GST to disrupt India Inc’s working capital cycle

The transition to GST is expected to disrupt the working capital cycle of India Inc during the initial phase of the new tax regime due to the lock up of input tax credit.

A India Ratings study on a sample set of 11,000 corporates revealed that the input credit lock up for this sample could be around `1 lakh crore of which about `50,000 crore would be blocked for about two months, which may result in higher short term working capital requirement for businesses in the near term.

It believes that in order to minimise the magnitude of such disruption at the earliest, and to absorb the sudden changes in requirement of shortterm finance, easy system liquidity is necessary.

EVEN IF the input tax is credited to the electronic ledger on a provisional basis, it will be subject to variations in the near term as there could be litigations on eligibility, it says

India Rating’s sample set of corporates showed that the task is humongous and can be gauged by the size of closing inventory of around `11.2 lakh crore as at FY16, which are at various stages of production process. The average excise duty of the sample set works out to around 5.5 per cent. Further assuming that 25 per cent of the over-all inventory is procured locally and is subject to an average VAT rate of 14 per cent, the over-all input credit lock up will be around `1 lakh crore for

this sample and would be higher on an over-all basis.

Even if 50 per cent of this is not available for setoff during the transition phase, the rating agency noted that it would result in blockage of `50,000 crore of input credit for about two months.

Moreover, service tax rates are likely to increase by a flat 3 per cent to 18 per cent as against 15 per cent earlier.

These factors may put stress on the short-term working capital requirement for businesses.