The Goods & Services Tax (GST), once it is implemented, will help India achieve a growth rate of 9 per cent or more, says Amitabh Kant, CEO, Niti Aayog. That may be true in the long run, but expect chaos and a dampening of business in the short term, all of which could further slow down GDP growth temporarily. Although the GST rollout has been in the works for a long time, the final rules are only being notified now. And with just three weeks to go for the intended July 1 rollout, there are still big grey areas for businesses to fret about.
Most businessmen expect a big disruption in their working capital cycles. That’s because input credit will not be available for goods sold till June 30 once GST comes into force. On July 1, all businesses will start with a nil balance on input credit. They will start by paying taxes in full and be able to claim input credit only after they have squared accounts with vendors in the next cycle. Mismatches in returns between vendors and OEMs (original equipment manufacturers) could result in long delays in getting input credit. Research reports suggest the working capital disruption could last anywhere between two months and two quarters, leading to additional capital costs for most companies.
Then there is the problem of unfinished and semi-finished goods and raw material held in stock. Because only part of it will be eligible for input credit, many businesses are unwinding stock and delaying orders so that they are left with a minimum on June 30. In a wide range of industries, from consumer durables to automobiles, companies are offering big discounts to get rid of inventory by June 30.
Finally, there is the overall level of preparedness among businesses. Bigger businesses have been hiring consultants and preparing systems for GST implementation. But small and medium businesses are still not completely aware of all that they need to do. Another worry for small businesses and traders is the considerably higher cost of compliance under GST. Whether all this will be captured in the CSO statistics when it compiles its GDP numbers is still uncertain. But don’t expect a smooth ride.