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Improving Working Capital Trough Indirect Tax Benefits

Business capital is the main thing for your business. As a business personality, you always try to improve your business capital. You may do many policies and apply many marketing strategies to improve your business capital. But time has changed due to this pandemic. Every industry and business are facing a crisis right now. So, in this situation do you have any plan to improve your work capital? Probably not. You are basically worried about how to improve your working capital, right? Your working capital is basically is a financial metric which represents operating liquidity available to a business, organization, or other entity including governmental entities. Along with fixed assets, working capital is considered as a part of operating capital. We all have an idea about tax and we pretty much know about it. But do you have any idea about indirect tax? Hopefully no. An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. Sales tax, VAT (value-added tax), GST (goods and service tax) are kind of indirect tax.

The roll-out of goods and service tax may affect the working capital cycle of business in the initial phase, with input credit worth Rs 1trillion. Input tax credits refer to the amount of tax already paid on material purchased, which can be used to set off tax payable on selling the finished product. Easy liquidity is essential in this period to take care of the cash requirements of companies. There is a perception that indirect tax has a negative working capital impact might suggest that organizations could be managing indirect tax more effectively. Alternatively, these perceptions could indicate that indirect tax leaders do not have enough information about their organization’s indirect tax inflows and out flows to determine exactly how net working capital is being affected. This knowledge can be gained by setting metrics to measure the effectiveness and results of indirect tax function’s performance. The impact of the indirect tax can be tipped to positive by effectively managing the timing of credits and payments, claiming recoveries as soon as possible, paying the right amounts when due and avoiding errors in transactions.   

According to the World Bank forecasts, the global economy will shrink by 5.2% due to COVID this year. That would represent the deepest recession since World War 2, with the largest fraction of economies experiencing declines in per capita output since 1870. Considering the current showdown in the economy and the unprecedented impact of COVID 19, business is dealing with an unexpected adverse period causing disruption which necessitated them to monitor their working capital needs to regular intervals to ensure funds are sufficiently available for day to day functioning of the business. At this juncture, it is important for a business to continuously keep exploring any optimization measures including any short to long term tax benefits and incentives which may be available under GST, Customs and Foreign Trade Policy (FTP)laws. By taking advantage of these opportunities, the business can improve working capital positions which will eventually help in tipping off the impact of the current slowdown to the extent possible.

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