Impact of GST on the Working Capital of Small Businesses in India

Personal Finance

The introduction of the Goods and Services Tax, also known as the GST, has been one of the most comprehensive and revolutionary tax reforms of independent India. Since the implementation of the national indirect taxation system, there have been both positive and negative effects across the board. The new system comprises four tax brackets, with rates of 5%, 12%, 18%, and 28%, respectively. The Goods and Services Tax (GST), directly related to your working capital loan, may affect the available cash. The term “working capital” is commonly used to refer to this type of funding. Working capital is sometimes called the “oxygen of a business.” This article will discuss how the Goods and Services Tax (GST) could impact your working capital.

Impact of GST on the Working Capital of Small Businesses in India

Stock management

The management of inventories has been significantly altered due to the GST. In the past, businesses had to have a network of warehouses in many states to avoid paying cross-border tax charges. Businesses had to spend a lot of working capital loans and time to meet the state’s tax laws and keep track of their numerous warehouses. If the items were sent to a different state, the corporation would be responsible for paying the CST, the octroi, and any other applicable state taxes at that time.

The expenses of maintaining the wide network of warehouses owned by the corporation and the costs of adhering to various tax regimes placed significant pressure on the operating capital owned by the company. Since the Goods and Services Tax was implemented, all the corporation has to do to serve demand in all fifty states is maintain four or five strategically located warehouses. In addition, taxes on the goods are not required to be paid at any of the ports of entry along the transportation route.

Because there is less of a need for the maintenance of warehouses, businesses can realize significant cost reductions in their working capital. Additionally, it enables unrestricted participation in international commerce. The eradication of tax collection at international crossings reduces the time required for travel.

Input Tax Credit

The Input Tax Credit (ITC) system was established before the establishment of the GST and could only be used in conjunction with taxable outputs. If the company already paid tax on it, it will not be eligible for the credit. The input tax credit’s potential uses have broadened since the advent of GST. Input tax credits may be claimed. The tax burden and the working capital loan interest rate impact will both be beneficial.

Breaking the chain reaction

Removing the cascading effects of previous taxes is among the most significant advantages of the GST. In the context of the computation of value-added tax, cascade effects do not meet the criteria for a tax on the product or an excise charge. The first advantage is that cash flow is shielded from the possibility of being disturbed by cascading impacts, which benefits the amount of working capital loan available.

Investing in primary materials

Before the GST’s introduction, it was widely believed that all businesses would benefit from the new tax system. However, this has yet to be the case. Expenses for running a company vary widely from one sector to another.

For instance, if a manufacturing facility imports raw materials from outside, it will now be subject to a GST of 18%. The former slab would have only subjected him to an import duty of 14%. Because of this subsequent tax rise, a company’s working capital loan interest rate will grow. The service industry is also affected, as its tax rate has increased from 15% to 18%.

Companies must allocate more working capital loans and revise prices to reflect the new reality. They must also find ways to work capital finance to compensate for the higher tax rates.

Tax return due date

Experts agree that this facet of the GST has the greatest effect on the company’s liquidity. Items are liable for GST at the time of transfer. However, businesses may only claim a tax rebate when customers pay for their products. The time it takes to sell products once they have been transferred might be substantial. The input tax credit is not available until after a sale. Firms are often forced to take out a working capital loan to compensate for the sharp drop in operational cash caused by this waiting period.

Impact of GST on resellers

Since the government has set a minimum size for businesses, this cap also applies to e-commerce sites. Therefore, all online businesses must sign up. Operators under the new tax system must refund a portion of the GST tax paid by the seller to the government.

Impact of GST on business loans

Since the GST was initially implemented, there has been an increase in the overall cost of the working capital loan. The introduction of the GST has resulted in repercussions for all categories of commercial enterprises.

Impact of GST on Startups

The straightforward procedure for forming a business and the consequences of doing so have been centralized due to the establishment of the GST. The tax legislation stipulates that the federal and state governments are exempt from imposing certain indirect taxes. The initial working capital loan investment required will be lower due to this solution.


Managing working capital loan, which is becoming increasingly important over time, is one that every company must undertake independently. It is in the best interest of the company to improve its performance. As a direct result of this, the goods and services tax (GST) is a very recent innovation within the context of the new tax regime. For more information, you can ask for help from a well-known institution like Piramal Housing. As a result, the company needs to be able to use the numerous benefits associated with the input tax credit without running the risk of losing this credit. This will inevitably affect working capital.