Why Small Businesses Are Facing a Growing GST Cash Flow Burden

Firms are struggling with working capital requirements due to upfront GST liabilities, delayed client payments

- Shipra Singh

Every month, Deepali Bhagat is taxed on the income that has not reached her. The founder of a small ed-tech startup in Bengaluru, Bhagat must pay goods and services tax (GST) on every invoice raised—even when clients delay payments for months. The burden eats into her working capital, and sometimes pushing her to borrow or dip into her savings just to stay compliant. By the year-end, nearly 3% of revenue is lost to GST on unpaid dues.

And, Bhagat's not alone. Many small businesses in India face a cash flow crunch due to GST's accrual structure. They must pay GST when an invoice is raised, not when payment arrives. Though GST rules say tax is due on the invoice or payment date, whichever is earlier, payments often come 40-90 days later. For firms with few input tax credits, this means paying GST upfront, hurting working capital.

"My payments are usually delayed by 60 days or more after raising an invoice. Since my major expenses are employee-related, I don't have much input GST to claim, so I end up paying GST well before I receive a payment," Bhagat, founder of D-Bright Minds, said. It is hurting businesses in more ways than just affecting their cash flow management.

Pay now, get paid later Under the GST framework, businesses must pay tax on monthly sales within fixed deadlines, even if their clients haven't paid them yet. Take, for instance, a services firm, XYZ, that makes sales worth ₹15 lakh in May. It issues invoices totaling ₹5.9 lakh, including 18% GST (₹90,000).

Step 1: By 11 June, XYZ must report its total sales (based on invoices issued) through GSTR-1.

Step 2: By 20 June, XYZ must pay ₹90,000 in GST—whether or not the money is received—after adjusting for any input tax credit (ITC), i.e., the tax paid on its own purchases.