The goods and services tax is soon set to become a reality in India. It will change the taxation system drastically.
Despite some controversies like the inter-State tax (that was later dropped), the GST has been hailed as a positive move.
Benefits of the GST
The main advantage that has already been pointed out in the media is that this is a single comprehensive tax that brings into its purview all existing taxes. Customs taxes, VAT, everything, is included under one heading.
Another significant advantage is that the tax will be applied at a single point, that is, the end consumer will pay the tax. This enables the suppliers, manufacturers, and retailers to recover GST incurred costs as a tax credit. This will also reduce ‘double counted’ taxes and will end up reducing tax burdens on small businesses as well.
In the long term, due to decreased transaction costs, prices of goods may become lower without causing any loss for manufacturers or businesses; this will increase consumption and end up increasing revenue.
GST and Invoice Discounting: Cheaper Capital?
Given that invoice discounting aims at solving immediate cash-flow issues for companies, it will be convenient to have a single point tax. It reduces the tax burden as every point of exchange will not be taxed.
Invoice discounting provides working capital for a business and charges a ‘service fee,’ for it. Given that the taxation in GST will not differentiate between goods and services, it may end up being cheaper and more profitable to work in invoice discounting as there will be a single tax and other costs incurred for GST will be tax deductible.
Increased consumption is good for businesses, but they will require increased capital to keep up with demand, and discount invoicing companies can take advantage of this need to expand their own business and also assist their clients.
Indirect Benefits
A major indirect benefit of the one point tax system to invoice discounting will be reduced transaction efforts.
While this is not directly reflected in the bottom line, when providing working capital there are transaction costs involved which complicate matters.
Calculating how much of the debt is owed to the discounting company for service fees, and also counting taxes and other government fees and what is thus owed to the other business is a complicated matter. A simpler transaction is possible with the GST if invoice discounting companies take advantage of the oncoming tax regime to make a similarly lean system for themselves.
Equality of tax treatment on goods and services will also mean that there will no longer be separate conditions for businesses according to whether they manufacture or provide goods. This will lead to lower transaction efforts for the invoice discounting company.
Another indirect benefit is that with increased transparency and efficiency, there will be a boost in the market. Entrepreneurial efforts are expected to increase, which will lead to an increased desire for working capital.
