The Goods and Services Tax (GST) revolutionized indirect tax system of India by replacing multiple and complex tax structure and brought a unified tax framework in the country. For businesses, this change didn’t just mean adapting to a new system—it meant rethinking how they manage their operations, pricing, and even cash flow. GST has opened new doors to new opportunities for businesses to grow.
GST is a single tax that is applicable to the supply of goods and services. The tax is dependent on consumption, which means that it is paid by the consumer, and the businesses collect it and remit it to the government. GST is divided into three main types:
- CGST (Central GST): It is collected by the Central Government on intra-state sales.
- SGST (State GST): It is collected by the State Government on intra-state sales.
- IGST (Integrated GST): It is collected by the Central Government on inter-state sales or imports.
In this blog, we will dive into the 5 most critical ways GST affects businesses and FAQs to help you with your doubts.
1. GST Transformation- From complexity to clarity
Before GST, businesses in India were heavily burdened by a web of taxes. Excise duty, VAT, service tax, CST and many more were the taxes businesses had to deal with throughout. Each state had its own set of rules, and managing and complying with these different tax systems was not just time-consuming but also expensive for businesses. In fact, according to a survey conducted in June 2022, it was found that almost 37% of businesses spent less time on GST compliance as compared to pre-GST taxation laws.
GST has simplified the entire process by consolidating over 17 different taxes into one, making it easier for businesses to manage their operations. For example, a manufacturer in Maharashtra previously had to pay multiple taxes like excise and VAT, but GST has all been replaced by CGST (Central GST) and SGST (State GST) for in-state transactions. Now, businesses only need to file a single return. An added advantage for businesses under GST is the Input Tax Credit (ITC), which has allowed businesses to offset the tax they pay on inputs like raw materials and services against the tax they collect on sales. As a result, businesses can lower their overall tax burden and improve their profitability.
2. Better Costs and Pricing Strategies
It is pertinent to note that GST has affected businesses’ pricing strategies. With multiple tax systems, separate tax was applied at the stage of production and distribution, and as a result, the final price of goods was much higher (due to taxes). Consumers were paying more to the business, and businesses were paying more tax. Businesses had a very limited opportunity to adjust the prices of products. The GST introduced the Input Tax Credit (ITC) that allowed businesses to reclaim the tax paid on raw materials and services used to create products. This helps lower the cost base for manufacturers and service providers. For example, a textile manufacturer can now claim back the GST they paid on fabrics, dyes, and machinery, reducing their production costs and allowing them to pass on these savings to the consumer.
According to a KPMG India report, retailers have seen a 10-12% reduction in prices for consumer goods like apparel and electronics because they can now avail of ITC, which was previously unavailable under the old tax system.
In terms of GST rates, they are divided into four main slabs
| Tax Rate | Items |
| 5% GST | Essential items include food items, medicines, and healthcare services. |
| 12% GST | Processed food, personal care products, and household goods |
| 18%GST | Mobile phones, electronics, and non-essential services. |
| 28% GST | Luxury items and services like high-end cars, fancy perfumes, and luxury watches. |
Businesses can modify prices in accordance with this fixed tax system to maintain their competitiveness and provide customers with more reasonably priced options.
3. New Compliance Requirements
While GST has made business taxation simpler in many ways, it has also introduced new rules that businesses have to follow regularly. One of the biggest changes is the need for businesses to file returns more often. Now, companies have to mandatorily submit their monthly returns (GSTR-3B) and an annual return (GSTR-9). For larger businesses with a turnover of over Rs. 5 crores, there is an additional requirement to file GSTR-1, where the businesses have to give the details of every single sale they make. Businesses have saved almost 8-12% in compliance costs after the implementation of GST.
Another significant change is the introduction of e-invoicing. Businesses with a turnover over Rs. 10 crores have to generate invoices electronically and upload them to the GST portal. The system has helped in reducing tax evasion by making things more transparent to the government as well as consumers.
4. Cash Flow Management: How GST Affects Your Business’s Finances
Under new GST system, businesses have to pay taxes on sales even if they haven’t been paid by their customers yet.
This means businesses, especially those who deal with clients on credit or have long payment cycles, may face temporary cash shortages. For example, a business might sell goods to a customer but not get paid for 30 or 60 days. However, the business still has to pay the GST on the sale by the end of the next month, even though they haven’t received the payment yet.
How Businesses Can Manage Cash Flow with GST
Luckily, businesses can reduce the financial strain with a system called Input Tax Credit. If a business pays GST on the materials it buys raw materials but hasn’t yet received payment for the goods it sells, it can use the ITC. This helps reduce the total tax the business needs to pay to the government. For example, if a business buys raw materials and pays GST on them, but the customer hasn’t paid yet, the business can use that paid tax as a credit when filing its GST return. This helps balance things out and reduces the cash flow crunch.
According to a CRISIL report, 36% of small businesses faced cash flow issues after GST came into play, particularly in industries like construction, where payments are often delayed. However, those businesses that figured out how to use ITC effectively and better manage their cash flow were able to ease the pressure on their finances and reduce delays in payments.
Another factor that can impact cash flow in the business is the Reverse Charge Mechanism (RCM). In the normal course of business, the supplier of the goods and services collects and pays GST to the government. However, under RCM, for specific transactions like dealing with an unregistered supplier or certain types of services, the recipient is required to pay GST instead of the seller. So, there is a probability that buyers may be troubled with cash flow. To combat this, businesses need to maintain detailed records, make proper planning, and claim Input Tax Credits, and it is suggested to consult a GST expert or a Tax Consultant to help you better manage cash flow or advise on any exemptions or planning suitable for your business.
5. Easy Cross-Border Trade
GST has been a game changer for the businesses that are engaged in interstate trade, Before GST businesses had to comply with the Central Sales Tax (CST) system that increased the complexity and increased costs for inter-state transactions. Under GST, businesses only need to pay the Integrated Goods and Services Tax (IGST) on interstate sales, which can be claimed back as an input tax credit in their home state. According to the Confederation of Indian Industry (CII), businesses involved in interstate trade have seen a 15-20% reduction in delays caused by tax-related issues since the introduction of GST.
Another notable advantage of GST is its good impact on exports. Exporters had to deal with a number of indirect taxes under the former tax system, which made exports more expensive. Exports are considered zero-rated under the GST, which means that no tax is applied to exported items and that exports are not subject to any GST. Furthermore, exporters can claim refunds for the taxes paid on inputs used in the production of goods that are exported.
Conclusion
Although the transition from a complicated, state-by-state tax structure to a single system has simplified compliance, companies now have to handle more submissions and modify their pricing policies. Furthermore, careful preparation is necessary to address the cash flow management issues, particularly those brought on by upfront GST payments. Businesses now have the opportunity to lower their tax liability and increase profitability by effectively using Input Tax Credit (ITC). After understanding GST registration and its compliances, business persons can properly use GST to cut their expenses, boost productivity, and expand their business.
FAQs
1. Can small businesses claim an Input Tax Credit (ITC)?
Yes, even small businesses can claim ITC on inputs used for their business operations, provided they are GST-registered.
2. How often do businesses need to file GST returns?
Businesses must file monthly GST returns (GSTR-3B) and annual returns (GSTR-9). Additional returns like GSTR-1 for sales are also required.
3. What impact does GST have on export businesses?
Exports are zero-rated under GST, meaning no GST is charged on export sales, and exporters can claim refunds on taxes paid on inputs.
4. Are all goods and services taxed under the same GST rate?
No, goods and services are taxed under different GST slabs (5%, 12%, 18%, and 28%) depending on their nature.
5. How does GST affect cash flow for businesses?
GST can impact cash flow since businesses must remit taxes monthly, even if they haven’t received payment from customers, although ITC can help mitigate this issue.
