The transition to GST will disrupt the working capital cycle of businesses in the initial phase and thus easy
liquidity in the system is essential for two to four months, says India Ratings and Research (Ind-Ra). The
agency believes that in order to minimise the magnitude of such disruption at the earliest, and to absorb the
sudden changes in requirement of short term finance, easy system liquidity is necessary. Ind-Ra studied a
sample set of 11,000 corporates and estimates that the input credit lock up for this sample could be around INR
1 trillion of which about INR500 billion could be blocked for about two months which may result in higher short
term working capital requirement for businesses in the near term.
Ind-Ra’s sample set of corporates showed that the task is humongous and can be gauged by the size of closing
inventory of around INR11.2 trillion as at FY16, which are at various stages of production process and includes
other inventory procured at various dates from different sources including CST, VAT and exempt purchases. 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 INR1 trillion for this sample and would be higher on an over-all basis. Even if 50 per cent of this is
not available for set-off during the transition phase, it would result in blockage of INR500 billion of input
credit for about two months (although may not necessarily be used during the first 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. These factors may put stress on
the short term working capital requirement for businesses.
Ind-Ra believes that even if businesses are able to achieve this seemingly mammoth task and the amounts are
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 and availability under the existing laws and under the GST regime
which may lead to disruption of working capital for businesses. The impact on individual companies could
however vary widely and Ind-Ra’s study suggests that around 85 per cent of the blocked input credit will be with
companies with greater than INR5 billion revenues. Ind-Ra believes larger companies whose credit profiles are
relatively stronger will tide over the short term working capital disruption relatively easily as compared to
the ones which have weaker credit profiles.