Saturday, January 7, 2012

Cash Flow and VAT

For those of you thinking of setting up a B2B business in India, there are a few pointers that might come in handy. Firstly you need to think about the kind of business you want to establish (Pvt Ltd, LLP, Sole Proprietorship, etc.). There are many websites that cover this in detail, so do your research on this before you start to incorporate. More importantly - get a good CA who will help you in this process. Don't think of doing this yourself.

If you're like me and have started a B2B company providing goods and services in the name of a Pvt Ltd Company. You need to get two certifications from the respective government authorities:
1. A VAT (Value Added Tax) registration. This basically allows you to buy and sell goods.
2. A service tax registration. This allows you sell services.

One tip for those of you dealing with VAT based services is the impact it has on cash flow. Let's take an example which I recently had to deal with.

Say your customer ordered a solution which requires 4 pieces of equipment, 2 of which (A & B) were imported and the other 2 (C & D)were bought domestically:

  • Item A Rs 10,000
  • Item B Rs 25,000
  • Item C Rs 20,000 + 14% VAT (Rs 2,800)
  • Item D Rs 50,000 + 14% VAT (Rs 7,000)
So your total input cost = Rs 114,800

Say you apply a profit mark-up of 30% and sell it to the customer at 149240 + 14% VAT (Rs 20,893.6)

Now you invoice your customer on the 31st of December, and your customer pays you after 2 months (1st of March). Two points to keep in mind in pricing and cash flow:
1. VAT is due on goods sold on the 20th of the subsequent month (in this example 20th Jan). 
2. Your input tax can be subtracted from the output tax. So in this case your VAT due is 20,893.6 - 9,800 = Rs 11093.6

So based on (1) time your invoices based on incoming cash flow. So defer your invoices when possible.
and (2) Don't forget to subtract your input tax when you pay your taxes.

Every little thing counts to maintain a positive cash flow, especially in a bootstrapped operation like we are in.