GST Pulse - Would my cash flow face the heat?

GST Pulse - Would my cash flow face the heat?

Be it good times or bad times, businesses always try to have a closer look at cash flow management. With the introduction of GST, businesses would be required to give a greater consideration to this aspect. In this article, we will discuss how GST would have a bearing on cash flows of an organization.

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Be it good times or bad times, businesses always try to have a closer look at cash flow management. With the introduction of GST, businesses would be required to give a greater consideration to this aspect. In this article, we will discuss how GST would have a bearing on cash flows of an organization.

At the time of cash flow budgeting, one would have to factor in cash flow changes that would result due to GST replacing existing indirect taxes and chalk out a plan to fund the deficiencies or deploy the additionally available funds. The major reason affecting cash flows would be the change in rate of tax vis-à-vis current tax rate for example the change in the rate of tax on services from 14.5% currently to 18% or 20% in GST would mean an additional cash requirement on the input services used by businesses. In case of inter-state purchases, businesses today pay Excise duty and CST to the supplier – at about 14.75%. Under GST, IGST of say 18% would be payable to the supplier on inter-State purchases. While on one hand, the purchaser would definitely save a tax cost of CST, the additional cash outflow is definitely going to strain the finances. Similar is the case of stock transfers which today do not attract sales tax, but will attract IGST at a full rate. 

Other reasons for a cash flow impact could be the discontinuation of existing exemptions, change in incentive/ promotional schemes of the Government such as state incentive schemes etc. Some positive cash flow impact would come from dates of payment of taxes – today Excise duty is payable on 6th of the following month while GST may be payable on 20th of the following month  . While doing an analysis of the impact of GST on operations, organizations will have to list all such instances and work out the positive and negative impacts on cash flow.

While cash flow impact is inevitable, businesses can still manage the impact by pruning the debtors lock up and by using other working capital management strategies. In some cases, where the removal of exemptions could substantially impact the cash flow, it would be advisable to approach the Government and other agencies with a representation. One view is that since all foreign trade policy (FTP) schemes are centrally sponsored , State Governments may not be agreeable to any upfront exemptions; say on imports. If that be so, EOUs, EHTPs may have a huge cash flow impact which needs to be brought to the notice of the Government through representations. While there is no clarity today on the fate of exemptions under FTP in the GST era, it is necessary that businesses work out all possible scenarios including worst case scenarios; and at least have contingency plans ready.

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”. Whilst it may look better to have large inflows of revenue from sales, 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 the impact prior to GST rollout. 

 

 

None of these materials is offered, nor should be construed, as financial, legal or other professional advice. The contents contained or made available through this web page is not intended to create any relationship between the reader and KPMG

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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