How To Maintain Positive Cash Flow with Input Tax Credit

How can Input tax credit ensure positive cash flow for your business_

A new circular by the Government proposes a 20% limit on Input Tax Credit. The limit is eligible for credit claims available for invoices/debit notes by suppliers when there is a mismatch/incomplete details. This can negatively impact your cash flow.

Worry not! We have you covered. You can now maintain a positive cash flow managing your Input Tax Credits.

How GST claim for Input Tax Credit works:

What is Input tax credit (ITC)? It is the balance of taxes paid on inputs, from taxes to be paid on output. This video will explain it better.

Let us explore ITC claims with an example.

S sells goods to B. B can claim Input Credit using his invoices under GST. B can do so if:

  • S uploads completed invoices and files GSTR-1. This is the base document upon which the entire compliance structure in GST would be based
  • Details of S are automatically reflected in GSTR 2A. This same data will get reflected when  B files the GSTR-2 returns which carry details of his purchase.
  • The details of the sale are then accepted and acknowledged for by B, and subsequently, the purchase tax is credited to B’s ‘Electronic Credit ‘. The buyer can now use this to adjust it for future output tax liability and receive a refund.

How will this new Input Tax credit claim impact business cash flow?

The new GST rules restrict the reimbursement of input tax credit to 20% of the total amount claimed in your GSTR 3B return.

Also, businesses will have to pursue their vendors on a monthly basis to upload their invoices to claim the entire input tax credit (ITC).

“This means going forward, it will be mandatory for the buyers to match Input tax credit claimed with the details uploaded by the vendors,” – Pritam Mahure, CA.

Archit Gupta, CEO of Cleartax said that a proper reconciliation of GSTR- 2A with books will now be critical to claim ITC.

“As businesses will strive to reduce instances of non-upload of invoices by sellers. They will have to reduce ineligible credit instances within 20% of eligible credit,” said Archit.

How to maintain a positive cash flow for your business?

Maintaining a healthy cash flow can be a challenge for small businesses. Here’s how your business can stay on top of things once the Input tax credit circular is passed in motion.

To start off, ensure your business maintains monthly reconciliation and takes appropriate action on any data mismatch when filing GST.

Cash flow with Input Tax Credit Claims:
  1. Make sure your suppliers are trustworthy and comply with GST norms. Suppliers need to declare outward supplies along with their tax payment.
  2. When you file GST returns, keep track of all your invoices. Many organizations don’t prioritize invoicing. This leads to loss of ITC and ultimately paying excess tax. Timely reconciliation helps ensure any eligible ITC is availed.
  3. Follow up on invoices with late payment reminders at 30, 45, and 60 days. Implement late penalties on your invoices. You can also offer discount codes for clients who pay early.
With regard to daily working capital:
  1. If you have inventory that has gone obsolete, then consider selling it to generate quick cash.
  2. Stay on top of your expenses, and keep buffer money aside for any emergency. You can also apply for short term working capital loans with low-interest rates.
  3. Switch to mobile payments so you can get paid faster. You can use UPI, IMPS, or wallets for quick cash.  

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