GST (Goods and Service Tax) has a direct link with your working capital and can impact your business's liquidity. With the introduction of GST, inventory management has seen a big change. Earlier, companies had warehouses in each state to avoid cross border taxation costs. Upkeeping all the warehouses would have been cumbersome, with all the different tax structures. Since GST has been introduced, the companies only have to maintain 4-5 warehouses to fulfill demand across all the states in the country. When the goods are moved, they don’t have to pay taxes every time they cross the border. This will save a lot of working capital.
If a manufacturer wants to import raw material from other countries, they would be levied GST of 18%. Under the old tax rules, only an import duty of 14% would be charged to him/her. This increase in tax also resulted in an increase in the businesses working capital. Businesses need to allocate more working capital and set factors accordingly. GST is levied on goods at the time of transfer and the time between the transfer of goods and their sale can take some time. Thus the businesses would have to wait for the input tax credit when the sale happens. This impacts the working capital which sees a drop during the waiting period.