Impact of GST on Business Impact of GST on Business
India celebrated the first anniversary of the landmark GST tax reform this July. The implementation was quite chaotic with various industries asking for several clarifications, frequent revision of rates, and other teething troubles. One year on, however, rates have stabilized, the e-way bill is in effect, and traders and businesses have adopted the technologies to be GST compliant.
Since its implementation, business owners have now started to realize the positive effects of GST on the larger business landscape. Some of the advantages are listed below:
Source
1) Input Tax Credit (ITC)
Previously ITC was only available for supplies linked to a taxable output. Under GST rules, businesses are allowed to claim ITC even on the tax paid for services complementing the business. Consequently, taxes paid on services such as advertising and marketing expenses can be claimed under a new GST feature termed as 'Furtherance of business'.
2) Free Movement of Goods
The implementation of a single tax structure has been beneficial for product companies as they do not have to maintain warehouses in every state of operation or through which the goods pass. Previously, the manufacturer had to pay 2% of the value of goods at every state border, in addition to paying a 1% octroi at the state of consumption of the goods. This caused huge working capital requirements as well as loss of days due to long queues at each state border.
With GST, companies can maintain one huge warehouse in order to cater to multiple states in a region.
3) Implementation of the E-Way Bill
The e-way bill system was implemented after much delay a year after the implementation of the GST Act. It has made the movement of goods for businesses hassle-free. An E-way bill is to be generated for all movement of inter-state and intra-state goods and provides several benefits like:
a) Efficient Transportation
A truck in India covers a distance of 85,000 kilometres annually as against 150,000 to 250,000 kilometres in developed countries. The implementation of the E-way bill is expected to bridge this gap.
b) User-friendly Portal
The e-way bill portal is extremely simple to use and all dealers/transporters can generate them without any hassle.
While the e-way bill is touted to be the game-changer in the transportation sector, several states have stated their preference for introducing state-specific e-way bills. Such a development will hugely diminish the benefits derived from the system.
Watch: E-Way Bill Automation in Tally
4) Provide an Impetus to Economic Growth
In the Annual CFO Survey conducted by Deloitte recently, 77 percent of the respondents believed that GST has had a positive effect on businesses. 58 percent of CFOs feel that the 'ease of doing business' parameter has improved and 57 percent of respondents are willing to take greater risks during the next few years.
Challenges for Business Owners Due to GST
In spite of the huge potential benefits of the implementation of GST, there are a few undesirable developments due to the implementation of this act, some of them are listed below:
1) Impact on Working Capital
Working capital is a very important component of any businesses' short-term liquidity. Enterprises, especially smaller ones, deftly manage working capital flow to minimize the quantum of external credit to run their businesses. The new tax regime allows entities to claim Input Tax Credit (ITC) only once the goods have been sold and delivered. This adds to the working capital requirements of the business as the waiting period for claiming ITC can stretch to months, which in turn leads to increased borrowing and higher cost of conducting business for enterprises.
Also Read: Impact of GST on MSMEs
2) Increase in Compliance Cost
GST mandates the electronic storage of records, generating e-way bills, and payment of taxes. This has led to an increase in the cost of compliance for all enterprises as they now have to maintain up-to-date records in an electronic system.
3) Higher Tax Burden on SMEs
Previously, companies whose business turnover did not exceed 1.5 crores were exempt from filing excise duty. However, under GST, companies whose turnover exceeds 20 lakhs are liable to file GST returns. This increases the burden on SMEs that are already running their businesses on thin margins and competing with larger enterprises with larger funds.
The Only Way Ahead is Forward
While the initial Impact of GST on businesses has been mixed due to the technological changes required and the lack of clarity on several aspects, GST is certainly a game-changer which will enable the country to improve competitiveness on the world stage. This will lead to greater business opportunities, increased employment, and eventually, more taxes for the state and central governments.