Working Capital and GST India- The Transition from Unorganized to Organized

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By definition, working capital is the measure a company’s efficiency and its financial health from a short-term perspective. With the implementation of GST in India on July 1, 2017, the unorganized sector has to pay GST at various levels in order to redeem it themselves.

The Indian economy in 2017 witnessed a revolutionary and one of the largest tax migration exercises that brought with it a mixed bag of response from different spheres. Since the rollout, GST-India has received a warm response from the financial circles who understand the deeper impact of this new tax regime. In fact, according to Taxsutra, a survey “highlights a large increase in no. of indirect taxpayers, many who have voluntarily chosen to be part of GST.”

One of the key impacts of post-GST implementation is the migration of unorganized sectors to more organized structures, a long-awaited move that empowers the government to keep a control on capital movement that often escaped the tax windows.

If we take a closer look on this shift of unorganized sector, the requirement of sustainable working capital to keep the manufacturing and supply funnels running can be mapped out as one of the major reasons that brought about this change.

By definition, working capital is the measure a company’s efficiency and its financial health from a short-term perspective. With the implementation of GST, now the unorganized sector has to pay GST at various levels in order to redeem it themselves, which in the older tax regime was often evaded with late tax filing.

Impact of GST-India on the Working Capital 

The pointers below will give you a fair idea of the impact of GST on the working capital of a company and help us look at it from a broader perspective.

  • Till the end of FY 2016-17, the service sector was paying 15% as taxes which now has been increased to 18%, clearly indicating that the service sector has to take a closer look at allocation and usage of working capital. In the present GST era, the service industry now has to look after avenues from where they can trim down the cost amidst stiff competition from organized players with stronger financial assets; and it'll be too early to give it a conclusion but post-GST, there has been a rapid slump in fraudulent transactions.

  • With the centralization of warehousing post GST which has led to the free flow of goods across state boundaries, companies now have to keep a closer watch on the inventories in order to ensure timely consumption of the manufactured goods and an equally efficient raw material inflow. This will pave way for effective marketing strategies by companies to keep an even paced consumption and working capital inflow. From a broader perspective, the centralization of warehouses has helped in reducing the cost a company has to bear while running statewide warehouses helping them allocate the financial resources to other pressing avenues.

  • Tax credits have played a pivotal role in maintaining working liquidity at the bottom line for businesses that involved the import of raw materials, to facilitate their production requirements. Though there has been a 4% hike in the tax rate, the restructuring of input tax credit which earlier was limited to supplies linked with taxable outputs as per the law, now allows Input tax credit for services that enable the process – covering advertising and marketing expenses as well

It will be too early to be conclusive about the pros and cons of the new tax restructuring, but a closer look at the changes brought about by GST implicates a stronger economy with a transparent and uniform taxation structure. 

With that comes a need for a robust tax technology that centralizes tax cycles and minimizes errors through automation. 

Thomson Reuters has stepped in with a solution, ONESOURCE, that helps automate taxes end-to-end eliminating challenges of complex taxation altogether. The future of tax is technology. Let’s see where this revolution takes the world of taxation.

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