Does having a GST registration impact the types of payment options you can offer your customers?
If you run a small business in India, chances are you’re offering your customers multiple methods of paying at checkout. Before demonetization, we used to be a cash-based economy, which meant a lot of our business transactions were made using cash.
After demonetization, consumer behaviour changed quite a bit. Customers and businesses are now more comfortable dealing with cash-less transactions while payment platforms, like Paytm, GooglePay, BharatePe, have made it easier to receive and make payments anywhere, anytime.
Despite this, some sectors (and consumers) still prefer to use cash when doing business. As a GST-registered SME, here’s how you should handle these cash transactions.
Does my small business need to register under GST?
If your small business meets one of the following criteria, it is mandatory for you to have a GST registration.
- E-commerce aggregators
- Individual suppliers on e-commerce aggregators
- Individuals who pay tax as per the reverse charge mechanism
- Agents of input service distributors and suppliers
- Non-Resident individuals who pay tax in India
- Businesses that have an annual turnover more than the threshold limit
- Individuals who registered before the GST law was introduced
Discover the latest threshold limits here.
As a GST-registered SME, do I need to issue an invoice for every transaction?
Yes, as a GST-registered and GST-compliant business, you are required to issue an “invoice” or a “tax invoice” when providing or purchasing goods and services under Section 31 of the CGST Act of 2017.
The invoices help buyers avail the Input Tax Credit (ITC) under the GST regime on input goods and services. If you’re paying for goods or services that you will sell further, you should collect a tax invoice for the goods or services you’re received to claim the ITC. If the dealer you are purchasing the goods or services from is unregistered, you must issue a payment voucher, in addition to the invoice, to claim the input credit.
Under the GST, you’re charged tax at every stage of the supply chain. As the tax adds up at every level, you could end up paying tax on tax like in the previous tax regime. To avoid this and help you save money, the GST system introduced the input credit to help SMEs claim taxes already paid for inputs when paying tax for outputs.
The CBIC put together a handy guide to GST invoicing. See it here.
Learn about Input Tax Credits (ITC).
What role do tax invoices play when applying for small business financing?
As mentioned above, GST registered businesses are mandated to issue tax invoices according to Section 31 of the CGST Act.
These invoices are a great way to track your income and expenses and for lenders to verify your cash inflows and outflows.
As an SME, you have the option of accepting cash-less or cash payments based on your customer preference.
When you apply for small business financing with a formal lender, your GST returns and bank statements are how lenders assess whether you’re tax compliant and whether you have regular and legitimate cash flows.
Your bank sales (income that directly gets deposited to your business bank account) are already accounted for. It is easy for the tax authorities and lenders to go through your bank statements and cross-reference credits into your account with the invoices you issued.
But how does the tax authority and lender authenticate tax invoices you’ve made against cash sales? This is where depositing your cash income to your business bank account becomes important. By diligently and regularly depositing your cash income to your business bank account, lenders can cross-reference the amounts you deposit to your invoices and determine where they came from.
Keeping thorough records and meticulously tracking your tax invoices lets lenders know that you’re a financially responsible business with regular cash inflows. This increases your creditworthiness with the lenders, making you eligible for better loan terms on larger loan amounts if you meet all other eligibility criteria.
As a GST-registered SME, am I allowed to make cash sales?
Yes, as a business owner, you’re allowed to use multiple methods to receive and make payments, including cash transactions.
Regardless of what method you choose – cash, debit, credit, bank transfer, cheque, or a UPI payment platform – you must issue or get a tax invoice for that transaction.
When customers pay for the goods or services you provided using cash, you should count the money so that nothing is misplaced or goes missing, and you must regularly deposit it to your business bank account.
By the time you’re paying your GST returns for the month that passed, at least 80-90% of your total GST sales (cash or otherwise) need to be in your business bank account.
How often should I deposit the income made from cash sales to my business bank account?
There is no hard and fast rule for how often you need to deposit the money into your account. However, it’s important to have 80-90% of your GST sales in your business bank account before filing your monthly or quarterly GST returns.
As good practice, you may want to deposit the money every 2 weeks, or more frequently if you have a high volume of cash sales, so you don’t have large amounts of cash lying around. This helps make your business more secure as you won’t become a target for burglars. It also helps you easily keep track of your finances and maintains a healthy cash inflow to your business bank account, which lenders want to see.
How does cash income affect my chances of getting small business financing?
If you regularly deposit the income made from cash sales to your business bank account, it indicates the following to lenders:
- There are regular cash inflows to your bank account, so your business is doing well and is not in a cash crunch.
- You can maintain a good average bank balance in your business bank account throughout the month.
- You’re a tax compliant business.
All these conditions combined positively impact your prospects of getting small business financing, making you a more creditworthy SME for lenders.
On the other hand, if you’ve issued tax invoices but never deposited the money to your business bank account, or you used the cash to make another payment but never got an invoice for the payment, your cash income isn’t accounted for anymore. This makes lenders question your trustworthiness, negatively impacting your chances of getting the business financing you need.
Regardless of whether you’re a GST-registered SME or not, we recommend regularly depositing your cash income to your business bank account to maintain a healthy average bank account balance and to increase your creditworthiness with lenders. Such financially responsible behaviours also positively affect your bureau report and credit profile.
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