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MSME’s to be Working Capital Ready Post GST - Yes Bank - YES GST

Out of the total expected number (approx 50 mn) of MSMEs in the country only about 4 mn are registered with DIC (earlier)/Udyog Aadhar (now). Estimated 0.8 mn to 1 mn MSMEs are having the bank lines at present. GST implementation is expected to see many folds rise in the number of registered MSMEs in the country.

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Input tax credit can be availed on vendor’s compliance with respect to tax payment and return filing. Being an integral part of the entire value chain an MSME will need to get registered and continue buying and supplying with the registered players.

Some of the material changes in business cash flow,that could impact the need for incremental working capital needs:

  1. Taxes will now be need to be paid monthly, which would be shorter than the usual working capital cycle, and hence would need to be funded through additional working capital.

  2. Unlike present practice under Central Excise, in GST regime, payment of tax on stock transfer depends on whether the supplying and receiving units are in the same state or not. In case both the units are in the same state and have same GSTIN, then no GST is payable. On the other hand, if the units are situated in different states, then each unit to register separately in the respective states and therefore GST payable on such supplies.

  3. With the seamless flow of input tax credit across state borders in GST, the need for businesses to open multiple branches or warehouses across states will be minimized. Supply chain companies would, possibly, consolidate the infrastructure network for maximizing operating efficiencies.

  4. Tax is now payable at the incidence of Import. Claim of such tax is possible on the export of such goods, with filing of requisite report evidencing exports.

  5. Import under Advance Authorization is exempted from Basic Customs Duty (BCD) only. IGST is payable. However, the same can be taken credit and may be utilized for supplies in domestic market or can be claimed refund.

  6. Government has specified a threshold limit for all the businesses. However, such limit is not applicable in case of E Commerce sellers. All the businesses carrying out e-commerce activity are required to get registered. Under the new tax regime, marketplace operators are mandatorily required to deduct a percentage amount as the GST liability of seller and deposit it with government. This mechanism is being termed as “Tax Collection at Source (TCS)” under the GST law. Eventually the marketplace seller will have to file monthly return under GST to claim the credit of TCS collected by the marketplace operator. This will also impact the liquidity and cash flow of these sellers.

Having said all of the above, following are some of the factors that are likely to result in significantly higher advantages to the MSME segment:

  1. The numerous filing of reports by the MSMEs and corporate anchors would result in significant transparency of information regarding underlying business. With availability of digital information, progressive and technology ready lenders would be able to assess the credit requirements almost on real time basis leading to more appropriate credit decisioning.

  2. Further to the above, seasonality of additional funding requirement due to inventory or debtor build up can also be evidenced objectively, assessed and extended on a need basis.

  3. Such objective assessment of financial needs of the MSME should reduce the need by the lenders to insist on additional collaterals, which are sometimes needed to address the gap regarding quality of financial information.

  4. With larger corporates likely to increase buying from GST compliant vendors (read MSMEs), this presents an exciting opportunity for the progressive MSMEs to demonstrate agility in recalibrating their business processes, disclosure mindset etc. to reap the benefit of this consolidation.

Authored by:

Mr Sumit Gupta, Group President and National Head, Business and Rural Banking, YES BANK


Every efforts are being taken to present the article in its true prospective on the basis of the understanding of law by the writer. However for any misrepresentation of the fact the writer is not responsible to anyone.


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80809 45075

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