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How does GST Impact your Company's Working Capital

Sakshi Jain
Sakshi Jain at March 14, 2023

The Indian economy in the last three months [since the launch of GST from 1st July’17] has seen the most revolutionary and mammoth taxation migration exercise since independence, leading to several challenges, confusions and erroneous actions and decisions – all for the good though and with seemingly fair intentions.

The old habits of tax evasion, intentional late filing of returns and the optimization of the working capital and many - all need a major revamp. GST has a direct linkage with the working capital of your business and you must have ample clarity on all the ways, it may at times, impact and squeeze the liquidity in hand. Working capital, also termed as the oxygen of every business, speaks volumes about the short term financial health of the company.

The article aims to apprise you about the overall thrust of the GST on your company’s working capital and the following pointers will give you ample clarity around it:

  • Services becoming expensive
  • GST is taxed during the sale of goods and services
  • Goods to move freely
  • Timeline of tax payment

Service becoming expensive:

It is needless to mention that the intentions were and are pretty fair, when GST was conceptualized and invented, promising to curb many economic evils and will help the businesses to save on their taxes. The monetary after effects of the GST have slowly started popping up and are not much in tune with the original ideation and vary from industry to industry. Say for example, the services sector was taxed at 15% in the pre GST era, being now increased to 18% - more taxes overall – the incremental pressure will obviously have to be absorbed by the working capital.

Services providers should revisit their overall strategy of the usage and allocation of the available working capital and should look and find legitimate avenues to compensate the enhanced taxation.


GST is taxed during the sale of goods and services:

GST only applies, once the transfer of supplies is done, prohibiting businesses to claim the tax credit until the goods are sold. This wait period can sometimes stretch to months leaving the organizations no option but to wait for the Input Tax Credit, ultimately affecting the bottom line working liquidity. Working capital levels might experience a drop during this time. 

Businesses importing raw material, could see their costs going up in the wake of an average 18% tax.

A manufacturer who was importing technological raw material from Sweden was paying an import duty of 14% earlier until 30th June’17, which has seen a considerable hike of 4% in the present GST ecosystem.

It is an undisputed fact, that the model of Input Tax Credit has been amended powerfully when compared to the previous taxation module, where the ITC was only available for supplies, which were linked to a taxable output. The present GST laws allow the ITC, even on the tax paid for services complementing the business, such as – advertising and marketing expenses, under a new GST feature termed as ‘Furtherance of business’.

Goods to move freely:

In the pre GST era, product oriented companies used to have several warehouses in each state to avoid cross border taxation costs. However, the cost of managing these giant storerooms was immense with also adhering to all the specific state laws and respective tax rates, which overall added to the costs and there was an intrinsic need for a massive in hand working capital always.

The present taxation structure, which subsumes all the major indirect taxes [CST/Octroi/Entry taxes] relieves such organizations to have multiple storage places but a singular and strategized centralized one, strengthening the overall working capital.

Say for instance, earlier, a manufacturing organization in Maharashtra distributed the products to its PAN India warehouses, while paying a 2% Central Sales tax at every state border and an Octroi or entry of 1% in the state where the goods will be ultimately sold. This cost was a part of the product and the company was not allowed to claim any tax credit.

The current taxation structure allows the organization to have lesser/minimal storage points, only adding to the working capital.

These are not all the ways but just the major ones, where the GST influences your working capital.

For a deeper know how, latest announcements and micro topics on GST, simply visit GST Articles.

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