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Budget

How to reduce debt?- An easy guide

by Sanjeev Archak Sanjeev Archak No Comments

All businesses have to borrow at some stage to fund growth. Debt in your balance sheet is not an unusual item. However, it is not a comforting factor in your financial health. India has seen several large scale debt related defaults by large corporate’s. This begs the question-How to reduce debt? Debt Management is the answer.

Here’s a step-by-step plan to help you reduce your business debt, so you can reclaim your sanity and start focusing on other important tasks.

Start with a Budget

We can’t emphasize how important it is to have a budget. In fact, we have written a whole blog about this. A budget is the best way to set target for revenues and limits for costs. Measuring these targets with actual revenues and costs will give you a good idea where you stand as a business. A business owner will actually be able to determine how much he can borrow and how long it will take to repay the loans.

Make a repayment plan

EMI’s for debt repayment are known to very borrower right from the start. So for a business, it is all about having money to fund the repayment schedule. One of the key aspects of this plan is cash flow management. A business needs to have enough cash for EMI payments. There are two thumb rules a business can use to save cash:

  1. Control spending: spend only on essentials. This is a tough plan which requires a lot of discipline.
  2. Earmark cash for repayment: set aside a % of your sales or profits each month to pay EMI’s

Set an “Exit Date” for Debt

This is a part of the “Repayment Goals”. Marking out a date in your calendar to be debt free will keep your motivation levels up. The lenders too would have specified a repayment schedule and pre-closures are not penalized anymore by lenders.

Negotiate Terms with Vendors

It is simple, ask for more credit. Most successful retail companies let vendor manage their working capital for them by asking for discounts or more credits. This will help you streamline your cash flows as well.

Avail the right debt product

 Identify the debt product which works best for your business. If working capital is what you are looking for then consider availing cash credits, overdraft or a working capital term loan. However, if you want to fund an asset purchase then avail a term loan. The security for the loan depends on the type of loan for e.g, for an asset purchase a mortgage on the asset will be security. However, an overdraft or a cash credit will be secured with stock or receivables of the business.The interest rates for these debt facilities vary as well. Choose an option that suits you best.

Renegotiate the terms of loans

What if you are not able to pay EMI’s? Don’t panic. You always have the option of renegotiating your loans. This requires the lender to recast the repayment schedule or include a moratorium period. Additionally, you can ask for a funding of interest via a funded interest term loan. This is easier said than done as it takes an excellent track record of the borrower to renegotiate.

Keep an eye on margins

Interest payments have a huge impact on margins. It is important to minimize the hit of interest on margins. As a business change your product or service mix to reduce low margin offerings.

Explore leasing

Leasing equipment’s often works out cheaper than owning them. Leasing will help reduce huge upfront payments for equipment’s.

Final Thoughts

It’s perfectly normal to be worried about repaying loans. The best way of getting rid of this stress is to pick debt management/reduction ideas, commit to a plan and make it happen.

Penalties for Fake Invoices

by Sanjeev Archak Sanjeev Archak 1 Comment

Ever since the introduction of GST, input credit has become a focus point for most tax payers. GST was supposed to have automated the process claiming credit. However, this facility has not seen light of the day. Further, confounding the problems is the recent ruling imposing input credit restrictions. In October last year GST department mandated that  a tax payer will be able to claim only 10% of input credit if the vendor has not filed his returns. The Government was forced to bring in this rule as only a handful tax payers were filing GST 1 returns. Another major problem the Government is battling is that of fake GST invoices. In order to combat this problem the Government has announced penalties for using fake invoices. This penalty will be applied to both persons accepting & making the fake invoices.

Recent Budget Amendments

The Budget presented by the Finance Minister earlier this month has introduced a new Section called Section 271AAD in the Income Tax Act. This Section provides for penalty for:

  1. A false entry in the books of accounts
  2. Omitting entries in the books of accounts which are required to compute total income with an intention to evade tax

It is important to note that these penalties will be applicable from 01.04.2020. The Assessing Officer (the Income tax officer examining books & returns) is empowered to direct the tax payer to pay this penalty if he finds there are fake entries or omissions in the books of accounts.

What is the quantum of penalty?

The penalty shall be equal to the aggregate amount of such false entry or omitted entry.

What is a false entry?

False entry has been defined to include the use or intention to use:

  1. A false or forged document such as a false invoice or in general a false piece of documentary evidence
  2. An invoice for supply of goods or services where the actual goods or service has not been delivered
  3. Invoice from or to a person who does not exist

The definition is wide ranging one which includes even the “intention to use” and further it goes to include not just invoices but all other documentary evidence. This could include balance confirmations from vendors/customers or any other correspondence with business associates.

Who shall be liable to pay penalty?

The penalty shall be levied not only on the person using the false entry but also on the person providing such false entry.

This amendment has far reaching consequences. The Government has now synced both Income Tax and GST data bases so that there real time information sharing. If a tax payer gets found out for a false entry in an Income Tax proceeding, it is safe to assume that, he will be sent a notice under the GST law as well.

Suitable changes have been made to Section 122 & Section 132 of the IGST Act, which deal with penalties for improper invoicing and frauds. Apart from monetary fines, GST registration can also be cancelled by the authorities.

So every business owner needs to be vigilant and not indulge in unethical or fraudulent business practices. It is evident that penalties for fake invoices will be steep.