VAT: Some helpful tips to reduce the impact on working capital

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: Business entities are caught up in a host of compliance issues arising out of introduction of VAT in a majority of States, such as classification, invoicing, record keeping, IT system updates and even filing. Lost amidst the chaos, is the focus on many non-compliance issues, which have a significant financial impact on the business. One such issue is calculating the impact of VAT on working capital and mitigating such costs.

This issue needs re-examination in light of the revised dynamics under VAT. The key drivers being the change in tax rate, input tax credit and change in mode of availing exemptions and/or concessions. As we shall see, the timing and manner of procurement of the purchase of input, or even capital goods could hold the key to considerable saving in working capital.

Under the sales tax regime, most States offered concessional rates ranging from Nil to 4% for inputs required in manufacture. Under VAT, these goods now attract a standard rate of 4% or 12.5%, resulting in additional outflow on local purchases. Where the rate has moved up to 12.5% (e.g. inputs required for automobiles and air conditioners) and out of that close to 4% input tax credit is lost on account of stock transfers outside the State (i.e. only 8.5% credit/refund is available at a later date), the possibility of switching over to inter-state purchases of such inputs may be explored.