working capital.

The greatest problem is that the loan application and approval process of traditional banking institutions is so tedious and prolonged, that SMEs find it excruciatingly painful to access these options. They may have to wait months only to have their loan application rejected. SMEs, therefore, look for alternate sources for financing of working capital and turn towards unorganized moneylenders who charge exorbitant interest rates.

Working Capital Financing Needs Met By Technology

SMEs need financing of working capital. They need swift and easy availability of commercial finance, without the need for extensive paperwork and collateral. The solution finally arrived in the form of FinTech lenders like Capital Float.

The FinTech segment has revolutionized the financing of working capital for SMEs by using cutting-edge technology in the loan application, underwriting and approval processes. This enables the disbursement of funds to SMEs within a matter of days.

Types of Working Capital Financing

There are a number of flexible, short-term and collateral-free loans offered that can be used to service new orders, purchase inventory and maintain cash cycles. These include:

Term Finance: This is ideal for SMEs particularly in the manufacturing and distribution space that need funds to meet operational needs or to expand and diversify the business.

Online Seller Finance: This is best suited for businesses that sell their products on leading online marketplaces. Capital Float has partnered with India’s largest marketplaces, like Amazon, PayTM, Snapdeal, Myntra, Shopclues and eBay to offer eCommerce sellers customized working capital finance.

Pay Later Finance: This product offers a credit facility and suits SMEs that have to regularly replenish their inventory. This revolving credit facility enables a borrower to make timely supplier payments from a predetermined credit amount. This amount can be reset upon repayment and is made available for further use.

Merchant Cash Advance: This credit solution is for businesses that receive payments via credit / debit cards via PoS (point of sale) machines. Capital Float has partnerships with multiple PoS machine vendors such as Pine Labs, Mswipe, ICICI Merchant Services, MRL Posnet and Bijlipay, expanding its reach to merchants across the country.

Supply Chain Finance: This commercial finance product allows businesses to use their invoices or accounts receivables as the basis to gain access to liquid funds.

SMEs are of strategic importance to the Indian economy and deserve a business climate in which they can thrive and grow. The financing of working capital made available by FinTech lenders will help the SME segment to move forward and contribute significantly to the growth of the Indian economy.

Oct 24, 2018

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HOW TO ENSURE CUSTOMER RELATIONS ARE MAINTAINED DURING COVID-19?

The world is not what it used to be since the Coronavirus outbreak. The virus has distorted the daily lives of millions of people across the globe. Social distancing, travel restrictions, work from home – are becoming the new normal. To gain customers’ trust, companies should understand the buyers and their requirements in this unprecedented environment.

Why is maintaining customer relations essential?

Good customer relationships can help a company to grow. As with personal relationships, creating and nurturing customer relationships is essential as well. When organizations develop strong customer relationships, it can lead to loyal customers, positive word of mouth, and higher sales.

What are the customers expecting from you?

For your company’s long-term well-being, you should put the needs of your customers first. Customers will always prioritize their safety and that of their families. They expect businesses to understand their shopping style, keep essentials well-stocked, be treated as a valued customer, and get benefits even in these hard times.

How to maintain customer relations in the pandemic?

  • Maintain hygiene: The safety of the customers should be the priority of any business concern. Therefore, businesses should keep their stores thoroughly sanitized. When a customer goes to the store, there should be provisions for social distancing and contactless operations to reduce the risk of contracting the virus.
  • Communicate with the customers: In the wake of the pandemic, everyone is in distress and fear. In such times, if a company can keep communicating with its customers, they will feel considered and cared for. By maintaining contact with its customers, the company can also stay informed about the customers’ needs and wants through feedback, thereby stocking inventory accordingly.
  • Make them feel special and valued: By storing customer information such as important dates, companies can surprise their customers with gift vouchers, coupons, gift hampers for special occasions such as birthdays and anniversaries. They can even send over medicines for the aged family members of the customers. Such little things can increase customer loyalty.
  • Understand what customers are looking for: Businesses can identify the needs and wants of its customers through research and surveys.
  • Added benefits: In these hard times, companies can give their customers free masks and sanitizers with the items they purchase.

It is important for a company to bear in mind the immediate needs of its customers during the Coronavirus crisis. By maintaining strong customer relationships, companies can ensure sustainability and brand loyalty while running their businesses in these challenging times.

Oct 24, 2018