Is GST the turning point for Indian Fintech Industry? How will this help in SME loans?

The Goods and Services Tax (GST), was a landmark indirect tax reform, passed by the NDA Government that has considerably eased the process of business operations and ensured higher tax collections. It has facilitated enhanced transparency and simplification of the tax process for the SMEs. The GST has eliminated the hassles of multiple tax structure and significantly reduced paperwork.

The Fintech industry which is already spearheaded the paperless, digital revolution is a key beneficiary of the GST law. Fintech companies grant SME business loan to eligible borrowers, only upon submission of GST returns. This provides the lender an indication of the stability and quantum of turnover. Accordingly, the lender can decide upon the loan sanction amount and the interest rate. Thus, in other words, Fintech has been at the forefront of encouraging the adoption of GST by small business units.

The Indian SME sector is rightly called the backbone of our economy as it contributes to 45% of India’s GDP. The simple GST filing procedure, the exemption criteria, frequent Government clarification on the intricacies of the law and the relaxation in registration norms have ensured larger compliance with this law. This has benefited the SME unsecured business loans space in the following ways:

  1. Reduced Tax Burden:Owing to the elimination of multiple indirect taxes like Service Tax, Entertainment Tax, Excise, Surcharge, Octroi etc throughout the supply chain, this has significantly reduced the tax liability of small business units. For example, before the GST came into effect, a small business, with a turnover of more than Rs. 5 lakhs, was required to pay a number of taxes at various points in the supply chain. Currently, there is an exemption of GST for SMEs with turnover less than Rs. 40 lakhs. The additional savings in tax can be fruitfully channelized towards servicing the interest on a business loan.
  2. Market Unification across States: GST was implemented with the spirit of having a common tax law throughout India i.e. one nation, one tax. Thus, any regional differences would be eliminated and small business units from every state would get a level playing field. This has positively influenced the pricing of goods and services across the states. A small business owner can now engage in the purchase and sale of raw materials and finished products anywhere in India without having to worry about taxation and pricing. This has expanded the customer base of the small business which means higher revenues. This would enable faster repayment of the SME business loans and also encourage availing additional unsecured business loans to expand business in other states with significant customer concentration.
  3. Reduced Logistical Costs: With the abolishment of multiple entry taxes, there has been a drastic reduction in transportation time. This has positively impacted manufacturers. As goods move quicker, they sell quicker and hence picking up the demand for a new stock, thus spurring manufacturing. This spur in production can result in big contracts which can be fulfilled by taking an unsecured business loan from a Fintech.
  4. Easier to start a new business:With the centralization of indirect tax, this has boosted the growth of SMEs owing to lower costs for starting anew venture. Small business owners can now utilize a larger portion of their money for business expansion rather than paying up unnecessary taxes and fees. Thus, increased entrepreneurship activity would indirectly translate into higher demand for unsecured business loans as promoter funding would be limited.
  5. Spur in SME finance: There has been increased business activity in the SME space, in the post GST era, owing to opening up of new markets and business growth opportunities. To cater to this, SMEs are increasingly approaching Fintech lenders for customized SME business loans. Fintech lenders are offering business loans at attractive interest rates with the quick turnaround time of 3-5 days. NBFCs are also offering complete digitized services in tandem with GST. This has enabled online loan application, uploading of documents and digital signing of the loan agreement. The loan disbursal is done via electronic transfer to the registered bank account. Online business loans have also reduced processing charges and prepayment penalties for SMEs, with no hidden charges.

Concluding Thoughts

GST has revolutionized the way Indian SME industry operates and in turn boosted the business prospects of the Fintech lenders that extend business loans to SMEs. This is truly a defining and turning point in the country’s growth story.