The Goods and Services Tax Law has been around for almost two years now, but it still causes pain for businesses when it comes to managing their cash flows and working capital requirements. Often business don’t really analyse their cash flow from a tax perspective and therefore don’t effectively manage GST implication. It’s all about timing and being aware of the rules that may help. Preparedness for smoother cash flows management under GST is crucial through availing input tax credit on business overheads. And effective vendor management, will play a key role in mitigating the risks on working capital.
Tax on Branch Transfers (Interstate)
Under GST interstate branch transfers are treated as a supply, liable to be taxed at open market value. It is very common that companies have their factories located in one state while sales are done from other states or different processes on same goods are carried at different places locating in different states. In this case, every time supplies crosses a state, businesses have to pay GST on them, hence blocking the company’s cash and working capital requirement. A change in GST making branch transfers tax neutral will help businesses significantly in managing their cash flows. This tax neutrality status may be awarded to an entity based upon filing requisite documents like Eway bill / monthly information statement which has an impact of controlling the tax evasion.
Reversal of ITC, due to suppliers non-compliance.
In previous laws, availability of ITC was not dependent on the compliances done by supplier. However, under GST, input tax credit depends on supplier’s compliance i.e. supplier should have filed the return declaring the outward supplies along with the tax payment.
Now if supplier fails to file the return/ pay taxes, then it will adversely affect the buyer’s profitability position. In such cases Law mandates reversal of ITC alongwith the interest at the rate of 18% per annum. This has an effect of slapping the bonafide recipient with double blow and the malafide supplier goes scot free. A simple change in law to safeguard the interests of bonafide recipients would help improve their cash flow position.
Mandatory payments to supplier in 180 days;
GST law states that payment to creditors should be made within 180 days from invoice date. If payment is not made within 180 days then ITC availed has to be reversed by the recipient along with interest @18%.
In many cases especially related to infrastructure, business have long credit terms or they have retention clauses or the cases are commercially struck in litigation which usually takes a longer period to settle. In all such cases recipient either has to claim the ITC only at the time of payment to vendors, or if they claim, then they have to reverse it after 6 months along with hefty interest of 18% per annum. In first case if no credit is taken within six months from the close of the financial year then entire tax credit is time barred. This is an extremely harsh provision for various industry especially those having long gestation period.
New government should make a simple change removing the liability of interest in all cases where the taxpayer has suo-moto reversed the tax credit. This will also give an incentive to compliant taxpayers payers promoting an automated response from over ten million registered taxpayers.
Charge of Interest even if payment is made through ITC;
Under GST law only thing which is certain is levy of interest even if payment is made through non-monetary measures. There are numerous cases where a registered taxpayer wrongly claimed ITC in returns, however he didn’t use such ITC for the payment of outward liability. Now, that registered person after finding on his own that he has claimed excess tax credit, would reverse the same. This reversal needs to be done along with the interest irrespective of the fact that such tax credit was not used for payment of outward liability. Now this interest will be a cost to the registered person, increasing his requirement for cash.
Government may introduce a scheme whereby no interest would be charged in case payment of taxes is by way of utilizing credit balance instead of cash balance. This would save taxpayers from punitive action in cases of clerical and tax neutral transactions.
Applicable GST Rates on Services.
After rollout of GST prices of most the commodities have come down however that’s not the case in services. Most of the services are taxed at the rate of 18% in GST, whereas under previous regime of service tax maximum applicable rate was 15%. Cash flows of services based industries are intensively affected, as the amount of taxes paid will be greater than before.
GST council must consider revising the applicable GST rates on services to 15%. , which is also the revenue neutral rate (RNR) suggested by then chief economic advisor Arvind Subramanian. This proposal if accepted would lessen the burden of services industry, however it would come at a cost of higher revenue deficit for the exchequer. Government needs to balance this proposition from an overall perspective.
Conclusion;
Cash flow is of vital importance to the health of a business. It is often said that “revenue is vanity, cash flow is sanity, but cash is king”. The most important focus for a business is cash flow, as no business can survive long without enough cash to meet its immediate needs. Making it all the more important to evaluate its impacts under GST.
Smooth cash flows and adequate working capitals are blood and back bone of any industry and for the survival in the short term solely depends on these two factors. Hence some changes by the new government would definitely help businesses manage their cash flows in a better manner.
About the Author
- Rajat Mohan is Fellow Member of Institute of Chartered Accountants of India (F.C.A.) and Fellow of Institute of Company Secretaries of India (F.C.S.). Furthermore, he also has qualified post qualification course of Institute of Chartered Accountants of India on ‘Information Systems Audit’ (D.I.S.A.). He also started a website (www.gstsms.in) which is the biggest single point database for GST related documents, news, views, presentations etc.
