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


The Goods and Services Tax, also known as the GST, has been the tax reform that has been both the most comprehensive and the most revolutionary since India’s independence. The implementation of the brand-new national indirect taxation system has 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) is directly related to your working capital loan. The term “working capital” is commonly used to refer to the type of funding that is available to meet the business’s current, short-term obligations. 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 corporation-owned warehouses and adherence to various tax regimes put significant pressure on the operating capital of the company. Since the GST was implemented, the corporation only needs to maintain four or five strategically located warehouses to serve all fifty states. Also, taxes on the goods are not required to be paid at any of the entry ports along the transportation route.

Because there is less of a need for the maintenance of warehouses, businesses can significantly reduce their working capital costs. Additionally, it enables unrestricted participation in inter-national commerce. The eradication of tax collection at state borders reduces the time required for travel.

Input Tax Credit

The Input Tax Credit (ITC) could only be used in conjunction with taxable outputs. If the company already paid tax on any goods or services, it will not be required to pay tax again under the GST. The input tax credit’s potential uses have broadened since the advent of the GST. Input tax credits may be claimed. The reduced tax burden and the impact on working capital loan interest rate 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 benefit is that cash flow is not affected by cascading effects, which increases the amount of working capital loan that can be used.

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 loan and revise prices to reflect the new reality. They must also find ways to finance new working capital 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 the 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 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 affected all categories of commercial enterprises.

Impact of GST on Startups

The straightforward procedure for forming a business and its consequences 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 are 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. The goods and services tax (GST) is a very recent innovation within the context of the new tax regime. For more information, you can visit Piramal Finance. They offer expert opinions and suggestions on various trade and finance-related topics to help you make an informed decision.