Small organizations are the backbone of any economy and a major contributor to the country’s gross domestic product (GDP). In the Indian context, they hold additional importance as they contribute significantly to employment generation as well, employing around 40% of the country’s workforce.
The introduction of Goods and Services Tax (GST) revolutionized the way business was being done by the Micro Small and Medium Enterprises (MSMEs). It made the tax payment simpler by merging all taxes for different states, viz; excise duty, service tax, VAT, etc.
Introduction of GST and initial reservations for MSMEs
The implementation of the GST was not without difficulty, and it was met with opposition from small businesses who were concerned about rushing to adapt to a new system, as well as increased compliance costs and the need to file numerous returns after moving into the realm of e-invoicing.
However, the new tax regime was a boon for MSMEs, who had long suffered as a result of tax on tax. With the introduction of GST, the complications of launching a new business eased, and there was a sudden reduction in the cost of logistics with the removal of border and check-post taxes. Most importantly, the distinction between goods and services was eliminated. All taxpayers including MSMEs could use the ITC available on goods and services to set off their total tax liability. This enabled the funds-deprived MSMEs to better manage their liquidity. The tax system also included an optional scheme of reduced taxes for startups and small businesses with annual revenues of up to Rs 1 crore. The enabled smaller businesses to pay lower taxes under the new tax regime. GST Composition Scheme enabled smaller businesses to pay lower taxes under the new tax regime.
How GST helped MSMEs
Working capital plays an important role in enhancing the agility and financial growth of a business, especially when it is an MSME. The introduction of GST resulted in a complete and connected taxation process and had a cascading impact on the productivity levels of MSMEs.
In the pre-GST regime, small companies had to go through rigorous compliance with a stressful procedure of interaction with multiple departments in person. GST made the entire process transparent, payments, registrations, refunds, and returns, everything turned online. Payments began to be made on time, and refunds became faster, resulting in increased liquidity, which is critical for a small business.
Further as newer GST compliances such as e-invoicing were introduced, possibilities to streamline invoicing and automate data exchange emerged. The e-invoice mandate currently covers businesses with turnover of ₹ 10 CR and above. As the threshold lowers, the e-invoice mandate shall be applicable to MSMEs. With digital data being embraced by banks and fintechs for better and faster lending, MSMEs will stand to gain because of e-invoice.
GST compliance means greater credibility
The nature of GST compliance is such that there are checks and balances built in the taxation process itself. This gives a major boost to the smaller companies vying for expansion. The online reporting of each business transaction may have brought them into the tax net, but it also helped increase the credibility for businesses looking to expand in the future. The online filing of the GST offers a detailed credit history, allowing access to more capital from banks and financial institutions to access working capital.
E-invoicing for small businesses
The Government now plans to extend the scope of e-Invoicing to all taxpayers. Small businesses need to ensure that they are ready for e-invoicing. However, this does not give small businesses a reason to worry. There are numerous benefits of e-invoicing and SMEs must accept the e-invoice revolution with open arms. At the outset, e-invoicing under GST can appear to be a big overhaul and humongous task but if handled well, it can serve you well. It does not require heavy investment to start e-invoicing or it is not necessary for your company to have a huge IT department to handle it. Just registering with IRIS IRP and choosing IRIS e-invocing for value added e-invoicing solution can take away all the hassle.
Emergence of new avenues to meet working capital needs
GST compliance has resulted in greater transparency in the operations of businesses as information is to be disclosed at transaction level. Large businesses hence are opening up more to provide early payment. Innovative credit products such as financing for payment of tax liability are useful for MSMEs who are crunched for liquidity due to longer payment cycles.
Working capital management and SMEs
Efficiently managing working capital is crucial for any organization, big or small, as it has significant impact on liquidity. It ensures that the financial health of the company remains sound by monitoring the effective use of its current assets and liabilities.
To put it in simple words, working capital is a real time indicator of a business’s ability to manage future expenses. It presents the actual picture of available assets that can be turned into cash to pay current liabilities, like paying salaries, purchasing inventory, etc. At the same time, insufficient working capital may lead to the company’s failure to fulfil obligations as they fall due.
For a small organization, it is of the utmost importance, knowing that many do not even have a credit policy and mostly rely on cash receipts. The introduction of GST may have increased the compliance burden for MSMEs, but it has been a boon to their businesses, ensuring that they receive timely payments from customers.
IRIS Peridot Plus – a reliable solution for MSMEs
IRIS Business Services, in its effort to support one of the important pillars of the Indian economy, MSME, launched a ground-breaking mobile app in collaboration with Vayana and Hylobiz, leaders in offering affordable credit and cash management solutions with the largest network for trade financing in the country.
This revolutionary mobile application is helping small businesses manage their finances prudently, along with cash, credit, and compliance requirements effectively.
It is crucial for businesses to stay updated with their GST compliance, even if they have outsourced their accounting and taxation functions. Using tools like IRIS Peridot, businesses can monitor and track their GST compliance, ensuring that they do not miss any deadlines or incur penalties. Additionally, keeping track of GST compliance can help businesses claim the input tax credit that they are entitled to. By staying informed and up-to-date, businesses can ensure that they are operating in compliance with GST regulations and are making the most of the benefits offered under the GST system.
The IRIS Peridot offers businesses a comprehensive view of their input tax credit (ITC) status through its ITC Report. This report enables businesses to monitor their ITC availability, track vendor payments, and manage ITC claims in real-time. By utilizing the ITC Report, businesses can streamline their vendor management processes and avoid any potential discrepancies. Claiming ITC earlier also helps to improve the working capital of the business, providing greater flexibility and liquidity.