Can GST open doors of access to sources of formal credit for SMEs?

Will the GST Bill help SMEs flourish by opening new avenues of finance?

September 16, 2016

[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]T[/dropcap]he GST or Goods and Services Tax is a broad-based, comprehensive, single indirect tax which will be levied concurrently on goods and services across India.

In my previous posts, I have argued for the formulation of a pan-India eInvoicing standard and the adoption of a blockchain based hyperledger technology as the the IT backbone for processing GST transactions by the GSTN.

In this piece, I argue the opportunity of access to formal sources of credit that the above mentioned technologies can open for SMEs.

Paper based invoice financing has been in vogue for centuries and us a proven and well understood financing mechanism. To recollect it , Invoice factoring is a financial transaction and a type of debtor finance in which a business sells its Account Receivable to a third party (here called ‘factor’) at a discount (interest or finance charge).

The development and growth of B2B networks containing the source documents in electronic formats augmented by rich intelligence on the supply chain and the emergence of new age Fintech ventures is perfectly suited to the emergence of a new generation of supply chain financing mechanisms.

While we all agree that SMEs face difficulties in access to formal sources of credit and this constrains their growth. At the same time, institutionalised formal sources of credit are wary of SMEs because of perceived risks, high costs of administration and comparatively lower returns.

[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]T[/dropcap]he dematerialisation of business transactions such as invoices and payments is an inevitability with an unstoppable migration from paper to electronic under the aegis of an open IT infrastructure propounded by GSTN.

A new data rich ecosystem is to evolve with real time B2C (Business to Customer) and B2B (Business to Business) networks exchanging structured data for invoices and remittances, etc. This new ecosystem will host new services encompassing more accurate risk evaluations and more efficient, immediate, effective, competitive and probably paperless financing structures.
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1. Text in Blue points to additional data on the topic.